Cukurova Finance v Alfa Telecom

Heard on 22–25 October 2012

This is a judgment to which all members of the Board have made substantial contributions. It arises from an appeal brought by Cukurova Finance International Ltd ("CFI") and Cukurova Holding AS ("CH") against a decision of the Court of Appeal of the Eastern Caribbean Supreme Court ("the Court of Appeal") handed down on 20 July 2011, reversing a decision of the trial judge, Bannister J.

At the trial, there was substantial documentary evidence, including witness statements, and there were significant issues of primary and secondary fact, which were the subject of cross-examination and argument. The great majority of the factual evidence and almost all the contents of the voluminous documentation are irrelevant for present purposes. Further, with the exception of one important area, so far as any of the factual material was in issue, any dispute has been conclusively resolved by the trial judge, Bannister J. Accordingly, the relevant facts can be stated relatively shortly.

CFI and CH are members of the Cukurova Group of companies, a group which has extensive business interests, the majority of which are in Turkey. Prior to September 2005, CH owned 52.91% of a company called Turkcell Holding AS ("TCH"). The remaining shares in TCH were held by a company now called Telia Sonera Finland OYJ ("Sonera").

TCH held 51 of the 100 issued shares in a company called Turkcell Iletisim Hizmetleri AS ("Turkcell"), a Turkish cell phone network provider whose shares are traded on the Istanbul and New York Stock Exchanges.

During 2003 and 2004, the Cukurova Group was under considerable cash flow pressures. With a view to alleviating those pressures, the group's representatives had discussions during 2005 with representatives of the Alfa Group, a substantial Russian conglomerate, with interests in various business areas including the provision of cell phone networks.

While those discussions were proceeding, Sonera raised a contention that CH was obliged to transfer its TCH shares to Sonera, pursuant to an alleged preemption agreement. In the course of the discussions it became apparent that the shares in Turkcell and TCH might feature in any agreement. Accordingly, with a view to defeating Sonera's claim to CH's shares in TCH, CH transferred those shares to a newly incorporated BVI registered company called Cukurova Telecom Holdings Limited ("CTH"), which was itself wholly owned by another newly incorporated BVI company, CFI, whose two shares were owned by CH.

Thereafter, the negotiations between the two groups proved successful, and, on 1 ^st June 2005, CH and CFI entered into an agreement (the 'Subscription Agreement') with a newly formed company in the Alfa Group, Alfa Telecom Turkey Limited ('ATT'). In summary, the effect of the Subscription Agreement was as follows:

Meanwhile, on 17 ^th June 2005, Sonera began arbitration proceedings against CH in Geneva ("the Geneva arbitration") claiming specific performance of the pre-emption agreement relied on by Sonera. Four days later, the existence of these proceedings was disclosed by CFI and CH to the Alfa Group.

The Shareholders' Agreement was executed on 20 ^th September 2005. About a week later, on 28 ^th September 2005, the Facility Agreement was entered into. Under this agreement, ATT agreed to lend CFI US$1.352 billion, secured on CFI's 51% shareholding in CTH, and on CH's 100% shareholding in CFI. This borrowing was to be repaid in four equal annual instalments, the first of which was due, in the event, on 24 ^th November 2008. Interest was payable on this facility at an annual rate of 8% over LIBOR Clause 6.4 of the Facility Agreement permitted CFI to prepay "the whole or any part of the loan" on giving "not less than 5 Business Days' prior notice." Clause 7.4 provided for default interest at a rate of 11.5% over LIBOR in relation to any payment once it becomes overdue.

The Facility Agreement imposed various obligations on CFI. They included, in clause 16.4 and clause 16.10 respectively, a qualified obligation not to increase the borrowings of the telecom companies in the Cukurova Group (which included CH, CFI and CTH), and an obligation to "take all such action as [ATT] may reasonably request for the purpose of perfecting the Security".

Clause 17 was headed "Events of Default", and its first seventeen sub-clauses identified what constituted such events. Clause 17.2(A) referred to non-compliance by CFI with any obligation in "the Finance Documents", which expression was defined as including the Facility Agreement itself and "any Security Document". However, clause 17.2(B) provided that if such non-compliance was "capable of remedy", it could not be relied on by ATT if it was remedied within five business days of ATT giving notice of the non-compliance or of CFI becoming aware of it. Clause 17.5 included the inability of any Cukurova Group telecom company "to pay its debts as they fall due".

Clause 17.16 of the Facility Agreement was in these terms (incorporating a relevant provision of the definitions clause):

"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]".

Clause 17.18 of the Facility Agreement provided that, '[o]n and at any time after the occurrence of an Event of Default which is continuing', ATT could take one or more of three specified steps, including 'declar[ing] that all or part of the Loan, together with accrued interest…. be immediately due and payable, whereupon they shall immediately become due and payable'.

On the same day, 28 ^th September 2005, ATT agreed to make an unsecured loan to CFI in the sum of US$355 million at the same rate of interest.

Also on the same day, CFI executed a charge by way of equitable mortgage, governed by English law, over CFI's 51% shareholding in CTH and on 25 November 2005 CH granted a similar charge over CH's 100% shareholding in CFI (together, "the Charges"), as security for the repayment by CFI of the US$1.352 billion facility to be provided by ATT. The Charges were in virtually identical terms, and each contained provisions disapplying the restrictions contained in the Law of Property Act 1925 in relation to the mortgagee's powers of sale and to appoint receivers.

Clause 9.3 of each of the Charges was in the following terms:

• 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…".

Completion of the arrangements did not take place immediately, because Sonera obtained an injunction in Switzerland. Following the discharge of that injunction, on 25 ^th November 2005 ATT made the secured and unsecured advances contemplated by the Subscription Agreement and the Facility Agreement, and CH and CFI granted ATT the Charges over, respectively, CH's 100% holding in CFI and CFI's 51% holding in CTH (together "the charged shares").

As explained by Bannister J:

"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 judge found that "from the outset", Alfa entered into the transaction embodied in the Agreements executed in September 2005 with a view to exercising its rights, especially the power of appropriation under clause 9.3 of the Charges...