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Conditions for granting relief against forfeiture determined (Privy
Council)
Resource type: Legal update: case report
Status: Published on 18-Jul-2013
Jurisdictions: England, Wales
In Cukurova Finance International Limited and another v Alfa Telecom Turkey Ltd [2013] UKPC 20 (9
July 2013), the Privy Council determined the conditions upon which relief against forfeiture should be
available in a case where shares had been appropriated. It provides useful guidance on how a court might
approach setting the amount of compensation a chargorwill be required to pay the chargee if such relief
is granted and the charged property is returned to the chargor.
Jonathan Lawrence of K&L Gates LLP has commented on the decision for Practical Law Finance.
Practical Law Finance
Speedread
The Privy Council has determined the conditions upon which relief against forfeiture should be available in
a case where shares had been appropriated. It provides useful guidance on how a court might approach
setting the amount of compensation a chargorwill be required to pay the chargee if such relief is granted
and the charged property is returned to the chargor. It is also notable for the fact that the Privy Council
were divided as to the reasoning behind the decision, taking differing views as to the basis upon which
relief should be granted {Cukurova Finance International Limited and another v Alfa Telecom Turkey Ltd
[2013] UKPC 20).
Jonathan Lawrence of K&L Gates LLP has commented on the decision for Practical Law Finance.
Background
Relief f r o m forfeiture
The jurisdiction of a court to allow relief from forfeiture is equitable. It was first established in relation to
leases of land and most commonly arises in that context. However, this relief may also be available in
relation to other types of property where the forfeiture is of proprietary or possessory rights rather than
mere contractual rights
{BICCPLCvBu^^
Appropriation
Regulation 17 of the Financial Cd^^^^^
(FCA
Regulations) provides that:
"Where a legal or equitable mortgage is the security interest created or arising under a security financial
collateral arrangement on terms that include a power for the collateral-taker to appropriate the collateral,
the collateral-taker may exercise that power in accordance with the terms of the security financial
collateral arrangement, without any order for foreclosure from the courts."
This was the wording of regulation 17 as it applied to the facts of this case, but regulation 17 has since
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been amended. For information on the amendments made to regulation 17, see Practice note, Financial
collateral anangements: Ciianges introduced by ttie FCA Amendment Regulations
2010 (vmw.practicallaw. com/8-212-1954).
Appropriation is not defined in the Directive or the FCA Regulations. The Concise Oxford English
Dictionary {Oxford University Press, 11th ed., 2006) defines "appropriate" as including "take for one's own
use without permission".
For more information on the right of appropriation, see Practice note, Financial collateral arrangements:
Right of appropriation (www.practicallaw.com/8-212-1954).
Facts
Corporate structure and background
The appellants, Cukurova Finance International Limited (CFI) and Cukurova Holding AS (CH), are
members of the Cukurova Group of companies. Before September 2005, CH owned 52.91% of Turkcell
Holding AS (TCH), the remaining shares in TCH being held by Telia Sonera Finland OYJ (Sonera). TCH
held 51 of the 100 issued shares in Turkcell lletisim Hizmetleri AS (Turkcell), a Turkish mobile phone
network provider whose shares are traded on the Istanbul and New York stock exchanges.
In 2003 and 2004, the Cukurova Group was under considerable cash flow pressures and it entered into
discussions with the Alfa Group with a view to alleviating those pressures.
While discussions with the Alfa Group continued, Sonera contended that CH was obliged to transfer its
shares in TCH to Sonera pursuant to an alleged pre-emption agreement. It became clear in the
discussions with the Alfa Group that the shares in Turkcell and TCH might be important in any
agreement reached between the Cukurova Group and the Alfa Group. Therefore, to defeat Sonera's claim
to CH's shares in TCH, CH transferred those shares to a newly incorporated BVI company, Cukurova
Telecom Holdings Limited (CTH). CTH was wholly owned by CFI.
Documentation and proceedings
On 1 June 2005, CH and CFI entered into a subscription agreement (Subscription Agreement) with Alfa
Telecom Turkey Limited (ATT) under which:
D In return for a subscription price of US$1.6 billion from ATT, CFI had to procure that CTH issued
convertible bonds to ATT which, when exercised, would give ATT 49% of the issued shares in CTH,
leaving CFI with the remaining 5 1 % .
