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 finance.practicallaw.conV9-534-4106 1/8
7I22J'\Z PLC - Conditions for granting relief against forfeiture determined (Pri\y Council) 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 finance.practicallaw.conV9-534-4106 2/8
7/22/13 PLC - Conditions for granting relief against forfeiture determined (Pri\yCouncil) 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. finance.practicallaw.com/9-534-4106 3/8
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