7/22/13 PLC -Conditions for granting relief against forfeiture determined (Privy Council)

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 from 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 51%.

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 51%

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 Appeal

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/4-524-

0432).

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

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Legal update: case report

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7/22/13 PLC - Conditions for granting relief against forfeiture deternnined{Pri\y Council)

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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