UKPC 2
Privy Council Appeal No 0023 of 2012
Privy Council Appeal No 0024 of 2012
Cukurova Finance International Limited and Cukurova Holding A.S (Appellants) v Alfa Telecom Turkey Ltd (Respondent)
From the Court of Appeal of the British Virgin Islands
JUDGMENT OF THE BOARD
30 January 2013
Heard on 22-25 October 2012
Kenneth Maclean QC
Arabella di Iorio
(Instructed by White & Case LLP)
Iain Milligan QC
(Instructed by Hogan Lovells International LLP)
See also:  UKPC 20,  UKPC 25
JUDGMENT OF THE BOARD:
The relevant factual background
The contractual documentation
a) In return for a subscription price of just under US$1.6 billion, CFI was to procure that CTH issued to ATT convertible bonds which, when exercised, would give ATT 49% of the issued shares in CTH, leaving CFI with 51% of the issued shares in CTH;
b) ATT would enter into a 'Facility Agreement', under which it would agree to grant CFI (i) a facility in the sum of US$1.352 billion, secured by charges over CFI's shares in CTH and CH's shares in CFI, and (ii) an unsecured facility in the sum of US$355 million;
c) The parties also agreed to enter into a 'Shareholders' Agreement'.
"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]".
a) "To the extent that this Deed constitutes a 'financial collateral arrangement' (as defined in the Financial Collateral Arrangements (No.2) Regulations 2003 (the 'Regulations') the Lender shall have the right (at any time after the charges become enforceable) to appropriate any Charged Asset which constitutes 'financial collateral' (as defined in the Regulations ('Financial Collateral') in or towards satisfaction of the Liabilities in accordance with the Regulations.'
b) "Financial Collateral shall be valued at its Fair Price."
By an addendum deed, "Fair Price" was defined as meaning "the value of the Shares calculated on a look-through basis, based on the weighted average market value of publically traded Turkcell shares over the previous 60 day period as reported in the Istanbul Stock Exchange Bulletin ".
"Thus, the position on closing was that CFI held 51% of CTH and ATT held the remaining 49%. ATT had paid Cukurova just short of US$1.6 billion for that interest which indirectly gave it 13.22% of Turkcell. CFI's 51% interest in CTH (amounting, to a 13.67% indirect interest in Turkcell), was charged to ATT to secure the US$1.352 billion lent to it by ATT. CH's interest in CFI was also charged to ATT in support of the secured facility. Taking into account the unsecured facility, Alfa's total outlay was therefore some US$3.3 billion. TS still held the 47% holding in TCH, which continued to give it an indirect holding in Turkcell of some 24%."
The court proceedings
In the High Court
In the Court of Appeal
The events of default issue
Clause 17.16 of the Facility Agreement: the background
Clause 17.16 of the Facility Agreement: discussion
Other events of default
Bad faith and improper purpose
Relief from forfeiture
Jurisdiction to grant relief in equity
"There cannot be any doubt that from the earliest times courts of equity have asserted the right to relieve against the forfeiture of property. The jurisdiction has not been confined to any particular type of case. The commonest instances concerned mortgages, giving rise to the equity of redemption, and leases, which commonly contained re-entry clauses; but other instances are found in relation to copyholds, or where the forfeiture was in the nature of a penalty. Although the principle is well established, there has undoubtedly been some fluctuation of authority as to the self-limitation to be imposed or accepted on this power. There has not been much difficulty as regards two heads of jurisdiction. First, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate and also costs (Peachy v. Duke of Somerset (1721) 1 Stra 447 and cases there cited). Yet even this head of relief has not been uncontested " (emphasis added).
"I would fully endorse this: it remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should reaffirm the right of courts of equity in appropriate and limited cases to relieve from forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. The word 'appropriate' involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach."
"There is no clear authority, but for my part I find it difficult to see why the jurisdiction of equity to grant relief from forfeiture should only be available where what is liable to forfeiture is an interest in land and not an interest in personal property. Relief is only available where what is in question is forfeiture of proprietary or possessory rights, but I see no reason in principle for drawing a distinction as to the type of property in which the rights subsist. The fact that the right to forfeiture arises under a commercial agreement is highly relevant to the question whether relief from forfeiture should be granted, but I do not see that it can preclude the existence of the jurisdiction to grant relief, if forfeiture of proprietary or possessory rights, as opposed to merely contractual rights, is in question. I hold, therefore, that the court has jurisdiction to grant Burndy relief."
Kerr LJ agreed with that part of Dillon LJ's judgment, and Ackner LJ agreed with the whole of it at 253C and 260A respectively.
Do the Regulations exclude or limit the grant of relief from forfeiture?
