Alfa Telecom Turkey Ltd Appellant v [1] Cukurova Finance International Ltd [2] Cukurova Holdings as Respondents

• Jurisdiction: British Virgin Islands
• Judge: GORDON, J.A. [AG.],Michael Gordon, QC,Albert J. Redhead,KAWALEY, JA. [AG.],Ian Kawaley
• Judgment Date: 20 July 2011
• Neutral Citation: VG 2011 CA 7,[2011] ECSC J0720-3
• Court: Court of Appeal (British Virgin Islands)
• Docket Number: HCVAP 2010/018
• Date: 20 July 2011

[2011] ECSC J0720-3

IN THE COURT OF APPEAL

Before:

The Hon. Mr. Michael Gordon, QC Justice of Appeal [Ag.]

The Hon. Mr. Albert Redhead Justice of Appeal [Ag.]

The Hon. Mr. Ian Kawaley Justice of Appeal [Ag.]

HCVAP 2010/018

HCVAP 2010/024

Between:

Alfa Telecom Turkey Limited

Appellant

and

[1] Cukurova Finance International Limited

[2] Cukurova Holdings AS

Respondents

Appearances:

Stephen Smith, QC, with Robert Levy, QC, and Oliver Clifton for the Appellant

Kenneth MacLean, QC, with James Nadin and Arabella Luisa di Iorio for the Respondents

Commercial appeal - Agreement for credit to be extended to respondents - Grant of equitable mortgages to the appellant over shares held by the respondents to secure loan - Whether the trial judge erred in finding that no events of default had occurred under the loan agreement - Whether the appellant had acted in bad faith in attempting to realise its security under the loan agreement

This appeal involved a loan arrangement between the appellant, Alfa Telecom Turkey Limited ("Alfa" or "ATT") and the respondents, Cukurova Finance International Limited ("CFI") and Cukurova Holdings AS ("CH"). The money was loaned to the respondents by Alfa against the security of shares held by both CFI and CH. In particular, an English share charge which was executed between the parties, included the right for Alfa to appropriate the shares used as security for the loan in the event of default by the respondents. The agreement expressly stated specific events which would constitute "Events of Default" on the part of the borrower, and also included the provision that should any one of these events occur, Alfa would be entitled to call in the balance of the loan. If payment was not forthcoming, then Alfa would then be entitled to appropriate the shares being held as security. The main issues which arose on appeal were whether in actual fact any Events of Default had occurred under the agreement such as to justify the appropriation of the shares held as surety for the loan, and also whether there was any bad faith on the part of Alfa in the way it proceeded after taking the decision that at least one Event of Default had occurred. In the court below, the trial judge held that no Events of Default had occurred under the loan agreement and ordered delivery up of the charged shares to the respondents. It was this decision which gave rise to the present appeal.

Held: allowing the appeal and setting aside the judgment and order of the learned trial judge, granting the relief sought by the appellant in Claim No.: BVIHC (COM) 2007/072, dismissing the respondent's claim in Claim No.: BVIHC (COM) 2007/119, and therefore dismissing the cross-appeal set out in the respondents' counter-notice advancing additional grounds for supporting the judgment, that:

• 1. The respondents, in failing to do what the appellants required them to do to perfect the security and then actively seeking to prevent the perfection of the security by Claim No. 119 of 2007, committed an act of default.

• 2. Based on the learning in the Privy Council decision in Cukurova Finance International Limited et al v Alfa Telecom Turkey Limited [2009] UKPC 19, as well as on the finding that an act of default had taken place on 27 ^th April 2007, the English share charges were enforced by a valid appropriation of shares, referred to in the letter from the appellant's solicitors dated 27 ^th April 2007.

  Cukurova Finance International Limited et al v Alfa Telecom Turkey Limited [2009] UKPC 19 applied.

• 3. The Geneva arbitral award did constitute an Event of Default. Clause 17.16 of the Facility Agreement provides that it is an Event of Default if any event or circumstance occurs which in the opinion of the appellant, has had or is reasonably likely to have a Material Adverse Effect. Even if, as the trial judge suggested, the controlling mind and will of Alfa (for the purpose of deciding whether an event was likely to have a Material Adverse Effect) was expressed over the signature of the sole de jure director of the appellant company, that in and of itself does not make his signing of the acceleration letter any less valid (per Gordon JA [Ag.]).