D ATT would enter into a facility agreement (Facility Agreement) under which it would grant CFI a
secured facility (Secured Loan) of US$1,352 billion (secured by charges over CFI's shares in CTH
and CH's shares in CFI), and an unsecured facility of US$355 million.
D The parties agreed to enter into a shareholders agreement.
On 17 June 2005, Sonera began arbitration proceedings against CFI in Geneva, claiming specific
performance of the pre-emption agreement.
On 28 September 2005, ATT and CFI entered into the Facility Agreement. The Facility Agreement
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contained various events of default, including a material adverse change (MAC) event of default at clause
17.16 on the following terms:
"Any event or circumstance which in the opinion of [ATT| has had or is reasonably likely to
have a material adverse effect on the financial condition, assets or business of [CFI]."
Also on 28 September 2005, CFI granted to ATT a share charge go\«rned by English law over its 5 1 %
shareholding in CTH.
On 25 November 2005, ATT made the advances contemplated by the Subscription Agreement and the
Facility Agreement, including the Secured Loan.
Also on 25 November 2005, CH granted to ATT a share charge governed by English law over its 100%
shareholding in CFI.
The terms of the share charges granted by CFI and CH (Share Charges) were identical in all material
respects and included a clause which provided that ATT had the right to appropriate the charged shares
in satisfaction of the liabilities owed to it.
On 24 November 2006, CFI made the interest payments required under the Facility Agreement, despite
the fact that ATT had blocked the payment of dividends to CTH with a view to preventing CFI from paying
that interest.
On 26 January 2007, Sonera issued a press release announcing that the Geneva arbitration had resulted
in an award (Award) that concluded that there was a binding obligation on CH to transfer its 52.91%
holding in TCH to Sonera for US$3.1m, and ordered specific performance of that obligation.
On 16 April 2007, in a letter signed by the sole director of ATT sent by its solicitors to CFI (with a copy
to CH), ATT:
D Alleged that a number of events of default had occurred under the Facility Agreement which were
incapable of remedy, and demanded immediate repayment of the Secured Loan (repayment
proceedings).
D Formally requested to be registered as the owner of the charged shares in CTH and CFI
(enforcement proceedings).
Also on 16 April 2007, ATT issued two claims in the BVI courts as follows:
D First, for a declaration that ATT was entitled to accelerate repayment of the Secured Loan, and
demanding its immediate repayment, together with contractual and default interest (repayment
proceedings).
D Secondly, for an order compelling CFI and CH to comply with ATTs request to be registered as the
owner of the charged shares.
On 17 April 2007, CFI challenged ATTs right to accelerate the Secured Loan but provided no arguments
in support of this challenge.
On 27 April 2007, ATT gave notice to CH and CFI that it had appropriated the charged shares in exercise
of its rights under the Share Charges, shortly after which CFI obtained an interim injunction restraining
ATTfi-om proceeding with the appropriation, if it had not already been completed.
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On 17 May 2007, CFI gave ATT formal notice that it intended to repay the Secured Loan in full, together
with contractual interest and default interest and formally tendered that amount to ATT on 25 May 2007.
However, ATT refused to accept the amount tendered on the ground it was made too late because ATT
had exercised its right to accelerate the Secured Loan and as such was entitled to appropriate the
charged shares which it had, therefore, done.
CFI and CH placed the monies tendered to ATT in an interest earning escrow account (Nammn account)
until 25 May 2010.
On 25 May 2007, CFI and CH began proceedings (tender proceedings) seeking an order requiring ATT to
accept the amount tendered and to redeem the security.
High Court
Before the enforcement, repayment and tender proceedings could proceed, the preliminary point of
whether ATTs actions on 27 April 2007 were sufficient to appropriate the charged shares had to be
decided. This issue was resolved by the Privy Council on 5 May 2009 which decided that ATTs action
had been sufficient, provided that ATT in due course established that it was entitled to enforce its
security {Cukurova Finance International Ltd & AnorvAlfa
Telecom Turkey Ltd (British Virgin Islands)
[2009] UKPC 19). For more information on this decision, see Legal update, Appropriation of financial
collateral: Privy Council decision (www.practicallaw.com/3-385-9105).
The High Court then had to decide on three issues as follows:
D Whether any e\«nt of default had occurred under the Facility Agreement so entitling ATT to
accelerate the Secured Loan.
D If an event of default had occurred, whether ATT was entitled to enforce its security by appropriating
the charged shares.