"an arrangement under which a collateral provider provides financial collateral by way of security in favour of, or to, a collateral taker, and where the full ownership of the financial collateral remains with the collateral provider when the security right is established."
This definition is not easily applied to an English charge (whether legal or equitable), under which each party has a proprietary interest in the collateral so long as the security is in place (see per Lord Walker at  UKPC 19, para 5). Nevertheless, it is common ground that each of the English share charges is to be regarded as a SFCA.
"This Directive provides 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. However, this Directive balances the latter objectives with the protection of the collateral provider and third parties by explicitly confirming the possibility for Member States to keep or introduce in their national legislation an a posteriori control which the Courts can exercise in relation to the realisation or valuation of financial collateral and the calculation of the relevant financial obligations. Such control should allow for the judicial authorities to verify that the realisation or valuation has been conducted in a commercially reasonable manner."
"1. Member States shall ensure that on the occurrence of an enforcement event, the collateral taker shall be able to realise in the following manners, any financial collateral provided under, and subject to the terms agreed in, a [SFCA]:
(a) financial instruments by sale or appropriation and by setting off their value against, or applying their value in discharge of, the relevant financial obligations;
(b) cash by setting off the amount against or applying it in discharge of the relevant financial obligations.
2. Appropriation is possible only if:
(a) this has been agreed by the parties in the [SFCA]; and
(b) the parties have agreed in the [SFCA] on the valuation of the financial instruments.
3. Member States which do not allow appropriation on 27 June 2002 are not obliged to recognise it. If they make use of this option, Member States shall inform the Commission which in turn shall inform the other Member States thereof.
4. The manners of realising the financial collateral referred to in paragraph 1 shall, subject to the terms agreed in the [SFCA], be without any requirement to the effect that:
(a) prior notice of the intention to realise must have been given;
(b) the terms of the realisation be approved by any court, public officer or other person;
(c) the realisation be conducted by public auction or in any other prescribed manner; or
(d) any additional time period must have elapsed.
5. Member States shall ensure that a financial collateral arrangement can take effect in accordance with its terms notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of the collateral provider or collateral taker.
6. This Article and Articles 5, 6 and 7 shall be without prejudice to any requirements under national law to the effect that the realisation or valuation of financial collateral and the calculation of the relevant financial obligations must be conducted in a commercially reasonable manner."
"An agreement or arrangement, evidenced in writing, where
(a) the purpose of the agreement or arrangement is to secure the relevant financial obligations owed to the collateral taker;
(b) the collateral-provider creates or there arises a security interest in financial collateral to secure those obligations;
(c) the financial collateral is delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf; . and
(d) the collateral-provider and the collateral-taker are both non-natural persons."
"Any legal or equitable interest or any right in security, other than a title transfer financial collateral arrangement, created or otherwise arising by way of security including - (a) a pledge; (b) a mortgage ..".
"Financial collateral" is defined as either cash or financial instruments, and the latter expression is widely defined as including shares in companies.
"provides for the collateral-taker to use and dispose of any financial collateral provided under the arrangement, as if it were the owner of it, the collateral-taker may do so in accordance with the terms of the arrangement" (regulation 16).
"17. No requirement to apply to court to appropriate financial collateral under a security financial collateral arrangement
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.
18. Duty to value collateral and account for any difference in value on appropriation
(1) Where a collateral-taker exercises a power contained in a security financial collateral arrangement to appropriate the financial collateral the collateral-taker must value the financial collateral in accordance with the terms of the arrangement and in any event in a commercially reasonable manner.
(2) Where a collateral-taker exercises such a power and the value of the financial collateral appropriated differs from the amount of the relevant financial obligations, then as the case may be, either
(a) the collateral-taker must account to the collateral-provider for the amount by which the value of the financial collateral exceeds the relevant financial obligations; or
(b) the collateral-provider will remain liable to the collateral-taker for any amount whereby the value of the financial collateral is less than the relevant financial obligations."
Should relief from forfeiture be accorded in this case?
"Although this confers an apparently broad discretion, it is likely to be very difficult to establish a case for relief against forfeiture in a commercial context involving a freely negotiated contract. In such cases courts will place considerable emphasis upon the need for certainty."
"the court may grant or refuse relief, as the court, having regard to the proceedings and conduct of the foregoing provisions of this section [provisions requiring notice of any breach and "a reasonable time thereafter, to remedy the breach, if it is capable of remedy"], and to all the other circumstances, thinks fit; and in case of relief may grant it on such terms, if any, as to costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future, as the court, in the circumstances of each case, thinks fit".