• 4. The Geneva arbitration award was a material adverse effect because, irrespective of the fact that the precise extent of the financial impact remained to be finally determined, it potentially entitled TeliaSonera to an award of damages initially estimated to be in excess of US$150 million. The acceleration letter itself was sufficient evidence that an agent of the appellant, its sole director, had formed the contractually requisite opinion that a material adverse effect had occurred. It was not properly open to the judge to find that the signature of the acceleration letter by the appellant's agent was insufficient evidence that the lender had formed the opinion that a material adverse development had occurred. If, as the trial judge found, the letter's signatory only acted upon the instructions of other individuals (acting through a company named Altimo) who were the true directing minds of Alfa, then the letter could only have been sent under such individual's instructions (per Kawaley JA [Ag.]).

• 5. Having found that it was open to the appellant to conclude that a material adverse effect occurred, as the judge clearly did, it was not open to him to find that no opinion to this effect was formed by the lender in the face of the express assertion of this act of default in the acceleration letter. The position might have been otherwise had the letter not been signed by the appellant's sole director with undisputed authority to bind the company.

• 6. The specific actions of Alfa as set out by the respondents in their counter-notice do not amount to evidence of bad faith on the part of the appellants, as was alleged by the respondents.

• 7. The appellant was entitled to accelerate the loan pursuant to its letter dated April 16 ^th 2007 in respect of at least one valid act of default, and to subsequently exercise its appropriation rights.

• 8. The learned judge erred in concluding that the acceleration letter of April 16 ^th 2007 was vitiated because its reliance on invalid acts of default constituted a fundamental breach of contract. Service by a lender of a demand letter relying on acts of default which are disputed by the borrower and subsequently not made out cannot constitute a breach of contract unless there is an express or implied duty to rely on valid acts of default in the relevant lending agreement. While there may have been an implied duty for the appellant to assert acts of default in good faith, there is no justification for construing the Facilities Agreement as containing an implied term that the lender would only assert such acts of default which might, if disputed by the borrower, be either agreed to be valid, or determined by a competent court to be valid.

  Concord Trust v The Law Debenture Corpn plc [2005] 1 W.L.R. 1591 cited.

  The fact that CFI was balance sheet insolvent as at December 2006 did constitute yet another Event of Default on the part of the respondent. The trial judge erred in finding that the respondent was not in fact insolvent, his reason for this being that the US$574m appearing in the CFI's balance sheet in consequence of the funding which it had received on 24 ^th November 2006, if not technically capital, was for all practical purposes to be treated as capital (per Gordon JA [Ag.]).

• 9. It was open to the trial judge, having regard to the oral evidence he heard and accepted and the factual matrix within which the Facilities Agreement was consummated read with its strict terms, to find in effect that the balance sheet insolvency upon which Alfa relied was wholly technical, easily capable of being remedied by and administrative act, and, accordingly, did not constitute to any material extent of an act of default (per Kawaley JA [Ag.]).

• 10. The trial judge's costs order of 22 ^nd July 2010 should be set aside as an incident of the result on the main appeal. Unless either party applies by letter to the court within 28 days to be heard on the issue of costs, the judge's order as to costs is set aside and costs are awarded to the claimant below to be taxed if not agreed, and the costs of the appeals are awarded to the appellants in the main appeal, to be taxed if not agreed.

GORDON, J.A. [AG.]

1 This Court delivered a judgment in Civil Appeal No. 1 of 2009 between the same parties as are parties to this appeal. In that judgment the Court set out in reasonably concise form some of the history giving rise to the litigation and some of the history of the litigation itself. I hope I may be forgiven if I repeat that historical perspective as an introduction to this judgment. The numbering of the paragraphs is taken from the judgment of Civil Appeal No. 1 of 2009 with the addition of the letter (a) to distinguish the quoted paragraphs from the paragraphs of this judgment proper.

"[2a] Alfa [Alfa Telecom Turkey Limited] (the claimant in claim BVIHCV 2007/0072 and the defendant in claim BVIHCV 2007/0119) is a company incorporated in the Territory of the Virgin Islands (BVI). It is a wholly-owned subsidiary of the Alfa group, a Russian-based conglomerate which controls a diversified range of businesses, including telecommunications companies.

[3a] Cukurova Finance International Limited (CFI) is a company incorporated in the BVI and a wholly-owned subsidiary of Cukurova Holding AS (CH), a company incorporated in Turkey. Cukurova Telecoms Holdings Limited (CTH), is a company incorporated in the BVI and is the majority shareholder of the Turkcell group of companies (incorporated in Turkey), which operate the largest mobile telecommunications business in Turkey. CFI and Alfa are the registered holders of 51% and 49% of the issued shares, respectively, in CTH.

Factual and Procedural Background to the Appeal

[3a] By an...