Cukurova Finance International Ltd & Anor, R (on the application of) v HM Treasury & Anor

Cukurova Finance International Limited and Cukurova Holding AS (Cukurova) seek permission to challenge the vires of the Financial Collateral Arrangements Regulations 2003, SI 2003 Number 3226 (the Regulations). It contends that section 2(2)(b) of the European Communities Act 1972 (the 1972 Act) did not confer power on Her Majesty's Treasury to make the Regulations and, accordingly, they should be quashed or, alternatively, construed so as to be intra vires; but in order to achieve that ambition, Cukurova need permission. This application follows an order of Mr Justice Bean that it be listed for oral hearing to be followed by the substantive application should permission be granted.

This was of course not a process by which the judge sought to transfer the burden of interesting arguments as to the application of section 2(2), its meaning already having been elucidated by the Court of Appeal in Oakley 2006 1 Chancery 337, still less to shield himself from the bludgeon of 100 pages of Cukurova's adipose post-skeleton argument, if I may borrow Mr Beloff's oxymoron. Rather, it was the only sensible response to the interested party and the defendant's contention that, since the Regulations impugned were made in November 2003 and came into force on 11 December 2003, the application issued on 4 December 2007 is just over four years out of date.

If permission is granted, the issue which would arise would be whether the Regulations were made for the purpose of dealing with matters arising out of or related to the Directive, which is the Financial Collateral Directive, Directive 2002 47 EC, within the meaning of section 2(2)(b) of the 1972 Act. This Directive concerns certain transactions involving the use of financial collateral but its scope is limited since its purpose is to provide only a minimum regime. The scope of the Directive is limited by reference to the nature of the financial collateral arrangements to which it refers and in particular by reference to the identity to the parties to such arrangements, described in argument as the personal scope of the Directive. The domestic regulations, Cukurova argues, enlarge that personal scope to an extent outwith the reach of section 2(2)(b).

Cukurova's interest in establishing the invalidity of the Regulations arises out of a commercial dispute in the British Virgin Islands with Alfa Telecom Turkey (Alfa). Alfa made a loan to Cukurova, the collateral for which was an equitable mortgage over Cukurova's shares. The equitable mortgage included a right to appropriate which depended for its validity on the validity of the Regulations. In reliance on alleged events of default, Alfa demanded repayment and brought proceedings in the BVI for that repayment shortly after it purported to appropriate the shares. On a trial of preliminary issues, the BVI court ruled that it was not open to that court to question the validity of the Regulations. The case proceeded on the basis that they were intra vires and Cukurova succeeded, at first instance, on the question as to whether Alfa had as a matter of fact appropriated those shares. Thereafter, Cukurova sought to challenge the vires of the Regulations in this court.

Understandably, Mr Crowe, QC, advanced Cukurova's argument by focusing on the invalidity of the Regulations and the appropriate relief consequential on that invalidity before meeting the contention of the opposing parties that the application was out of time. Such an approach represents a forensic inevitability since the courts have shown themselves to be reluctant to shut out an application which has not only importance but merit. But this should not disguise the need to acknowledge that, however interesting the arcana of the Directive, the Directives and the financial arrangements to which they refer, Cukurova must establish either that it has brought these proceedings in time or that the court should extend time for the application to be made.

In 2005, Alfa loaned Cukurova Finance International Limited the sum of US$1.352 billion. This loan was secured by equitable mortgages over Cukurova Holding AS's shares in Cukurova Finance International and Cukurova Finance International's shares in Cukurova Telecom Limited. The equitable mortgages included a right to appropriate the charged shares in the event of default. Regulation 17 of the Regulations introduced into English law this remedy in the event of default. Its significance in financial collateral arrangements is a matter of hot dispute between Cukurova and Alfa, a dispute I shall not resolve at this stage. It is sufficient to note for the purposes of the narrative that a solicitor for Alfa describes appropriation as an important and simple method of self-help, avoiding the complexities and delay in foreclosure and sale. A collateral-taker may acquire the asset and hold on to it during a falling market rather than being required to sell it immediately at a loss. (See paragraph 16 of Mr Yeowart's first statement). But those who have advised Cukurova assert the uncertainty surrounding its efficacy and contend that it is highly unlikely that it would be the sole security enforcement mechanism provided for. (See Mr Hamilton's first witness statement).

