On 22 April 2008 the Eastern Caribbean Court of Appeal handed down its decision in Alfa Telecom Turkey Limited v Cukurova Finance International Limited, reversing the original decision of the British Virgin Islands High Court. The case related to the English remedy of "appropriation" under the Financial Collateral Arrangements (No 2) Regulations 2003 (the "Regulations") as it applied to shares in British Virgin Islands companies which are subject to an English law share mortgage.
The case is the first known judicial decision anywhere on the interpretation of the Regulations, and has generated considerable interest in the European financial markets.
Facts
The relevant facts can be succinctly summarised: The applicant, Alfa, had made a loan of approximately US$1.352 billion to the first respondent, Cukurova Finance. As part of the security package for the loan, share charges had been granted under both English law and British Virgin Islands law over the shares in Cukurova Finance itself and one of its British Virgin Islands incorporated subsidiaries. A default was called under the loan, and Alfa sought to "appropriate" shares in the two British Virgin Islands companies under the English law governed share mortgages by sending letters to the registered office of the chargors and the share issuing companies purporting to exercise the right of appropriation, but the chargee was never actually entered in the share register as the registered holder of the relevant shares.
First instance
At first instance Joseph-Olivetti J held that although the remedy was available, the mere sending of the letters by Alfa had not effectively exercised the right. Influential in her thinking was that (i) under British Virgin Islands law a person is not recognised as the legal owner of shares until they are registered in the share register; (ii) the Regulations laid emphasis upon the right to "keep" or "retain" collateral, rather than to require the chargee transfer it; and (iii) she felt that some "overt action" was required which vested the legal and equitable rights in the chargee in order to exercise the right - the mere sending of letters was not sufficient, and that actual registration should be required - commenting: "I am not persuaded that to require registration would be that cumbersome to be said to defeat the purpose of the [R]egulations & to my mind it will lend certainty to a situation as has arisen here."
Court of Appeal
The leading judgment was given by Barrow JA. The Court of Appeal did not agree with Joseph-Olivetti J that to exercise the remedy, one had to become absolute owner of the shares. They preferred the view of Lord Millett (who gave expert evidence for Alfa at first instance) that an exercise of the remedy which did not result in the chargee being registered as the absolute owner had the effect of making it the full beneficial owner of the shares, and reducing the legal ownership to a mere shell. Joseph-Olivetti J had rejected that view on the basis that the Regulations needed to be interpreted in a uniform manner across EU member states, and such an interpretation would be wholly improbable where the vast majority of EU member states did not recognise the concept of equitable title. The Court of Appeal did not agree. It felt that because the Regulations were expressed to apply to equitable mortgages (which are themselves similarly unknown outside of common law systems), this provided a basis for divergence: "It follows inescapably & that what is required for appropriation in English law must diverge from what may be required in other EU member states."
The Court of Appeal further added that, following the guidance of Lord Steyn in Director of Fair Trading v First National Bank plc [2001] UKHL 52, "[t]he requirement & that the collateral taker must become the absolute owner of the collateral on appropriation, calls for a pragmatic construction." Implicitly this would require different things to be done in different member states. The Court of Appeal felt it could not be right that the remedy be effectively unavailable to equitable mortgagees when the Regulations are expressly stated to apply to such mortgages. Furthermore, appropriation was intended to solely be a self-help remedy.
The Court of Appeal further held that pragmatic interpretation required that "full ownership" or "absolute ownership" be construed as meaning full or absolute ownership of the beneficial interest in line with the common law on mortgages (see for example Marshall v Shrewsbury (1875) LR 10 Ch App 250 at 254), and that no particular difficulty would arise by virtue of a separation of legal and beneficial title on enforcement as this had been the position for years in relation to the law of foreclosure.
By holding that the right of appropriation can be exercised with respect solely to equitable title, the Court of Appeal also sidestepped the concern that the emphasis of the Regulations was to allow the chargee to "keep" or "retain" collateral. If the right related to equitable title only, then it did not matter that the chargee had never been registered as the holder of the shares, or that relevant provisions of the British Virgin Islands statute requiring a registered title holder to be entered in the share register had not been complied with. Further, it was therefore felt that forming a mere intention to retain the collateral was sufficient for an equitable interest. In the Court's closing remarks it held that Alfa "formed the intention to keep absolutely the interest that had previously passed by way of security. That is all appropriation requires."
It is assumed that Cukurova will now make a further appeal to the Privy Council.
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