Vol 10 (2013) - Issue 3

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Equity Steps in to Relieve from Appropriation under the Financial Collateral Arrangements (No. 2) Regulations

The battle in the courts of the British Virgin Islands ('BVI') between Alfa Telecom Turkey Limited ('Alfa') and Cukurova Finance International Limited and Cukurova Holding AS ('Cukurova') for control over the foremost mobile phone company in Turkey, Turkcell Iletisim Hizmetleri A.S ('Turkcell'), has resulted in further elucidation by the Privy Council of the scope of the remedy of appropriation under the Financial Collateral Arrangements (No. 2) Regulations 2003 ('the Regulations').
In its 30 January 2013 decision, the Judicial Committee (Lords Neuberger, Mance, Kerr, Clarke and Sumption) held that relief from forfeiture is available in equity to relieve a collateral-provider from an appropriation of collateral by a collateral-taker.
This article summarises the court’s reasoning, and reminds the reader of the court’s earlier landmark decision on appropriation.

The facts in brief
In 2005, Alfa lent Cukurova USD 1.35 billion on the terms of a facility agreement and secured by English law-governed equitable mortgages over Cukurova’s indirect shareholding interest in Turkcell. The mortgages imported the remedy of appropriation under the Regulations in the event of Cukurova’s default. In April 2007, Alfa alleged that Cukurova was in breach of the facility agreement, demanded immediate repayment of the loan, and commenced proceedings seeking repayment of the loan and registration as legal holder of the mortgaged shares. Some 10 days later, Alfa stated that it had appropriated the shares. Cukurova denied that it was in default and in any event disputed that the shares had been validly appropriated.

The Regulations
The Regulations were introduced into English law in order to implement Directive 2002/47/EC ('the Directive') on financial collateral arrangements. The stated aim of the Directive was to promote the stability of the EC financial system and the free movement of capital in the single market by providing for 'rapid and nonformalistic enforcement procedures' by way of sale or appropriation by a collateral taker. Those procedures were to be balanced by the ability of Member States to retain or introduce a posteriori control over the realisation or valuation of the collateral. The application of the Directive was mandatory in respect of transactions between public authorities, central banks, financial institutions subject to prudential supervision, central counterparties and clearing houses. Member States were free to exclude from the scope of the Directive entities other than natural persons, but including companies and partnerships, who were transacting business with a central bank or other relevant institution.
The UK Treasury ('the Treasury') in fact went further than this, and in implementing the Directive by the Regulations, provided that it should encompass not only the optional case, but also transactions between ordinary companies. This is how the Regulations came to be at the heart of a dispute between one Turkish and two BVI companies over a loan transaction to which the Directive never contemplated it should apply.