Cukurova Finance International Ltd & Anor v. Alfa Telecom Turkey Ltd

Factual and Procedural Background

Company C borrowed USD 1.352 billion from Company A under a facility agreement dated 28 September 2005. The debt was secured by (i) Company C’s 51 % shareholding in Company D and (ii) Company B’s 100 % shareholding in Company C. Those shares conferred control of Turkey’s largest mobile-telephone operator. The loan was repayable in four annual instalments with interest at LIBOR + 8 %, rising to LIBOR + 11.5 % on default.

An event of default occurred. On 16 April 2007 Company A accelerated the loan and, on 27 April 2007, appropriated the pledged shares pursuant to the Financial Collateral Arrangements (No 2) Regulations 2003, treating the loan as discharged. On 25 May 2007 Companies B & C tendered what they considered the full redemption sum, backed by funds held in an escrow (the “Namrun account”), but Company A refused, wishing to retain the shares and the accompanying control premium.

Lengthy litigation ensued. In May 2009 and January 2013 the Privy Council upheld the validity of the appropriation yet held that Companies B & C were in principle entitled to relief against forfeiture on appropriate terms. The present judgment determines those terms after further written and oral submissions heard on 4 March 2013.

Legal Issues Presented

1. Whether the court’s power to grant relief against forfeiture obliges the borrowers to perform all contractual obligations (including ongoing default interest) or permits the court to modify those obligations in exceptional circumstances.
2. The effect of the borrowers’ tender on 25 May 2007—and the maintenance of USD 1.5 billion in the Namrun account for three years—on the running of contractual interest.
3. Whether Company A may rely on a minor shortfall in the tendered amount to defeat the borrowers’ reliance on that tender.
4. The proper rate and period of interest to be included in the redemption sum.
5. The incidence and quantum of costs payable as a condition of relief.

Arguments of the Parties

Borrowers’ Arguments (Companies B & C)

• The court has a discretion, grounded in equity, to adjust the terms of redemption where strict enforcement would be unconscionable.
• The tender on 25 May 2007, rejected without justification, should stop interest running while the Namrun account remained funded.
• The contractual default-interest provisions should not apply after 25 May 2007; at most LIBOR + 8 % should run from 25 May 2010.
• The minor arithmetical shortfall in the tender was de minimis and, in any event, Company A is estopped from raising the point so late.
• Company A’s litigation stance was motivated by a wish to obtain control of the underlying telecom company, so its costs recovery should be limited.

Lender’s Arguments (Company A)

• Relief against forfeiture can do no more than extend the time for strict contractual performance; therefore the loan must be treated as outstanding with default interest at LIBOR + 11.5 % compounded since 17 April 2007.
• The borrowers’ tender was ineffective: (a) it post-dated a lawful appropriation, (b) it understated the amount due, and (c) the funds were not kept “dead”.
• All enforcement costs fall within a contractual indemnity; payment of the full figure (approximately USD 3.97 million) should be a condition of relief.
• Any departure from the contractual position undermines commercial certainty in secured lending.

Table of Precedents Cited

Court's Reasoning and Analysis

Majority (Judges Mance, Neuberger and others)

• Although appropriation technically discharged the debt in law, equity may grant relief in “exceptional circumstances” where insisting on strict contractual terms would be unconscionable.
• The lender’s central objective was to seize control of the telecom company, not to secure repayment; rejecting the borrowers’ timely tender was therefore inequitable.
• During the three-year period when USD 1.5 billion was locked in the Namrun account, the borrowers carried the financing cost; equity should therefore suspend interest for that interval.
• From 25 May 2010 onward, interest should resume at the standard (non-default) contractual rate (LIBOR + 8 %) with annual rests.
• The lender’s contractual costs clause is subject to the court’s equitable discretion; a flat sum of USD 3.02 million (≈ GBP 2 million) on account, plus standard-basis costs of the proceedings, is sufficient.

Minority (Judges Neuberger and Sumption)

• Equity’s role is to relieve from the penalty of forfeiture, not to alter non-penal contractual obligations; the debt (principal and contractual interest) is revived upon relief.
• The tender and escrow stopped interest only because, once relief is granted, the refusal becomes unjustified under common-law tender principles—not because of any discretion to rewrite the contract.
• Accordingly, interest halts from 25 May 2007 to 25 May 2010 but otherwise accrues strictly under the facility agreement.

Holding and Implications

Relief GRANTED on Conditions.

Companies B & C must, within 60 days, pay approximately USD 1.565 billion calculated as:

• Principal and accrued interest to 16 April 2007.
• Default interest at LIBOR + 11.5 % from 17 April 2007 to 25 May 2007.
• No interest for 25 May 2007 – 25 May 2010.
• Standard contractual interest (LIBOR + 8 %, annual rests) from 25 May 2010 to payment.
• USD 3.02 million on account of enforcement costs.
• Credit for a USD 328.9 million dividend already received by Company A.

Costs of the proceedings are awarded to Company A on the standard basis. Failure to satisfy the conditions within 60 days will leave the appropriation of shares undisturbed.

Implications are confined to the parties: the borrowers regain control of the telecom-holding shares upon payment; the lender receives full repayment with interest curtailed only for the Namrun period. No new general precedent is set, the majority stressing the “exceptional” facts, while the minority emphasise orthodox contractual principles.