On 16 April 2007, in reliance on a number of alleged events of default, Alfa demanded repayment of the outstanding $1.3 billion and interest. On the same day Alfa took steps to become registered as holder of the charged shares and, by such registration, to turn the equitable mortgages into legal mortgages, a right it sought to perfect its security, irrespective of the right to appropriation.

On the same day, 16 April, Alfa started proceedings in the BVI against the two claimants seeking repayment of the debt. When the sum did not materialise, 11 days later, it purported to appropriate the charged shares. Cukurova sought to resist registration. Alfa claimed that the consequences of the successful appropriation were to extinguish the equity of redemption and that it became beneficial owner of the shares. Since the debt was also extinguished, Alfa was liable to account to Cukurova for the difference between the amount loaned and the value of the shares according to the contractually-agreed mechanism.

On 25 May 2007, Cukurova tendered repayment of the loan; Alfa said it was now too late. On the same day, Cukurova started proceedings in the British Virgin Islands, known as "the Redemption Action", in which they sought to compel Alfa to accept repayment of the loan. In that action they raised a number of points as to the purported appropriation but did not assert that the Regulations were invalid. On the contrary, the points they advanced were predicated on the validity of the Regulations.

In its defence of 8 June 2007 to Alfa's April claim, Cukurova contended that appropriation was not available to Alfa or that Alfa had not validly exercised that right. They contended that, for example, the charged shares were not financial collateral within the meaning of the Regulations and that the equitable charges were not security financial collateral arrangements within the meaning of the Regulations. Again, those were arguments based on the validity of the Regulations.

In June 2007, Cukurova applied for trial of the preliminary issues relating to appropriation culminating, after some dispute in court, in the court ordering issues on 3 September 2007. Again no question was raised as to the validity of the Regulations.

The first reference to the issue of the validity of the Regulations came at the time when expert reports relevant to English law were exchanged on 7 September 2007. Professor Cranston, as he then was, raised questions as to the validity of the Regulations. This had never been publicly previously mentioned although it was apparent that Professor Cranston had been instructed to consider the point at least by 16 August 2007.

On 25 September 2007, the court ruled that it was not open to it to question the validity of the Regulations introduced by a foreign state. It also declined to do so because it took the view that it was too late for such a challenge to be entertained. It said:

On 16 November 2007, the BVI court held that Alfa had not in law appropriated the shares. Thus Cukurova had won at that stage. Only then, on 3 December 2007, did it start these proceedings to question the vires of the Regulations. The Eastern Caribbean Court of Appeal allowed Alfa's appeal on 22 April 2008, namely concluding that it had lawfully appropriated the shares. Cukurova has permission to appeal that decision to the Privy Council.

The Regulations were made for the purposes of implementing the Directive but they also extended the scope of the Directive. Whereas the Directive was confined to financial collateral arrangements made between non-natural persons and such persons called in argument "specified financial institutions" -- in other words, persons identified within the Directive -- the Regulations extended the provisions of the Directive to cover financial collateral arrangements transacted between non-natural persons, neither of whom were specialised financial institutions. The Regulations were made in purported exercise of the power conferred by section 2(2)(b) of the European Communities Act 1972. This provides that:

Cukurova contend that the scope of the Directive was extended beyond the confines of the power conferred by that sub-section.

