Like a low budget horror film, the Alfa v Cukurova litigation seems to have an inexhaustible supply of sequels.  However, beyond a propensity for repetition, there the end of parallels to low budget horror films ends (or low budget anything: the parties have spent millions of dollars in legal fees fighting for control of the US$3.3 billion BVI incorporated joint venture vehicle).  And unlike the denizens of Elm Street or Crystal Lake, the end of this series seems to have a slightly less predictable finish.On 30 January 2013 the Privy Council handed down the seventh, and what may be the last, substantive judgment in the seemingly interminable Alfa Telecom v Cukurova litigation (report at UKPC [2013] 2).  In a surprising decision, the Privy Council determined that Alfa had validly enforced the underlying share security, but awarded relief from forfeiture.  The decision is likely to prove controversial.  Whilst affirming the availability and exercisability of appropriation of collateral as a summary out of court remedy, hedging the remedy in by making available relief from forfeiture is certain to attract a great deal of commentary.

The History

The background facts are complex, but in summary: In 2005 the two protagonists entered into a joint venture whereby the Cukurova group sold to Alfa a 49% interest in a BVI single purpose vehicle which held a significant stake in Turkcell AS, a telecoms company listed on the New York stock exchange.  In addition, Alfa advanced a substantial loans to the Cukurova group, approximately US$1.3 billion of which was secured by mortgages over the remaining shares which Cukurova held in the BVI SPV (Harneys acted for the Alfa group on the original transaction, and Harneys’ associated fiduciary company formed all of the offshore vehicles for both parties in the transaction).  Alfa actually took two share mortgages over Cukurova’s 51% interest in the BVI SPV: one governed by BVI law and one governed by English law.  The main purpose of the English law governed mortgage was to make available the English law remedy of appropriation under the Financial Collateral Arrangements (No 2) Regulations 2003.  This would prove to be crucial.

The Litigation

The relationship was fairly rocky from the outset, and eventually in 2007 Alfa sought to accelerate the loan and exercise its rights as a secured creditor in relation to Cukurova’s 51% stake in the SPV.  Perhaps predictably, given the values at stake, this then created an avalanche of litigation.

Alfa immediately sought to “appropriate the shares” in the SPV by sending a letter to the registered agent, and Cukurova immediately sought to restrain the enforcement and disputed that an event of default had occurred or that enforcement action had been validly taken.

A preliminary point, whether the remedy of appropriate had been validly exercised by Alfa (assuming an event of default had occurred) was litigated all the way to the Privy Council (report at [2009] UKPC 19) and ultimately determined in favour of Alfa.  Separately Cukurova instituted judicial review proceedings in the UK courts alleging that the Financial Collateral Arrangements (No 2) Regulations 2003 were ultra vires and void, but Alfa prevailed again in those proceedings (R v HM Treasury [2008] EWHC 2567).

Thus after about two and a half years of preliminary wrangling the substantive proceedings then started, and initially Cukurova prevailed in the BVI commercial court, Bannister J holding that (i) no event of default had in fact occurred, (ii) if an event of default had occurred Alfa would not be precluded from enforcing by virtue of acting in alleged bad faith.  The finding relating to events of default was reversed by the Easter Caribbean court of appeal and that determination was upheld by the Privy Council.  However the Privy Council held that Cukurova was entitled to relief from forfeiture – a point not even addressed by the court of appeal’s judgment, and one which the court at first instance declined to consider (having held there was no event of default).

The Privy Council decision

Of the several events of default which were relied upon, the Privy Council focused solely upon the “material adverse change” ground.  At first instance, Bannister J had held that the ground was not mad out as Alfa needed to plead and prove that it was subjectively satisfied that Cukurova had suffered a material adverse change as a result of related litigation; the court had held that no evidence had been put before it that the sole director of the Alfa shareholding vehicle had formed the necessary view.  The Privy Council dismissed this as unnecessarily formalistic: it was clear that the moving minds behind Alfa had formed the relevant state of mind, regardless of what the personal opinion of the de jure director of the Alfa shareholding vehicle was.

Sadly, having determined that one event of default was made out, the Privy Council then did not consider any further events of default.  This was perhaps unfortunate, as it meant that their Lordships did not comment on one of the more controversial aspects of the first instance decision.  During the period prior to litigation, Cukurova had made various “cash injections” into the SPV.  Alfa alleged that these were legally presumed to be loans, and thus triggered an event of default by breaching various indebtedness covenants in the loan documents.  However Bannister J had held that these were “equity injections” despite no shares being issued in consider for the funds and no documentation supporting this contention (and the fact that the company’s accounts showed it as debt).  This novel concept of equity injections was certainly judicially innovative, and the views of the Board would have been welcome.

In relation to whether any lack of good faith should vitiate the right of Alfa to exercise its rights as a secured creditor, the Privy Council endorsed the decision of Bannister J: once Alfa had validly accelerated the US$1.3 billion debt, it was entitled to make full use of its recourse to collateral.  Whether or not Alfa had manufactured the situation did not change that the basis of its right to enforce was grounded upon and founded in its right to have its debt satisfied.

The Board then considered relief from forfeiture, the first tribunal to do so substantively in the litigation.  Their Lordships first confirmed that the remedy was in principle available in relation to personal property rights in commercial transactions, and then turned their minds to whether the Regulation precluded relief, and rapidly determined that they did not.  Considering the facts of this case they held that relief from forfeiture was appropriate on terms to be determined at a subsequent hearing.  The Board noted the strong admonitions against relief from forfeiture in commercial cases in leading texts, but were satisfied that relief was still appropriate, citing several factors, almost all of which focused on the behaviour of Alfa, rejected tenders for payment and taking steps to complicate Cukurova’s attempts to repay or refinance the debt.

Part VIII?

The Board invited the parties to return for arguments on the terms of relief, and went so far as to set out an exhaustive list of matters on which the Board would wish to hear argument.  Whether or not the parties have enough energy for one more battle remains to be seen.  But whether they do so or not, the decision of the Privy Council has given the legal world plenty to think about, and it remains to be seen how the markets will react to summary remedy like appropriation being hedged in with the prospects of relief from forfeiture in commercial transactions.  That should at least be more interesting than wondering whether the scantly clad heroine of the low-budget horror film will ultimately triumph over the serial killer.  Again.