Cukurova Finance International Limited and another v Alfa Telecom Turkey Limited (British Virgin Islands)

Relief against forfeiture ordinarily requires late performance of the secured contract, including payment of principal, interest and costs. Where appropriation has discharged the secured debt, however, equity may depart from that basis in exceptional circumstances if subsequent events make its application inequitable or unconscionable. A full tender which the mortgagee rejects, supported by money kept available in a segregated fund, may suspend interest while the fund remains available. Interest may resume when the fund is released, but the standard rather than default rate may apply where the lender’s rejection caused the continuing non-payment. Contractual costs rights remain subject to equity’s ultimate control over the conditions of redemption.

Cukurova Finance International Limited and another v Alfa Telecom Turkey Limited (British Virgin Islands) concerned a US$1.352 billion loan secured by equitable mortgages over shareholdings which conferred control of a mobile telephone company. Following an event of default and acceleration of the loan, the lender appropriated the shares under the Financial Collateral Arrangements (No 2) Regulations 2003.

In the preliminary appeal reported at [2009] UKPC 19 and [2009] 3 All ER 849, the Board held that appropriation had occurred. In [2013] UKPC 2, it held that the appropriation was valid but that the borrowers were entitled to relief against forfeiture on appropriate conditions. The present judgment determined those conditions.

Shortly after appropriation, the borrowers tendered what the parties then treated as the full debt. The lender rejected the tender, and US$1.5 billion was maintained in the Namrun account for three years. The principal issues were whether equity could depart from the contractual basis ordinarily governing redemption and what effect the tender and segregated fund had on interest.

1. Disposition. The Board unanimously agreed on the financial result. Relief against appropriation was granted on condition that the borrowers paid a redemption sum of US$1,564,719,492.62 within 60 days, together with further interest calculated to the date of payment. The calculation allowed default interest until the tender, no interest while the Namrun account remained funded, and standard contractual interest thereafter.
2. Lord Mance, with whom Lord Kerr and Lord Clarke agreed, held that appropriation under the Financial Collateral Arrangements (No 2) Regulations 2003 had discharged the debt at law. Equity did not preserve the debt in a parallel existence or necessarily revive the entire contractual history retrospectively. Although relief ordinarily requires payment of principal, contractual interest and costs, that rule is not inflexible. After a discharged debt, equity may consider subsequent events and set different conditions where exceptional circumstances make the ordinary reconstruction inequitable or unconscionable.
3. The appropriation had been intended to forestall imminent repayment. A tender of the debt, including default interest, was made shortly afterwards and was backed for three years by the Namrun account. The lender rejected payment because it wanted the shares and control which they conferred. Equity therefore treated the tender and segregated fund as preventing interest from running between 25 May 2007 and 25 May 2010. Once the account closed, standard interest at LIBOR plus 8%, compounded annually, resumed. The borrowers were not thereafter treated as remaining in default because the lender’s rejection was the operative reason for non-payment.
4. The acceleration notice did not select a new interest period or determine a new LIBOR rate under the contractual provisions. It merely notified acceleration and the application of the default margin. A one-day shortfall in the tender was included in the final calculation but did not otherwise invalidate the tender. The lender had accepted its sufficiency throughout the litigation and raised the objection too late.
5. Contractual and equitable rights to costs normally support an indemnity as a condition of redemption, but they remain subject to the court’s control. The borrowers were ordered to pay £2 million on account and the lender’s costs of these proceedings on the standard basis.
6. Lord Neuberger, with whom Lord Sumption agreed, reached the same financial result by a different route. In their view, relief merely extended time or retrospectively revived the contract, so equity could not alter non-penal contractual terms. Interest nevertheless stopped while the tendered money remained segregated under the ordinary rule governing a rejected tender. The Board was therefore divided three to two on the scope of equitable discretion but unanimous on the operative conditions.

1. Privy Council: In the present judgment, [2013] UKPC 20, the Board fixed the conditions for relief against appropriation. The financial result was unanimous, although the Board divided three to two on the legal basis.
2. Privy Council: In [2013] UKPC 2, the Board held that an event of default had occurred and that the lender had validly appropriated the shares, but that relief against forfeiture should be available on appropriate conditions. Further submissions were invited.
3. Privy Council: In [2009] UKPC 19, also reported at [2009] 3 All ER 849, the Board determined the preliminary appeal and held that the lender had appropriated the shares.
4. Court of Appeal of the British Virgin Islands: Appeals arose from a preliminary determination and a later full trial. Citations for the Court of Appeal judgments are not stated in this judgment.