The Directive introduces a regime relating to the use of financial collateral arrangements. I shall have to consider in some detail the rival contentions as to its purpose, but at this stage I need do no more than recall that it creates a minimum regime, (recital 22), which abolishes most formal requirements and requires enforcement despite the insolvency of either party, the collateral-provider or the collateral-taker. The Directive in essence protects financial collateral arrangements against insolvency rules. Central to the arguments of Mr Crowe is the effect the Directive has on the rights of unsecured creditors. It limits the effect by restricting the personal scope of the Directive to transactions where at least one party is a specified financial institution; but the impact is increased by the Regulations which expand the scope of those Regulations to transactions where neither party falls within the category of a specified financial institution.

The arrangements to which the Directive applies are identified in Article 2. Collateral consists of cash or financial instruments, not chattels or real property. Cash or financial instruments are collateral if they represent security given by the collateral-provider to the collateral-taker for performance of an obligation. It is a significant aspect of Cukurova's submissions that the Directive applies not only to those which would, traditionally, in English law be recognised as security transactions, called in the Directive "security financial collateral arrangements", but also to transactions involving the outright transfer of title which serve the same economic purpose, called "title transfer financial collateral arrangements". In English law, such transactions are not characterised as security transactions, (see Professor Goode, Legal Problems of Credit and Security, 3rd Edition).

Cukurova stresses this feature because it says that by far the greater impact of the Directive is on title transfer financial collateral arrangements of which repos and sale and repurchase agreements are the most common example.

Article 3 requires member states to abolish all formal requirements for financial collateral arrangements save that the collateral shall have been provided and that the arrangements are evidenced in writing. Regulation 4 implements this provision by disapplying, for example, in England, the provisions of section 4 of the Statute of Fraud 1677 and section 395 of the Companies Act 1985.

Article 4 requires member states to change their laws to permit enforcement according to the terms of the financial collateral arrangements, in particular, despite insolvency of either party and to permit the remedy of appropriation where the arrangements so provide. That important article is implemented by Regulations 8 and 10 which disapply provisions of the Insolvency Act 1986 when a company or partnership is in administration proceedings or subject to a voluntary arrangement; or might result in such an arrangement being avoided once winding-up has started because the arrangement has been made or collateral provided within a prescribed period before the start of the winding-up proceedings.

Regulation 17 provides that a collateral-taker under a security of financial collateral arrangement has a mortgage over the collateral provided. It may enforce any right of appropriation without applying to the court for an order of foreclosure. Regulation 18 makes provision for valuation in the event of the exercise of the right of appropriation.

Article 7 requires member states to ensure that a close-out netting provision is enforceable despite, for example, a winding-up. That is implemented save where the collateral-taker has knowledge or constructive knowledge of the winding-up by Regulation 12.

Article 8 requires member states to ensure that financial collateral arrangements are not avoided because they have taken place or collateral has been provided on the day of or within a prescribed previous period before the commencement of the winding-up proceedings. That article is implemented by Regulation 13.

The personal scope of the Directive is all important in these proceedings, and I read into the judgment the whole of Article 1.2 of the Directives set out at paragraph 23 of Cukurova's skeleton.

Thus at least one party must fall within the description within Article 1 (a) to (d), called in argument "a specified financial institution". Article 1.3 permits member states to restrict the application of the Directive to transactions where both parties are specified financial institutions. Some Member States have exercised their right to make such restrictions. Others, such as the United Kingdom, have extended the personal scope of the provisions. There is a useful table prepared by Linklaters within the papers at pages 16 to 18 which is called "The EU Directive on financial collateral arrangements, a comparative view of implementation dated December 2005".

The Regulations extend the personal scope of the Directive through the definition of security financial collateral arrangements and title transfer financial collateral arrangements. At Regulation 3(d), for example, security and financial collateral arrangements are defined to mean an agreement or arrangement evidenced in writing where, subject to various other conditions, the collateral-provider and the collateral-taker are both non-natural persons, and see similarly the definition of title transfer financial collateral arrangements within Regulation 3(c). Thus the question arises whether section 2(2)(b) of the 1972 Act permits such an extension to be implemented by secondary legislation.