D Whether, if they failed on the first two issues, CFI and CH were entitled to relief from forfeiture.
On 20 May 2010, the High Court held that ATT had not established any event of default, in particular the
MAC event of default had not been established because there was no evidence ATT had fomned the
requisite opinion that the Award was an event that would trigger the MAC event of default. This meant
that the Court did not need to decide the other two issues but the Court did, however, reject the
argument raised by CFI and CH that ATT was not justified in appropriating the charged shares because it
had done so in bad faith and for an improper motive (namely with the intention of obtaining control of the
shares in Turkcell).
The High Court directed that, if CFI tendered the appropriate amount outstanding, ATT would be obliged
to permit CFI to redeem the charged shares.
ATT appealed to the Court of Appeal of the Eastern Caribbean Supreme Court.
Court of A p p e a l
On 20 July 2011, the Court of Appeal held, disagreeing with the High Court, that ATT had established
three events of default. The Court of Appeal also held, this time in agreement with the High Court, that
CH and CFI could not rely on the bad faith or improper purpose arguments. They allowed the appeal and
held that ATT had properly accelerated the Secured Loan and had properly appropriated the charged
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shares. While two judges did not consider the claim for relief from forfeiture, Kawaley JA effectively held
that that claim could not succeed because the argument based on bad faith and improper purpose had
failed.
CH and CFI appealed the decision.
Privy Council
On 30 January 2013, the Privy Council upheld the decision of the Court of Appeal of the Eastern
Caribbean Supreme Court that:
D The MAC event of default had been established by ATT.
• ATTs exercise of its remedy of appropriation was not vitiated by bad faith or improper purpose.
The Privy Council also held that relief from forfeiture should be available to CH and CFI on appropriate
conditions, and asked for further submissions as to the basis and terms upon which it should be granted.
For more information on this decision, see Legal update, Material adverse change event established and
appropriation not invalid but relief from forfeiture available (Privy Council) (www.practicallaw.com/4-5240432).
Decision
Having received submissions from both CFI and CH and ATT as to the basis and terms upon which relief
from forfeiture should be a\ailable to CFI and CH, the Privy Council directed that relief against the
appropriation of the charged shares should be available to CH and CFI on condition that CH and CFI pay
to ATT, within 60 days of the date of the judgment, the following amounts:
D The redemption sum.
D Further interest on the redemption sum accruing between the date of the judgment and the date of
payment of the redemption sum.
a An amount on account of costs on the standard rather than the indemnity basis.
The Board were, however, divided as to the reasoning behind the decision and the basis upon which relief
against forfeiture should be granted. The minority were of the view that the obligations in the contract had
not been discharged by ATTs appropriation of the charged shares so the contractual terms should
govem the granting of relief. The majority, on the other hand, were of the opinion that the debt owed was
discharged in law by the appropriation. While the majority accepted that in the ordinary course, relief in
equity will only be granted on the basis of conditions requiring performance of the relevant contract in
accordance with it terms, they did not accept that this was an entirely inflexible rule. They felt that equity
has the power, in exceptional circumstances such as this case, to identify particular circumstances that
make it inequitable or unconscionable to insist on redemption taking place on a basis that treats the loan
as if it had remained continuously outstanding.
An important point made by the Board was the critical effect on the conditions for relief (in particular on
the interest that should be payable by CFI and CH) of ATTs rejection of CFI and CH's tender on 25 May
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2007 of the full amount of the Secured Loan (along with interest). In view of the tender, and the fact that,
after ATTs rejection, CFI and CH placed the tender monies in the Namrun account for three years such
that these monies were available to pay ATT, the Board held that:
D No interest was payable on the amount of the Secured Loan for that three year period.
D After that three year period, interest should only be payable at the contractual rate under the Facility
Agreement, rather than the default rate.
CoiTiinent
Although this is a Privy Council decision and not technically binding on courts in England and Wales, it
is considered highly persuasive authority.
This decision is of interest because it provides useful guidance on how a court might approach setting
the amount of compensation a chargor will have to pay to the chargee where the chargor is granted relief
fl-om forfeiture and the charged property is returned to it. The difference in the reasoning of the majority
and the minority of the Board in this instance show alternative approaches that courts might take.
Practical Law Finance is grateful to Jonathan Lawrence of K&L Gates LLP for providing his comments
below on the decision.