"I desire in the first instance to point out that the discretion given by the section is very wide. The Court is to consider all the circumstances and the conduct of the parties. Now it seems to me that when the Act is so express as to provide a wide discretion, meaning, no doubt, to prevent one man from forfeiting what in fair dealing belongs to some one else, by taking advantage of a breach from which he is not commensurately and irreparably damaged, it is not advisable to lay down any rigid rules for guiding that discretion. I do not doubt that the rules enunciated by the Master of the Rolls in the present case are useful maxims in general, and that in general they reflect the point of view from which judges would regard an application for relief. But I think it ought to be distinctly understood that there may be cases in which any or all of them may be disregarded. If it were otherwise the free discretion given by the statute would be fettered by limitations which have nowhere been enacted."
"to impose a requirement that relief under section 146(2) should be granted only in an exceptional case seems to me to be seeking to lay down a rule for the exercise of the court's discretion which the House of Lords in Hyman v Rose said should not be done. Certainly Lord Wilberforce in Shiloh Spinners Ltd v Harding did not purport to do so in cases under the statute."
"no inflexible rule to the effect that the tenant must make good the breach. In an appropriate case relief against forfeiture may be granted without requiring the tenant to make good the breach immediately or at all."
Cited in support are Westminster (Duke) v Swinton  1 KB 524, where two years was allowed for reinstatement of alterations, and Associated British Ports v C.H.Bailey plc  2 AC 703, where reinstatement would have cost over £600,000, in circumstances where the tenants' evidence was that "immediate remedying of the breaches of covenant is not requisite for preventing substantial damage to the value of the reversion and is wholly out of proportion to the extent of damage to the reversion". Lord Templeman, in a speech with which all members of the House agreed, recalled Earl Loreburn's words in Hyman v Rose and said:
" . therefore, it would be open for a judge in the exercise of the discretion conferred on him by section 146 of the Act of 1925 to grant relief against forfeiture of a lease with nearly 60 years to run without requiring the tenant to spend over £600,000 without substantial benefit to anyone" (p.708F).
Again, this affirms the breadth of the court's discretion both in granting relief and as to the terms on which to grant it.
a. The basis of valuation of the shares after appropriation is for present purposes, under clause 9.3(b) of the Charges, read with the definition of "Fair Price", i.e. the weighted average market value of publicly traded Turkcell shares over the previous 60 day period as reported in the Istanbul Stock Exchange. This makes no allowance for the value of acquiring control over Turkcell, which is what this litigation is largely about. The value of that premium could be very substantial indeed. An indication of its worth is provided by the "Buy Out Price" payable under the CTH Shareholders' Agreement between CFI and ATT. This provides that, if either is required to buy out the other, a 20% premium is added to the 60 day weighted average market value on the Istanbul Stock Exchange. ATT submitted, with understandable circumspection, that, when Regulation 18 specifies that "the collateral-taker must value the financial collateral in accordance with the terms of the arrangement and in any event in a commercially reasonable manner", the concluding nine words could enable CH and CFI to require ATT to credit them with the premium, contrary to express terms of the charges. But, as Mr Milligan in effect accepted, ATT would be likely vigorously to resist any such suggestion. When ATT announced that it had appropriated the charged shares on 27th April 2007, it did so expressly on the basis that it would value them under clause 9.3 of the Charges. The Board need do no more than express scepticism that the concluding nine words of Regulation 18 could over-ride this agreed basis.
b. From the outset, the transaction was structured to preserve CH's control over Turkcell. That is why, despite the Alfa Group's wish to acquire control, CH was only willing to sell 49% of the shares in CTH to ATT.
c. Also from the outset, the Alfa Group knew that it was CFI's intention to refinance the loan as quickly as possible, but, as the judge found, "it was the expectation and aim of Alfa that [CFI] would default in November 2006 and [the] remaining [51%] stake in [CTH] would fall into Alfa's lap" (see also paras 19 to 21 above).
d. ATT acted within its rights in November 2006 in voting against any distribution of dividends until audited financial statements were available (judgment, para 184; para 20 above). It also acted within its rights in remaining silent about its plans to call in the loan because it wished to spring acceleration on CFI and in reducing the window within which the Cukurova Group might be able to achieve a refinancing (para 21 above). The press conference statements on 17th April 2007, although designed to hamper any such refinancing, were not actually causative of the Cukurova Group's inability to complete its refinancing prior to the appropriation on 27th April 2007. But all these factors expose the reality that ATT was primarily concerned with the shares not as security, but for the control over Turkcell that they would supply.
