Description of the legal term Ordinary Course of Business:
The term ‘Ordinary Course of Business’ in British legal context refers to the regular conduct of business according to routine standards and practices that a company engages in to carry out its usual business activities. The significance of this term arises in various aspects of law including contract, company, and insolvency law. It serves to delineate what constitutes a standard operating procedure for a business versus activities that may be considered extraordinary or outside the normal scope of business operations.
A company’s ordinary course of business is what is typically expected from the company by its stakeholders – this includes customers, creditors, suppliers, and even regulatory bodies. Actions and transactions carried out in the ordinary course of business generally do not require special approval from higher levels of corporate governance such as the board of directors, because they are a part of routine daily operations and do not substantially alter the company’s assets or liabilities.
For instance, if a business usually sells goods or supplies services, entering into contracts for sales or service agreements would be in the ordinary course of business. However, selling a significant portion of company assets or merging with another company would not be. Transactions made in the ordinary course of business are protected under law in that they are presumed to be acted upon in good faith, and are less liable to scrutiny in the event of disputes or bankruptcy proceedings.
Contextually, this term assumes particular importance in situations where a company is facing financial difficulties. Transactions made in the ordinary course of business will typically stand up in court if challenged during insolvency, on the ground that they were part of the regular operations necessary to keep the business running. Conversely, transactions outside of this scope may be viewed as an attempt to defraud creditors or preferential treatment of certain parties, and thus could be overturned.
Legal context in which the term Ordinary Course of Business may be used:
An example of the application of ‘Ordinary Course of Business’ can be found in the event of a company entering administration. Imagine Company A has been facing severe financial troubles and is on the verge of insolvency. The administrators are brought in to manage the company’s affairs. During this period, the administrators may continue to enter contracts and carry out transactions that are considered in the ordinary course, such as paying for utilities, purchasing raw materials necessary for production, or employing staff for daily operations. This ensures the company maintains its value and operational capability while the administrators seek a resolution.
On the other hand, suppose that prior to entering administration, Company A had sold a major piece of manufacturing equipment to a director’s relative for considerably less than market value. This transaction would likely not be considered in the ordinary course of business, arousing suspicion that it was conducted not in good faith but rather as an attempt to transfer assets out of the company prior to the anticipated insolvency. Such a transaction could be reversed by the administrators or challenged in court by creditors.
Understanding the ordinary course of business is fundamental for legal practitioners in the UK. It informs the boundaries within which companies are expected to operate and provides a framework for assessing the validity of business transactions, particularly in disputed scenarios or when financial difficulties arise. The significance of distinguishing between ordinary and extraordinary business actions underpins the governance and judicial oversight of companies, and thereby maintains confidence in the corporate structures and financial markets of the United Kingdom.