(1) Koza Ltd (2) Hamdi Akin Ipek v Mustafa Akcil & 5 Ors (2017)
Where a company whose control was disputed had undertaken not to dispose of funds "other than in the ordinary and proper course of business", expenditure for an arbitration by the company's alleged owner before the International Centre for Settlement of Investment Disputes was not within the undertaking. The expenditure would not be in the ordinary course of business, as the authenticity of the owner's share purchase agreement was open to doubt, and in any event it did not include a qualifying investment giving rise to ICSID jurisdiction.
The first claimant, a company whose control was disputed, sought either a declaration that certain expenditure was within the terms of an undertaking it had given, or variation of the undertaking so as to permit the expenditure.
The company was based in England and belonged to a Turkish mining and media conglomerate. The sixth defendant was its Turkish parent company. The second claimant was the company's director and a member of the family owning the conglomerate. The Turkish authorities alleged that the conglomerate was involved in terrorist financing. It replaced the boards of group companies with trustees. The first five defendants were appointed as the parent's trustees. The parent issued a notice requiring the company to replace its board with the trustees. The company brought the instant claim seeking a declaration that the notice was ineffective. The company gave an undertaking in the proceedings that it would not dispose of funds "other than in the ordinary and proper course of business". In the instant application, the company sought to be able to spend up to £1.5 million for fees and disbursements in an arbitration before the International Centre for Settlement of Investment Disputes (ICSID) and a further £1.5 million as provision against possible adverse costs orders. The arbitration would be brought by an English company (IIL) connected with the director against the Turkish government alleging that its takeover of the conglomerate was unlawful. There was said to be a share purchase agreement (SPA) transferring the company's ownership to IIL; the defendants challenged the SPA's authenticity. The company also sought to spend up to £30,000 per month on public relations consultants. It further sought to pay the director £650,000 per annum for his services. It adduced expert evidence that that was in line with remuneration in mining companies and AIM-listed companies. The defendants considered that the company was not comparable to those because it had only seven employees and little revenue.
Ordinary course of business - Several considerations were relevant. First, whether an objective observer, with knowledge of the company, would view the expenditure as within the ordinary course of its business. Second, whether, on the proper interpretation of the undertaking, the parties had nevertheless not intended that the expenditure should be regarded as being in the ordinary course of business. Third, the fact that the expenditure was unprecedented or exceptional did not preclude it from being within the ordinary course of business. Fourth, if the expenditure would give rise to a breach of a director's fiduciary duty, that could indicate that it was not within the ordinary course of business, Ashborder BV v Green Gas Power Ltd  EWHC 1517 (Ch) applied (see para.41 of judgment).
Arbitration - On the evidence, the SPA's authenticity was open to serious doubt. That was to be taken into account when deciding whether the expenditure should be allowed. If the expenditure appeared objectively to be within the undertaking, the doubt was nevertheless relevant to whether it would be made in good faith and consonant with the director's fiduciary duty, and more generally to the overall justice of allowing it. If the expenditure was outside the undertaking, the doubt was relevant to whether the undertaking should be varied (paras 90-91). It was seriously arguable that a successful outcome for IIL in the arbitration would be of substantial commercial benefit to the company. It was thus in the ordinary course of business (para.97). However, even if its authenticity had not been in issue, the SPA did not give rise to a qualifying investment so as to found jurisdiction for an ICSID arbitration. The SPA involved IIL issuing its shares to the vendors, but IIL had no value as it had been established solely to move the group's headquarters to England. It therefore involved no investment in Turkey and so did not found ICSID jurisdiction (paras 119-120). The court was not satisfied that there was no available funding other than the company's assets or that it be impossible to commence an arbitration if the expenditure was refused. The circumstances were not so different from those which appeared to have been contemplated at the time the undertaking was given that it would be appropriate to release the company from the undertaking. The expenditure was not within the undertaking and it was not appropriate to vary the undertaking (para.126).
PR consultants - It appeared to be contemplated that the PR campaign would not be confined to the company's affairs but would extend to the wider dispute between the director and the Turkish state. Incurring expenses in defending the director's reputation would not necessarily be an improper use of company resources; it depended on the facts. The expenditure would be allowed, but the company would need to take care not to breach the undertaking by paying for PR services that were not within it (paras 137-140).
Director's services - The company's size meant that comparisons with the companies relied upon did not justify the proposed fee. There were also highly unusual features of the case that made it difficult to make reliable comparisons. The director had difficulties arising from Turkey's actions. Further, in fixing the remuneration between the company and himself, he would be acting for both sides. Accordingly, the expert's advice was not dependable and the sum sought was excessive. The appropriate remuneration would be no more than £250,000 (paras 157-159).
Application granted in part
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16 Nov 2017
Richard Spearman QC
Siward Atkins KC