The English High Court Provides Important Guidance On Appropriation

• Published date: 22 December 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Charges, Mortgages, Indemnities, Financial Services, Corporate and Company Law, Contracts and Commercial Law, Trials & Appeals & Compensation, Securities
• Law Firm: Morrison & Foerster LLP
• Author: Mr Vladimir Maly, Polly Ehrman, Clara Wong and Amrit S. Khosa

In this client alert we set out some of the key lessons from the recent judgment in ABT Auto Investments Ltd v Aapico Investment Pte Ltd [2022] EWHC 2839 (Comm), which considers the validity of appropriation as an enforcement power pursuant to Regulation 17 of the Financial Collateral Arrangements (No. 2) Regulations 2003 ("FCARs"), the duty imposed on a collateral-taker by Regulation 18 of the FCARs in connection with the valuation of a collateral subject to appropriation, and provides useful guidance on what is "commercially reasonable" in this context.

An Overview of Appropriation under the FCARs

The FCARs represent the UK's implementation of Directive 2002/47 EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements. The FCARs introduced into UK law the concepts of "financial collateral arrangement", a form of security arrangement designed to provide rapid and simplified recourse to financial collateral across the EU. Under the FCARs, "financial collateral" means cash, financial instruments, or credit claims, with financial instruments including shares in companies, equivalent securities, bonds, and other tradable capital market securities.

Under Regulation 17 of the FCARs, where a security interest is created or arises under a financial collateral arrangement, the parties may agree for the collateral-taker to "appropriate" the financial collateral should the security become enforceable. By this act, the collateral-taker will become the absolute owner of the financial collateral, without the need for a court order (in the case of a foreclosure or through the exercise of the power of sale). Appropriation is therefore permitted under the FCARs so long as the security agreement provides for it and, in accordance with Regulation 18(1), the financial collateral is valued "in accordance with the terms of the arrangement and in any event in a commercially reasonable manner". It is intended to be a self-help remedy and a less formalised method of security enforcement.

Background to the Case

The case was brought by ABT Auto Investments Ltd ("ABT") against Aapico Investment Pte Ltd, Aapico Hitech Public Company Limited (and, together with Aapico Investment Pte Ltd, "Aapico"), and Sakthi Global Auto Holdings Limited ("SGAH"), concerning Aapico's decision to appropriate shares in SGAH owned by ABT, which were provided as security under a share charge against the loans granted by Aapico to SGAH. SGAH is a joint-venture...