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Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd

In a judgment of enormous importance for financial markets, the Privy Council has held that a borrower can claim relief from forfeiture notwithstanding that the forfeited security has been appropriated by the lender in satisfaction of its debt. The remedy of "appropriation" is a new means of enforcing security (introduced by the Financial Collateral Arrangements (No 2) Regulations 2003 ("the Regulations")). In effect it operates as an out of court foreclosure of the charged assets whereby the chargee becomes the absolute owner. Since its introduction, appropriation provisions have become increasingly common in financial documents.

Alfa Telecom Turkey Limited lent USD1.35 billion to a company in the Cukurova group secured by charges over Cukurova's shares in a number of BVI companies and thereby an indirect shareholding in Turkcell, the largest Turkish mobile operator.

On 16 April 2007, Alfa accelerated the loan on the footing that various events of default had occurred and demanded immediate repayment of the entire outstanding balance. Cukurova failed to pay and on 27 April 2007, Alfa appropriated the charged shares. A month later, Cukurova gave Alfa notice that it intended to "prepay" the full amount due, and purported to proffer the full sum eight days later. Alfa Telecom rejected the tender on the basis that it was too late.

At first instance, Bannister J held that none of the events of default relied on by Alfa had been made out and that the acceleration and appropriation were accordingly invalid. On appeal, the Court of Appeal held that three of the alleged events of default had been established, and therefore that Alfa had been entitled to accelerate the loan and appropriate the charged shares.

The Privy Council upheld the decision of the Court of Appeal that the acceleration and appropriation were valid (albeit for somewhat different reasons).The Privy Council, however, concluded that the Board had jurisdiction in equity to grant relief from forfeiture. It also held that Cukurova was in the circumstances of the case entitled in principle to such relief. The terms of the relief will be subject to a further ruling from the Board.

The Regulations were promulgated in order to give effect in the United Kingdom to European Directive 2002/47/EC on financial collateral arrangements which was intended to provide for "rapid and non-formalistic enforcement procedures in order to safeguard financial stability and limit contagion effects in case of a default of a party to a financial collateral arrangement." Notwithstanding that stated purpose, it is now plain that in certain circumstances it is possible for the court to reopen an appropriation and exercise its jurisdiction to grant relief from forfeiture after the event.

Members of Chambers: Iain Milligan QC and Blair Leahy for the Respondents (instructed by Hogan Lovells International LLP)