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Appropriation of shares and relief from forfeiture



United Kingdom

Appropriation of shares and relief from forfeiture

Finance brief - April 2013

  • New regime for registering charges at Companies House
  • FATCA: better news for Lenders
  • Is your default interest clause enforceable?
  • Appropriation of shares and relief from forfeiture
  • Security over Art: an introduction
  • Margin lending: a brief introduction


The saga concerning control of the Cukurova group – and hence ultimately of a publicly quoted Turkish cell phone network provider – returned to the Privy Council in the case of Cukorova Finance International Limited and Cukurova Holding AS v Alfa Telecom Turkey Ltd [2013] UKPC 2, resulting in a decision of considerable interest on the remedy of appropriation, and also on a material adverse change event of default.

Under the Financial Collateral Arrangements (No 2) Regulations 2003 (the "Regulations") a right may be included in a mortgage and, following an amendment to the Regulations in 2011, a charge of financial collateral such as shares, to appropriate the collateral in satisfaction of the secured obligations.  It is effectively a right of forfeiture without having to go through the courts.

In April 2007, Alfa Telecom Turkey Ltd ("ATT") accelerated a loan made to Cukurova Finance International Ltd ("CFI") then standing at $1.352bn and gave notice requesting that is be registered as the owner of shares in two Cukurova group companies which had been charged to it under share charges governed by English law.  It was accepted by the parties that these fell within the Regulations, presumably on the grounds that they amounted to equitable mortgages.  CFI was, by then, in a position to refinance the facility, and challenged the appropriation on a number of grounds.  Following earlier proceedings which confirmed that what had been done had been sufficient to appropriate the shares, the case came on appeal to the Privy Council once again, this time on the issue of whether CFI could recover the shares.

CFI sought to have the appropriation set aside on the basis that the power had been exercised by ATT in bad faith and for an improper purpose.  But despite the fact that ATT's motive in exercising the power had been held by the lower courts to have been a commercial one, to gain control of the companies whose shares had been charged, CFI was unsuccessful on this point.  The Privy Council held that a default had been established, and that ATT had been entitled to exercise its contractual right to appropriate the shares in order to satisfy the debt.  The fact that the outcome was highly attractive to ATT did not mean that it was acting in bad faith.  Appropriation is, however, essentially an act of forfeiture, albeit one established by regulations stemming from the EU Financial Collateral Directive, and the court held that it retained its inherent jurisdiction under English law to grant relief from forfeiture when a power of appropriation had been exercised.  It referred the matter back to the lower courts to determine the terms on which relief would be granted.  What is perhaps unusual is that ATT had retained the shares: indeed the court noted that the case involved a combination of unusual features unlikely to be repeated, but also made some interesting observations on matters such as the valuation of the shares.  Had they been appropriated and then disposed of, it is most unlikely that the court would have been willing (or able) to restore the shares to CFI, suggesting that an aggrieved debtor should seek relief from forfeiture promptly.

The other interesting aspect of the decision is that the court found that ATT had been entitled to accelerate the loan on the basis of the breach of a material adverse effect event of default.  The relevant provision required an event or circumstance which in the opinion of ATT had had or was reasonably likely to have a material adverse effect on the financial condition, assets or business of CFI.  In defaulting the loan, ATT had expressly relied on the fact that a press release had been issued reporting an arbitral award that CFI would obviously be unable to comply with, and which would result in a substantial damages claim likely to have a material adverse effect.  The relevant clause did not require ATT as lender to establish objectively that these events had actually had a material adverse effect, but the lender's belief that they had in fact done so had to be both honest and rational.  There also had to be admissible evidence to show that ATT had actually formed that view, which there was.  Having come to this conclusion, it was unnecessary to consider whether any of the other alleged events of default had occurred.

In relation to appropriation, the interesting aspect of the decision is the confirmation of the close alignment between the new remedy of appropriation and the longstanding one of forfeiture, with the result that the court has power to grant relief.  A lender may enforce its security for the proper purpose of satisfying the debt even though it may have other reasons for doing so, but its motives may be highly relevant to whether or not the court will grant relief from forfeiture.  On the material adverse effect issue, lenders have traditionally been cautious about relying on such a provision to default a loan.  Much will depend on the facts of the case and the exact terms of the relevant event of default – in particular if there is a requirement for the lender's view to be a reasonable one.   Together with other recent decisions, however, the case may give lenders slightly more confidence in their ability to default a loan in reliance of such a provision.  Clearly though, if the clause requires the lender to form a particular view, it should ensure that the process by which this is done is properly conducted and documented. 

Robert Cooke, Partner, Finance at Field Fisher Waterhouse LLP