The first issue which must be determined is to identify the date when the grounds to make the claim first arose. Only when that date is identified can it be said that there has been undue delay for the purposes of section 31(6) of the Supreme Court Act 1981. This provides, so far as material:

The Regulations were made on 10 December 2003 and came into force on 11 and 26 December 2003. At that stage, Cukurova had no possible reason to question the validity of those Regulations and no standing to do so. In my view, the date when the grounds to make the claim first arose must be ascertained by reference to the nature of the challenge and not by reference to the identity or circumstances of the challenger. (See in particular R v HM Treasury Office, ex parte Smedley (1985) QB 657 and R v Customs and Excise Commissioners, ex parte Eurotunnel (1995) CLC 392). In Eurotunnel, Balcombe LJ made clear that the grounds arose when the orders came into force. (400 at F).

The challenge is to the vires of the Regulations. The grounds for making that challenge arose when, as is alleged, the Regulations were unlawfully made or came into force. Accordingly, these proceedings were neither made promptly nor in any event not later than three months after the grounds to challenge the vires to the Regulations first arose. In order to bring this challenge, Cukurova require an extension of time in which to apply for judicial review.

The real question therefore is whether this court should extend time pursuant to CPR 3.1. It is true that the courts have sought to emphasise the importance of a timeous challenge in public law by purporting to confine the grant of extensions of time to exceptional cases, see, for example, Bahamas Telecommunications Company Limited v Public Utilities Commission (2008) UKPC 10 at paragraph 25; but that provides no standard which a court might apply when deciding whether to extend time or not.

I prefer not to ask whether this is an exceptional case but rather to start by considering to what extent there are good reasons for extending time and, if there is good reason, to what extent relief would be likely to cause hardship, would be prejudicial or would be detrimental to good administration. (See R v Dairy Produce Quota Tribunal for England and Wales, ex parte Caswell (1990), 2 Appeal Cases, 738 at 746H to 747B).

Plainly one of the issues which arises is the extent to which Cukurova has a good excuse for not launching this claim earlier. Even if it has a good excuse, that is not dispositive but it is of importance. As it argues, there was no possible reason to challenge the Regulations when they were first made. Certainly by 25 November 2005, the date of the second agreement which incorporates the English charges at clause 9.3, the appropriation remedy was to be found in Regulation 7 and Cukurova was aware of the remedy they now seek to impugn. It was at that time represented by an international law firm with a London office and English qualified solicitors. But though from that time there was a risk that the remedy might be exercised, it makes no commercial sense to suggest that it would have challenged the lawfulness of the Regulations on which the potential remedy was based. Nevertheless, Cukurova did obtain the commercial advantage of the substantial loan in return for placing itself at risk of the remedy of appropriation; thus it did obtain the loan, at least in part, on the assumption that the remedy of appropriation was available on the basis of the legality of the Regulation.

The main difficulty from Cukurova's point of view seems to me to stem from its conduct in the litigation. Alfa purported to appropriate on 27 April 2007 but no contention of invalidity was advanced until the exchange of experts' reports on 7 September 2007, over four months later. As the BVI Court of First Instance recalled, there had never been any suggestion in the pleadings or delineation of issues that the vires of the Regulations was challenged. Even after 25 September 2007, when the BVI court decided that it could not rule on the vires of the Regulations, another two and a half months elapsed before this claim was launched. In the meantime, the proceedings had been conducted on the basis of the validity of those Regulations.

Cukurova's repost is to assert that it was necessary to exhaust alternative remedies in the BVI before invoking the residual jurisdiction of judicial review in this court; but it was not seeking in proceedings in the BVI some alternative method for challenging the Regulations. There was no means of doing so other than its belated and doomed attempt to do so in that court. On the contrary, in the "Redemption Proceedings" which it initiated and in its defence to Alfa's claim, it relied upon the terms of the Regulation in order to defeat Alfa's purported appropriation. The BVI's eventual refusal to consider the issue of the vires of the Regulations can have come as no surprise to Cukurova and has not been challenged by way of appeal since. The delay in challenge cannot be excused by reference to the proceedings in the BVI.

