Ordinary course of business

Meaning of ordinary and proper purpose

A dispute had arisen between rival parties over the management of a company.

Pending resolution of that dispute, the company undertook to the court that it would not "dispose of, deal with or diminish the value of any funds belonging to it or held to its order other than in the ordinary and proper course of business".

The company subsequently wanted to incur certain expenditure and asked the court whether that expenditure would fall within “the ordinary and proper course” of its business.

The Court of Appeal in a recent case made the following comments:

Although the meaning of the phrase “ordinary and proper course” is a matter of law, the court will always look at the facts of the case to see whether the transaction in question was within the ordinary and proper course of business.

In deciding whether a transaction is in the ordinary and proper course, the court will apply an objective test. It will consider the question against accepted commercial standards and practices for running a business.

The question is not whether a particular transaction is “ordinary” or “proper”, but whether it takes place in the ordinary and proper course of the company’s business. So, it is perfectly possible for an unprecedented or exceptional transaction to form part of a company’s “ordinary” business.

“Ordinary” and “proper” are separate requirements, and both need to be satisfied. In theory, it is possible for a transaction to take place in the context of a company’s ordinary business, but yet be improper (for example, because it is not carried out in the company’s interests or in good faith). Phrases such as "ordinary and proper course of business" or "ordinary course of business" appear frequently in all kinds of commercial agreement, including joint venture and shareholders’ agreements, agreements for the sale of shares in a company or a business, and financing arrangements.

 

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