Cukurova Finance International Limited and Cukurova Holding A.S. v Alfa Telecom Turkey Ltd (British Virgin Islands)

A contractual default depending on a lender’s opinion requires admissible evidence that the opinion was actually formed. The opinion must also be honest and rational.

A mortgagee who enforces security to satisfy the secured debt does not act invalidly merely because it also pursues substantial collateral objectives. Enforcement solely for a collateral purpose remains ineffective.

Equity may relieve against forfeiture of proprietary or possessory rights in personal property. Commercial character does not remove the jurisdiction. Appropriation under the Financial Collateral Arrangements (No. 2) Regulations 2003 does not exclude that relief. Its exercise depends on all the circumstances, including the applicant’s conduct, the gravity of the breach, proportionality, the ability to achieve the security’s purpose and commercial certainty.

Two companies in the Cukurova group charged shares to Alfa Telecom Turkey Ltd as security for a US$1.352 billion loan. Following an arbitral award against another group company, the lender declared an event of default, accelerated the loan and appropriated the shares under the Financial Collateral Arrangements (No. 2) Regulations 2003.

Bannister J held that no event of default had been established. He directed that the borrowers could redeem the shares upon paying the principal and interest, but did not determine their alternative claim for equitable relief from forfeiture. The Eastern Caribbean Supreme Court Court of Appeal reversed that decision on 20 July 2011. It found three events of default and upheld the acceleration and appropriation.

An earlier decision of the Board, [2009] UKPC 19, had determined that the lender’s acts were capable of effecting an appropriation, provided that it established a right to enforce the security. The present appeals concerned whether a default had occurred, whether enforcement was vitiated by bad faith or improper purpose, and whether relief from forfeiture was available and should be granted.

1. The appeals were allowed in part. The lender established an event of default under the material-adverse-effect clause and was entitled to accelerate the loan. Nevertheless, the borrowers were entitled in principle to relief from forfeiture on conditions to be determined after further submissions.

2. A provision which depended upon the lender’s opinion required proof by admissible evidence that the opinion had actually been formed. The opinion also had to be honest and rational. Bannister J had confused the companies involved in the lender’s decision-making arrangements. The evidence established that the authorised directing mind had formed the required opinion about the adverse financial consequences of the arbitral award. The Court of Appeal had therefore reached the correct result on this issue, although for different reasons.

3. A mortgagee has only the title needed to secure payment of the debt. Enforcement solely for a collateral purpose is ineffective because it frustrates the equity of redemption. Here, however, appropriation satisfied the accelerated debt in the manner expressly permitted by the charges and the Regulations. Obtaining control of the companies was a necessary incident of appropriation. Additional collateral purposes, however important to the mortgagee, did not invalidate enforcement undertaken for the proper purpose of satisfying the debt.

4. Equity had jurisdiction to relieve against the forfeiture of the charged shares. The jurisdiction extends to proprietary or possessory rights in personal property and is not confined to land. Nor is it excluded merely because the transaction is commercial. The decisive distinction is between forfeiture of proprietary or possessory rights and termination of purely contractual rights. The reasoning in BICC Plc v Burndy Corporation [1985] Ch 232 was approved and applied. The Scaptrade [1983] 2 AC 694, concerning a non-demise time charterparty, was distinguished.

5. The Financial Collateral Arrangements (No. 2) Regulations 2003 were to be construed consistently with the scheme of Council Directive 2002/47/EC, including for transactions between ordinary companies outside the Directive’s mandatory scope. Neither the Directive nor Regulations 17 and 18 excluded domestic a posteriori control through equitable relief from forfeiture.

6. The discretion was broad and flexible. Relevant considerations included wilfulness, the gravity and consequences of the default, disparity between the property’s value and the damage caused, and commercial certainty. The unusual circumstances favoured relief: the defaults were not wilful, the security remained ample, the lender suffered no material prejudice, the agreed valuation omitted a potentially substantial control premium, valid funds were tendered within a month, and restoration remained feasible. The basis, payment conditions, interest and costs were reserved for further submissions.

1. Privy Council, 30 January 2013: Upheld the finding that an event of default entitled the lender to accelerate the loan and rejected the bad-faith and improper-purpose challenge. Reversed the approach taken below to equitable relief and held that relief from forfeiture was available and should be granted on terms to be determined.

2. Privy Council, 5 May 2009: In an earlier stage reported at [2009] UKPC 19, held that the lender’s acts were sufficient to appropriate the charged shares, subject to its establishing a right to enforce the security.

3. Eastern Caribbean Supreme Court Court of Appeal, 20 July 2011: Allowed the lender’s appeal from Bannister J. It found three events of default and upheld acceleration and appropriation. Gordon and Redhead JJA did not determine relief from forfeiture; Kawaley JA rejected it because the bad-faith case had failed.

4. High Court of Justice of the Eastern Caribbean Supreme Court, Commercial Division: Bannister J held on 20 May 2010 that no event of default had been established and directed that the charged shares could be redeemed upon payment. He rejected the bad-faith argument obiter but did not determine relief from forfeiture. On 22 July 2010 he ordered contractual interest until payment.