In Michael Wilson & Partners Limited v John Forster Emmott, the Court of Appeal considered whether rental and loan payments fell within the “ordinary and proper course of business” exception to a freezing order.
Michael Wilson & Partners Limited (“MWP”) is a company incorporated in the BVI that provides legal and business consultancy services, principally in Kazakhstan and Azerbaijan. Mr Emmott entered into a partnership agreement with MWP. Following a breakdown in relations, the partners engaged in arbitration which resulted in an award made in favour of Mr Emmott and a freezing order was granted in aid of the award. The freezing order contained an exception in standard terms which stated:
“This order does not prohibit the respondent from dealing with or disposing of any of its assets in the ordinary and proper course of business”.
On 17 March 2015, MWP received US$ 4.6 million into its Kazakhstani bank account by way of fees for its services. MWP then made two payments which Mr Emmott alleged breached the freezing order. These payments were as follows:
- US$ 1,856,500 to Kazak Holdings Inc, a BVI company, for the repayment of part of the principal of a secured loan (the “KHI Payment”); and
- US$ 1,232,515 to Kazak Holdings LLP, a subsidiary of KHI, which was a rental payment (the “LLP Payment”).
At first instance, Mr Justice Andrew Smith held that the payments were made in breach of the freezing order. MWP was given a substantial fine and Mr Wilson was sentenced to eight months’ imprisonment for contempt of court. In reaching his decision, Andrew Smith J paid specific attention to the timing and size of the payments, which were prima facie irregular. MWP appealed.
Court of Appeal decision
The Court of Appeal in its decision noted that the issue to be determined was whether the payments made fell within the exception to the freezing order. In order to fall within the exception the disposal of an asset (including a payment) must be both:
- in the ordinary course of business; and
- in the proper course of business.
These are separate and cumulative requirements.
Lewison LJ noted that in the first instance decision Andrew Smith J had decided that the secured loan (the KHI Payment) was genuine and that the rent (the LLP Payment) was not inflated. It appeared to Lewison LJ that Andrew Smith J must have decided this on the basis that both payments were made in the “proper course of business”. Consequently, the only finding to be made was whether or not the payments were made in “the ordinary course of business”.
With respect to the KHI Payment, Lewison LJ held that Andrew Smith J had taken too narrow a view in reaching his decision. Lewison LJ highlighted the following:
- Although the largest individual payment for the KHI loan prior to the freezing order was US$ 525,000, Andrew Smith J had overlooked the fact that four repayments totalling US$ 1.14 million were made in fairly short order between September and November 2010.
- Despite the substantial temporal gap between the previous payment and the KHI Payment, there had been similar temporal gaps before.
- No repayment was due until a written demand had been made, and no written demand had been made between the date of the last repayment and the demand that triggered the KHI Payment.
- The KHI Payment was the repayment of a pre-existing secured loan and consequently would not have been available to satisfy the arbitration award.
Lewison LJ therefore held that Andrew Smith J’s decision in relation to the KHI Payment be set aside.
Similarly, with the LLP Payment, Lewison LJ held that the basis of the first instance decision, which dwelt on the fact that before the LLP Payment the largest rental payment had been US$20,000, was too narrow. The LLP Payment was in respect of outstanding rental arrears and MWP had otherwise made regular payments in respect of rent. Consequently, he set aside Andrew Smith’s decision in relation to the LLP Payment as well.
In its judgment, the Court of Appeal stressed that it had not sought to provide a general definition of what constitutes a payment “in the ordinary course of business” and that this will always be a fact sensitive matter. In particular, Lewison LJ observed:
“What is in the ordinary and proper course of business will, of course depend on what business is carried on by the respondent in question, and how it is carried on. A payment which might be made in the ordinary and proper course of one business may not satisfy that description in the case of a different business. Likewise a payment which might be made in the ordinary and proper course of a business carried on in one location, may not satisfy that description in the case of the same kind of business carried on in a different location”.
However, this decision does show that a wide view should be taken as to the circumstances surrounding a disposal when seeking to determine whether or not it breaches the terms of a freezing order.