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20 July 2010
After extensive litigation on preliminary issues of law, which involved hearings before the Privy Council and the English High Court (seeking judicial review of whether certain regulations were ultra vires and thus void), the Commercial Division of the BVI High Court has finally heard the substantive action in the long-running Alfa v Cukurova litigation.
The decision itself largely turned on the facts; Justice Edward Bannister QC held decisively in favour of Cukurova, finding that no event of default had occurred, and accordingly that it was not open to Alfa to enforce its security. However, for commercial lawyers in the British Virgin Islands, two key legal points arose.
The court accepted that a key payment into one of the Cukurova companies from a group company was a capital contribution, even though no shares were issued, thus rebutting the presumption of a loan. Although many lawyers in the British Virgin Islands have long thought that it was possible for shareholders to contribute capital other than by way of loan without shares being issued, they lacked judicial support for this view – judicial support now provided by this decision. The support is not wholly unequivocal: when referring to the injection of the funds, the court indicated that:
"if [the payment was] not technically capital (because the legal formalities of appropriating the payments to capital had not been undertaken) [it] was for all practical purposes to be treated as capital."
However, it is clear (and was central to the case) that such funds are not funds which the company treats as debt or is obligated to repay other than as a distribution.
The other notable feature of the judgment was that Cukurova made extensive submissions to the effect that Alfa had, from the outset, been acting for an improper purpose and with ulterior motives (ie, to foreclose on the collateral pledged rather than to receive repayment of its loan). However, the court had little time for such arguments, broadly stating that it was less concerned about people's motives than about legal rights, and stressing that those rights were freely given at arm's length in a negotiated commercial transaction. The judge stated that:
"I have already found that Alfa's intention from the outset was to use the power of appropriation (or its ability to procure a pre-pack receivership) in order to acquire the shares... [I]ts attempts to do so were... no more than unsuccessful attempts to exploit commercial advantages which Cukurova had freely agreed to as a matter of contract and were untainted by bad faith."
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