e. Even if all the events of default which ATT alleged could be relied on, they were limited in number and are not shown to have occurred wilfully:
i. The Award, giving rise to an event of default relating to 'material adverse effect', involved a decision on a strongly contested issue, whether CH and Sonera had ever reached final agreement for a sale of the shares in TCH then held by CTH. The Award held that final agreement was reached, but there is no reason to think, and there has been no suggestion, that CH did not believe that there was no binding agreement, nor that the Alfa Group was not kept fully informed about Sonera's claim.
ii. As already mentioned, the other events of default relied on by ATT, even if they had all been established, demonstrate no bad faith on the part of any company in the Cukurova Group and caused no significant damage to ATT: at worst, a couple of these alleged events of default can be said to show that CFI was somewhat casual in giving notice of certain transactions (see para 66 above).
f. The Board regards the event of default constituted by the Award as one of potential gravity, in so far as it was likely to (and did eventually) lead to a major financial liability in damages. But its actual gravity is diminished by the consideration that ATT's financial position was never really threatened or prejudiced by the Award. ATT's financial interests as lender were protected by its charges over the charged shares. At the material times, the value of those shares was sufficient to cover the whole of CFI's borrowing from ATT, even ignoring any premium attaching to them for the control over Turkcell that they would have brought. However CFI was intending to refinance its borrowing from ATT. ATT knew, and was concerned, that CFI was close to achieving that. It was ATT's aim to forestall this, and to convert its charges into ownership of the shares, giving it control of Turkcell.
g. Within a month of the appropriation, on 25th May 2007, CFI tendered what would have been valid prepayment under clause 6.4 of the Facility Agreement, five days' notice to do so having been given on 17th May 2007, and the monies tendered were thereafter kept for three years in an interest earning escrow account until 25th May 2010. Consistently with its overall aim to control Turkcell, ATT rejected the tender as well as CH's and CFI's subsequent claim to relief against forfeiture.
h. It was not until the defence was amended on 11th July 2008 that relief against forfeiture was claimed, with particulars of the essential matters relied upon, and a considerable period has elapsed since then. But the position regarding use of the appropriated shares and control of Turkcell has been frozen since April 2007, so that relief against forfeiture to restore the status ante quo is in principle feasible. It is also clear that, whenever relief against forfeiture was claimed, it would have been strongly contested, with the result that the matter would inevitably have come before this Board in any event. Para 22 of ATT's reply to the amended defence was a summary denial both of any jurisdiction to grant relief and of the appropriateness of any relief if jurisdiction existed.
a. the parallel statutory jurisdiction introduced in relation to real property by the Act, 4 Geo 2, c.28, the Common Law Procedure Acts 1850 and 1860, the Conveyancing Act 1881 and its successor section 146(2) of the Law of Property Act 1925;
b. any relevant authorities, including Hyman v Rose  2 KB 234 and  AC 623, Croft v London and County Banking Co (1885) 14 QBD 347, Howard v Fanshawe  2 Ch 581, Westminster (Duke) v Swinton  1 KB 524 and Associated British Ports v C H Bailey  2 AC 703.
If (i) is the right analysis:
a. the rate(s) of interest such amount should carry thereafter and
b. the nature and quantum of any costs, payment of which should also be made a condition of relief.
a. the rate(s) and amounts of interest incurred in order to borrow from J P Morgan Europe Ltd the monies held in the Namrun Escrow account for the three year period from 25th May 2007 to 25th May 2010 the Board understands such monies to have been borrowed under the Facilities Agreement dated 17th May 2007 found in Bundle 4d at p.2109, but invites submissions on the effect of the provisions of that Agreement,
b. the rate(s) and amounts of any interest earned on such monies while in the Namrun Escrow account for such three year period, and
c. the rate(s) of interest at which CFI could have borrowed monies to repay the debt at other times up to the present date.
If (ii) is the right analysis:
a. the precise nature and extent of the obligations regarding payment of principal, interest and, if applicable, costs, which are to be treated as having been revived retrospectively as from 257h April 2007 to date,
b. whether the effect of the revival of the contractual obligations is by the same token to enable the tender of 25th May 2007 to be taken into account retrospectively, if and to the extent that it would have been relevant had there been no appropriation, and
c. if that is the effect of the revival,
i. what the effect of the tender having been retrospectively rendered effective would be,
ii. whether the effect of the case-law is as Bannister J decided in his judgment on 13 July 2010, and, if so, whether the Board should distinguish or depart from those cases;
iii. how the court should exercise its equitable jurisdiction to grant relief from forfeiture, and in particular, what terms with regard to the rate of interest it should impose on CFI; and
d. the nature and quantum of any costs, payment of which should be required of CH and CFI as a condition of relief.
e. the nature and quantum of any costs, payment of which should be required of CH and CFI as a condition of relief.