Appropriation Of Shares In BVI Companies Under English Law Share Mortgages

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...