Appropriation Of Shares In BVI Companies Under English Law Share Mortgages

On 5 May 2009 the Privy Council in London handed down its

decision in Alfa Telecom Turkey Limited v Cukurova Finance

International Limited [2009] UKPC 19, drawing a definitive end

to the vexed preliminary issue under British Virgin Islands law.

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 equitable mortgage

governed by English law.

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 have been summarised in previous notes in

relation to this case, but can be briefly repeated: 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...