Jonathan Lawrence, K&L Gates LLP
The differing reasoning of the majority and minority leaves an element of uncertainty for lenders as it will
have to be seen which view the English courts will take. Further litigation will be required before lenders
can exercise the power of appropriation with confidence that, if a right of redemption is granted, English
courts will necessarily uphold the rest of their contractual bargain. If the majority's reasoning is followed
then lenders cannot be certain that the contractual provisions which they have agreed will apply and the
majority's departure fi-om the principle on the basis of exceptional circumstances risks leaving the law in
a state of uncertainty.
According to the majority (Lord Mance giving the judgment, with which Lord Kerr and Lord Clarke
agreed), this case was exceptional, and it would have been both inequitable and unconscionable to
ignore the unusual facts, which were probably unlikely to be repeated. It is true that the amounts of
money involved and the company whose control is at stake makes this case very high profile, however
this will most probably not stop borrowers trying to argue that they are in a similar position.
The majority were of the opinion that the loan had been discharged at law by appropriation. However,
they said it would be remarkable if a court was unable to take account of circumstances which would
make it inequitable or unconscionable to insist on redemption taking place on a basis which treated the
loan as if it had remained continuously outstanding. When equity granted relief after an appropriation has
discharged a debt, it did so by setting conditions, which would take close account of the temns of the
original loan, but may also take account of the fact that the appropriation only occurred to forestall a
repayment of that loan, which was tendered and rejected shortly after it occurred. A number of cases
showed that equity would consider whether the mortgagee by his conduct or fault may have disentitled
himself from insisting on the usual conditions on which equity insists for redemption. Equity could and
should respond by way of adjustment to the amount of interest or costs in exceptional situations where
the mortgagee had by words or conduct rejected, made impossible or delayed repayment of the
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mortgage debt. Such a situation may exist where there was a tender or offer of repayment, particularly
one backed by monies actually paid into court or an account.
Although they arri\«d at the same result as the majority, the minority (Lord Neuberger and Lord
Sumption) did not accept that appropriation discharged the due debt in this case. They thought that by
exercising its equitable power to permit CH and CFI to recover the shares, the court was simply
extending the time for paying what was due from them to ATT under the contract, and accordingly the
mortgage remained in being until the money due had been tendered and accepted. They considered that
the contractual terms must be treated as continuing and must determine the terms on which a right to
redeem could be exercised. Given the nature of the equitable power, the terms of that contract with
regard to the payment of interest must apply until CH and CFI paid the whole of what was due. It would
be incongruous if CH and CFI could have the benefit of the appropriation being reversible, without the
consequence of the reversal reviving their contractual liability to repay the principal and to pay interest at
the agreed rate. Further, it would be surprising if CH and CFI could be better off as a result of ATT having
appropriated the shares than they would have been if the shares had not been appropriated. The minority
considered that where a mortgagor invoked its equitable right to redeem secured property, the court
should grant relief assuming that the terms of the original bargain between the mortgagor and mortgagee
continued, despite the security having been foreclosed on or appropriated by the mortgagee. If the whole
amount due under the mortgage was tendered and refused and then put aside in an account by the
mortgagor, the mortgagee was not entitled to interest at the contractual rate while it was in the account,
although it could recover the interest actually earned on the amount in the account (less any expenses).
Also, those terms would continue to apply until all the mortgagor's liabilities under the contract had been
satisfied.
Although this case has reached its conclusion, the issues it raises remain ones to watch in the fijture.
Case
Cukurova Finance International Ltd and another v Alfa Telecom Turkey Ltd [2013] UKPC 20 (09 July
2013)
Resource information
Resource ID: 9-534^106
Published: 18-Jul-2013
Products: PLC UK Finance
Related content
Topics
Lending: General (http://uk.practicallaw.com/1-103-2033)
Security and Quasi Security (http://uk.practicallaw.com/6-103-1106)
Legal update: case report
Appropriation of financial collateral: Privy Council decision (http://finance.practicallaw.com/topic3-385-9105)
Material adverse change event established and appropriation not invalid but relief fi'om forfeiture available (Privy
Council) (http://finance.practicallaw.com/topic4-524-0432)
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Case page
Cukurova Finance International Ltd & Anor v. Alfa Telecom Turkey Ltd [2013] UKPC 20 (09 July 2013)
(http://finance.practicallaw.com/topicD-022-0805)
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