CUKUROVA FINANCE INTERNATIONAL LTD V ALFA TELECOM TURKEY LTD (BRITISH VIRGIN ISLANDS)

[2009] UKPC 19, Privy Council, Lord Hope of Craighead, Lord Scott of Foscote, Lord Walker of Gestingthorpe, Baroness Hale of Richmond and Lord Mance, 5 May 2009

Remedies – Appropriation – Equitable mortgages – Whether appropriation remedy had been validly exercised – European Directive 2002/47/EC on financial collateral arrangements – Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226)

Shares in two companies, one of which was the first claimant and both of which were incorporated in the British Virgin Islands, were provided as security under two sets of equitable mortgages. One set of equitable mortgages were governed by BVI law and the other set governed by English law. The background was that one party had defaulted on the loan and the other had purported to appropriate the shares serving as security by serving stop notices directing that no transfers in the shares could be registered and that no payments of dividends could be made. This was an appeal to the Privy Council of a decision on preliminary issues from the Court of Appeal of the British Virgin Islands. The issue at hand was how the rules of English law relating to equitable mortgages of shares had been affected by European Directive 2002/47/EC on financial collateral arrangements and whether the remedy of appropriation had been validly exercised, although the mortgagor had not obtained registration of the shares. The Privy Council held that a valid appropriation had been effected, holding inter alia as follows. The UK Treasury, in introducing the Statutory Instrument (2003/3226) which transposed Directive 2002/47 into UK law, appeared to have thought that appropriation was already a familiar remedy in the United Kingdom, so that it was not necessary to define it of give any detailed guidance as to how a power of appropriation was to be exercised. Their Lordships agreed with the sentiments expressed in the leading speech in the Court of Appeal that the need for an autonomous Community interpretation appropriation did not by necessity entail uniformity throughout the Community. They went on to describe appropriation as being much closer to sale than to foreclosure, saying that it is in effect a sale by the collateral-taker to himself, at a price determined by an agreed valuation process. The Court of Appeal had been right in adopting a pragmatic interpretation and in concluding that it was not necessary for a valid appropriation for the collateral-taker to become the registered holder of the shares.