Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Lord Walker of Gestingthorpe |
| Judgment Date | 05 May 2009 |
| Neutral Citation | [2009] UKPC 19 |
| Court | Privy Council |
| Docket Number | Appeal No 60 of 2008 |
[2009] UKPC 19
Present at the hearing:-
Lord Hope of Craighead
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Baroness Hale of Richmond
Lord Mance
Privy Council
[Delivered by Lord Walker of Gestingthorpe]
This appeal from the British Virgin Islands ("BVI") raises a novel issue as to how the rules of English law relating to equitable mortgages of shares have been affected by European Directive 2002/47/EC on financial collateral arrangements ("the Directive"). The issue happens to arise in an appeal from the BVI because shares in two companies incorporated under the BVI Business Companies Act 2004, Cukurova Finance International Ltd ("CFI") and Cukurova Telecoms Holdings Ltd ("CTH") were provided as security under two sets of equitable mortgages, one set ("the BVI share charges") governed by BVI law and the other set ("the English share charges") governed by English law. CFI is the first appellant. The security was provided for repayment of a loan of US$1,352,000,000 made to CFI by Alfa Telecom Turkey Ltd ("ATT"), the respondent to this appeal.
The appeal now before the Board is concerned with preliminary issues directed to be heard in two sets of proceedings which have been consolidated, that is a claim by ATT for (among other things) a declaration that the English share charges have been enforced by a valid appropriation, and a claim by CFI and CTH for the redemption of all the share charges (both BVI and English). It is the novel remedy of appropriation, introduced by the Directive, which lies at the heart of this appeal.
In the meantime litigation is continuing in the BVI courts on other issues not within the scope of the preliminary issues (in particular, whether or not default has occurred within the terms of the facility agreement between the parties under which the share charges were made). Their Lordships will not express any view on contentious issues which lie outside the scope of the preliminary issues.
The Directive
The Directive was made by the European Parliament and the Council of the European Union on 6 June 2002. Its purpose (described in no fewer than 22 recitals) is to improve the integration, efficiency and stability of financial markets by simplifying enforcement procedures, eliminating or reducing difficulties arising from the insolvency laws of different member states, and eliminating re-characterisation of repurchase arrangements (repos) as merely security interests. Recital (17) is particularly in point:
"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."
The Directive is concerned with financial collateral arrangements, divided into two mutually exclusive categories defined in Article 2.1(b) and (c):
"(b) 'Title transfer financial collateral arrangement' means an arrangement, including repurchase agreements, under which a collateral provider transfers full ownership of financial collateral to a collateral taker for the purpose of securing or otherwise covering the performance of relevant financial obligations;
(c) 'Security financial collateral arrangement' means 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."
Some commentators (including Professor Sir Roy Goode, Legal Problems of Credit and Security, 3 rd ed. (2003) para 6-38) have pointed out that the assumption that "full ownership" is with one party or the other does not easily apply to an English mortgage (whether legal or equitable) as each party has a proprietary interest in the collateral so long as the security is in place. But it is common ground that each of the English share charges must be regarded as a security financial collateral arrangement ("SFCA").
Article 1.4 provides that financial collateral must consist of cash or financial instruments (widely defined in Article 2.1(e) so as to include shares, whether quoted or unquoted). Article 2.2 provides:
"References in this Directive to financial collateral being 'provided', or to the 'provision' of financial collateral, are to the financial collateral being delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral taker or of a person acting on the collateral taker's behalf. Any right of substitution or to withdraw excess financial collateral in favour of the collateral provider shall not prejudice the financial collateral having been provided to the collateral taker as mentioned in this Directive."
Article 4 (Enforcement of financial collateral arrangements) must be set out in full:
"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."
The Regulations
The Directive did not have direct effect as a matter of Community law. Member States were required to give effect to it by 27 December 2003 at latest. The United Kingdom gave effect to it by the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226) ("the Regulations") made by HM Treasury under section 2(2) of the European Communities Act 1972. The Regulations apply in Scotland and Northern Ireland as well as in England and Wales. They are significantly wider in their scope than the Directive required, since (by the effect of Article 1.2 and 1.3) its application was mandatory only in respect of transactions between public authorities, central banks, and institutions authorised to participate in financial markets (the precise terms as set out in Article 1.2(a) to (d)). Its application was optional if one party was a public authority or authorised institution and the other was an ordinary company (within Article 1.2(e)). The Treasury, after consultation, decided to include not only the optional case but also transactions between ordinary companies. In separate judicial review proceedings in England ( R (Cukurova Finance International Ltd) v HM Treasury 29 September 2008 [2008] EWHC 2567 (Admin)) the appellants applied for leave to challenge the Regulations as being on this ground ultra vires section 2(2) of the European Communities Act 1972, but leave was refused on the ground of delay (Moses LJ also commented that the challenge was unlikely to have succeeded on its merits).
The Regulations contain (in Regulation 3) some definitions that call for mention. "SFCA" is defined as meaning:
"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; any right of the collateral-provider to substitute the equivalent financial collateral or withdraw...
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