Vol 6 (2009) - Issue 1

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Recent Application for Permission to Bring Judicial Review Proceedings Challenging the Validity of the Financial Collateral Arrangements (No. 2) Regulations 2003

The validity of the Financial Collateral Arrangements (No. 2) Regulations 20031 (the ‘Regulations’) was recently challenged by Cukurova Finance International Limited (‘CFI’) and its parent Cukurova Holdings AS (‘CH’) (together ‘Cukurova’) in the case of R (on the application of Cukurova Finance International Ltd and another) v HM Treasury. Cukurova applied to the Administrative Court of the High Court of England and Wales for permission to bring judicial review proceedings challenging the validity of the Regulations.

The Regulations implement the Financial Collateral Directive (the ‘Directive’) and came into force in England and Wales on 26 December 2003. The purpose behind the Directive was to ensure that Member States adapted their national laws in order to facilitate the provision and receipt of financial collateral in circumstances where such collateral is part of a ‘financial collateral arrangement’. However, although the Directive concerned certain transactions involving the use of financial collateral, the scope of the Directive is limited as its purpose is to provide only a ‘minimum regime’.

Cukurova sought permission to challenge the vires (or legality) of the Regulations on the grounds that section 2(2)(b) of the European Communities Act 1972 (the ‘1972 Act’) did not confer power on Her Majesty’s Treasury to make the Regulations. This was on the basis that the Regulations enlarge the personal application of the provisions beyond the scope of the Directive and thus in contravention of section 2(2)(b) of the 1972 Act. Accordingly, Cukurova argued, they should be quashed or, alternatively, construed so as to be intra vires (or within the confines of the Directive).

The issue: validity of the extension to the Directive by the Regulations

The Regulations were made for the purpose of implementing the Directive but they also extended the scope of the Directive. Whereas the Directive was confined to financial collateral arrangements made between nonnatural persons and specified financial institutions, the Regulations extended the provisions of the Directive to cover financial collateral arrangements transacted between non-natural persons, neither of whom needed to be specialised financial institutions.

Background: Alfa Telecom Turkey Ltd v Cukurova Finance International Ltd and Cukurova Holdings AS (BVI)

The challenge by Cukurova in the Administrative Court to the validity of the Regulations was part of ongoing litigation between Cukurova and Alfa Telecom Turkey Ltd ('Alfa') originally commenced in the British Virgin Islands (‘BVI’).

Alfa had loaned Cukurova USD 1.352 billion (the ‘Loan’) which was secured by equitable charges over shares (the ‘Charged Shares’) in certain subsidiaries (the 'Share Charges'). Two of the Share Charges were governed by English law and two were governed by BVI law. They provided that Alfa had the right, on enforcement of the Share Charges, to appropriate the Charged Shares to discharge the liabilities owed to it under the Loan.