Of greater substance is the contention that the issue of the vires of the Regulations is a matter of general public importance. In altruistic mode, Cukurova assert that it is in the overall public interest that the lawfulness of the Regulations be determined. If this challenge is precluded on the grounds of delay, some other claimant is bound to advance a similar challenge in the future. A similar argument was advanced by Eurotunnel. In the light of many and substantial doubts expressed as to the validity of the Regulations, to which I will refer later, it is in the public's interest that the fears expressed as to whether the Regulations were properly implemented should either be shown to be justified or laid to rest. Stability in the markets requires determination of the issue.

There can be little doubt that the issue is of importance; it is a matter of public concern that Regulations which may have a significant impact on the priority of unsecured creditors in an insolvency should be properly implemented. It is, as I shall explain, central to the argument as to the vires of the Regulations that the extension of the provisions of the Directive to financial collateral arrangements where both parties are non-natural persons, but neither is a specified financial institution, represented a significant inroad into the rights of unsecured creditors in an insolvency.

Whether the Treasury was or was not entitled to make such an extension by way of secondary legislation in reliance on section 2(2)(b) is of public importance. The extent of the power conferred by section 2(2)(b) which enables the Executive to avoid the level of Parliamentary scrutiny inherent in the introduction of primary legislation is a matter of public concern. But this point cannot be taken too far, there is no principle that the mere fact that an issue is of public importance dictates that the courts should adopt a more benign approach to undue delay. Nor is there any principle according to which a challenge to the lawfulness of the implementation of secondary legislation may be brought later rather than sooner. On the contrary, the more Cukurova stress the importance of resolving the vires issue, the more it tends to demonstrate the impact of declaring unlawful legislation, the validity of which has by now guided commercial transactions for some five years.

There is no want of authority as to the importance of finality in relation to decisions which affect commercial transactions and the need for speedy challenges in relation to the financial market where deals will have been done in reliance on the validity of decisions subsequently impugned. See, for example, R v MMC, ex parte Argylle Group Plc (1986) 1 Weekly Law Report, 763 at 774H to 775B, and R v Panel on Takeovers and Mergers, ex parte Datafin Plc (1987), Queen's Bench Reports, 815, a fortiori, a challenge to secondary legislation on the validity of which corporate entities have offered and taken collateral.

There has been much lengthy debate as to the extent to which the validity of the remedy of appropriation under Regulation 17 is of significance. Cukurova contend that a conclusion that the Regulations are invalid, at least insofar as they purport to extend the provisions of the Directive to transactions where neither party is a specified financial institution, will have little impact since Regulation 17 applies only to security financial collateral arrangements and such arrangements represent only a small minority of all financial collateral arrangements.

Moreover, as I have already noted, Mr Hamilton has suggested it is unlikely that appropriation will be relied upon as the sole security enforcement mechanism, not least because of the other better known remedies and doubts previously expressed as to the validity of the Regulations and as to how the remedy may be validly exercised. To the contrary, Mr Yeowart, a deputy chairman of the Financial Law Committee in the City of London Law Society, speaks to the very many security documents which he has drafted involving many billions of pounds.

The reality is that it is impossible to ascertain the extent to which a declaration that the Regulations are invalid, at least to the extent that they expand the personal scope of the Directive, will have an impact upon existing commercial arrangements; but that commercial arrangements had been transacted, at least in part on the basis of the validity of the remedy of appropriation over the past five years, cannot be denied. Thus in determining whether the time to bring the instant challenge should be extended, I take the view that the fact that the challenge relates to legislation, the validity of which has been accepted in commercial transactions for the past five years, is of considerable significance even though no one has been able to discover any other case where a party like Alfa has sought to rely on the Regulations and assert a right to appropriate on the occasion of default.

