After more than five years of litigation between Cukurova of Turkey and Alfa of Russia, the Privy Council has delivered a pivotal ruling in Cukurova’s favour. The decision establishes that a borrower may be entitled to equitable “relief from forfeiture” even after a lender has exercised a power of appropriation under the Financial Collateral Arrangements (No 2) Regulations 2003 (the “FCA Regulations”).

In December 2003, the FCA Regulations introduced the novel remedy of appropriation into English law. Since then, borrowers and lenders have been able to agree that, where a security interest is created under a security financial collateral arrangement, if the security becomes enforceable, the lender can appropriate the financial collateral in satisfaction of a due debt (under Regulation 17) without the need for a court order. This enables the lender to become the absolute owner of the collateral upon appropriation, subject only to a duty to account to the borrower for any excess in the value of the collateral over the outstanding debt. Unsurprisingly, the power of appropriation has been widely incorporated into English law security documentation.

Crucially, the Privy Council’s decision confirms that, in appropriate circumstances, the power of appropriation is subject to equitable safeguards which may permit the borrower to redeem its security even after a valid appropriation.

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