This brings me to another aspect of the application for permission to extend the time which relates to the nature of the relief sought. The nature of relief which should be granted is relevant not merely should Cukurova's application be successful in the substantive application but is also of importance to the question as to whether time should be extended in the context of the prior application for permission. Cukurova recognises that, if it is granted permission and establish that the Regulations are ultra vires, quashing the Regulations altogether will not only have a far greater commercial impact but will also put the United Kingdom in breach of its Community obligation to give effect to the Directive.

It recognises, consequently, that its claim for an extension is more likely to be refused or relief is more likely to be denied unless it can reduce the impact of its contention that the Regulations are ultra vires. It does so by contending that the Regulations may be saved, to the extent that they bring into force the Directive, but they should be struck down only to the extent that they extend the personal scope of the Directive. They advance that submission by seeking to adapt the Marleasing principle, (case C10689 1990 ECR1-4135). By that principle, it is well established that Member States are under an obligation to interpret national legislation enacted to introduce a Directive so as to achieve the result specified in the Directive in issue.

That principle has, it is accepted, no direct application in a case such as this where the United Kingdom has implemented the Directive as required by its Treaty obligations. But Cukurova supplement the Marleasing principle by invoking the further principle that, where it is possible, a Member State should depart from a strict and literal interpretation by supplying words by implication, so as to comply with its interpretive obligations under the Treaty. (See, for example, Litster v Forth Dry Dock & Engineering (1991) AC, 546 at 559). In the instant case, it seeks to apply those principles by seeking relief limited to what it asserts is the overextension of the personal scope of the Directive and thus to achieve a result which ensures that the United Kingdom continues to abide by its obligation to implement the Directive. To quash the Regulations would be to leave United Kingdom in breach. The Treasury, understandably, support this submission, it is opposed by Alfa.

I am unhappy to record that I need not resolve this issue at this stage when considering the permission application. Alfa has finessed the argument by accepting that the question whether time should be extended should be judged on the basis that Cukurova are correct and thus, if its substantive application is successful, the only relief the court would grant would be limited to striking down the Regulations only to the extent that they enlarge their personal scope beyond that within the Directive. I shall therefore consider the impact of Cukurova's application on that diminished basis.

The undoubted importance of the issue is not a trump card. Cukurova rely on two cases, R v Secretary of State for Trade and Industry, ex parte Greenpeace (2000) Environment Law Report 221 and R (on the application of Grierson) v Ofcom (2005) EWHC 1899, to demonstrate that the public importance of the issue is of itself sufficient to justify an extension of time. Neither case support so stark a principle.

It is correct to observe that in Greenpeace, Maurice Kay J concluded that the public interest balance came down in favour of extending time, (page 263). But that was a conclusion reached in the context of a case focused primarily not on the effective implementation of the Directive in question but rather on the intended grant of licences for North Sea exploration. The relief sought would not have prevented the Secretary of State from granting licences but would have required him to have regard to the Directive in making his decision as to the grant of the licences. The oil companies had wasted expenditure prior to the challenge but had done so in the knowledge that a challenge might be advanced. The complaint of Greenpeace was foreshadowed in a complaint to the Commission. The relief sought would not have upset commercial transactions made on the basis of legislation which has remained in force for about five years. The delay in Greenpeace occurred over a period of a few months.

In Grierson, a challenge was brought within a three-month period but was not prompt. There was no egregious delay. The case merely demonstrates the application of the well-established principle as to the flexibility of the approach the courts should take to timing. Stanley Burton J said:

Two features of this controversy, to my mind, tells strongly against granting an extension. Firstly, the length of time, now over four years, during which the Regulations remained unchallenged in any court and on the basis of which, for over four years, at least a substantial number of financial collateral arrangements have been made. Whilst it has not been shown that anyone would in fact be prejudiced should the Regulations be declared invalid to the extent that they extend the personal scope of the Directive, non-natural persons have entered into financial collateral arrangements in reliance on the validity of Regulation 17 and thus in reliance on the lawfulness of the remedy of appropriation.

This leads me to the second feature which weighs with me against an extension. Cukurova obtained the commercial advantage of a loan from Alfa in part at least in return for the obligations into which it entered in the event of default. It was prepared, with advice on English law available to them, to accept at that stage at least in part that in the event of default the lender would be entitled to appropriate the shares designated in the agreement. Thus for the purpose of gaining the commercial advantage of the loan, it in part assumed the validity of the Regulations. That of course could not bar it from challenging the availability of the remedies Alfa might seek to invoke in the event of the default, but it is a significant factor against an extension and at the very least required Cukurova to take speedy and effective measures to make its challenge to the vires rather than delay until December 2007, over some seven-months after the purported appropriation.

For those reasons, I would, but for one other factor, decline to grant the extension of time which I rule Cukurova need before it may be given permission to move by way of judicial review. I hesitate at this stage for this reason: it is often the case that the court will grant an extension despite undue delay where the merits are so strong that the court senses that a grave injustice will result were permission refused on the grounds of delay. Of course sometimes, however strong a case, the delay will be so serious or the impact of a late challenge so severe that, however dripping with merit a case may be, an extension will be refused, as Lord Goff recognised; but it would, in my view, be wrong to refuse an extension without some consideration of the true merits of the challenge. The case against an extension is not so overwhelming that it could resist Cukurova's demonstration of the likelihood of establishing that the Regulations are indeed ultra vires.

In the Oakley case, the Court of Appeal ruled that transitional provisions in the Design Regulations 2001 were lawfully implemented under section 2(2)(a) because they were made for the purposes of implementing a Community obligation. The importance of that case in the instant application lies in their observations relating to section 2(2)(b). It is important to recall that they overruled the deputy judge who had held the Regulations ultra vires because the transitional provisions were not necessary for implementation. They were, as he ruled, permitted but not required.

The context of section 2 was identified by Waller LJ as being a context in which the United Kingdom had agreed to make Community legislation part of its laws (see paragraph 39). Jacobs LJ said the meaning of the words in section 2(2)(b) depended on what he called their overall context. Both Waller LJ and May LJJ explained the effect of the importance of context. Waller LJ said (C39):

May LJ said:

Jacobs LJ referred, as I said, to the overall context and said that: "One cannot put a gloss on the meaning". (Paragraph 80).

It is important to note that, prior to the decision in Oakley, Lord Johnston, in Addison v Denholm Ship Management (UK) Limited (1997), ICR 770, in the Employment Appeal Tribunal in Scotland did not construe section 2(2)(b) so as to have a meaning which was wider or had greater implications than the parent allowed. Thus it could not be used to widen the benefit afforded by the Community legislation which had been implemented.

The Court of Appeal in Oakley ruled that was wrong. The rejection of Lord Johnston's judgment has importance when I come to consider the doubts expressed by commentators as to the vires of the Regulation. The rejection also establishes two important propositions which were not in dispute. Firstly, the mere fact that secondary legislation goes further than the Directive it is designed to implement does not necessarily mean that that secondary legislation is ultra vires. Secondly, the mere fact that the extension is a result of an independent domestic policy decision does not necessarily mean that the legislation is ultra vires.

I draw particular attention to the reference by May LJ to choice. As he explains, a Directive may permit a Member State to choose how to implement its provisions into domestic law. The exercise of that choice would be an exercise by virtue of section 2(2)(a) since it will be the exercise of a choice designed to further the purpose of the Directive. Section 2(2)(b) adds something to section 2(2)(a) as Jacobs LJ observed (at paragraph 76). It permits what May LJ described as an original choice, that is a choice which is not designed to further the purpose of the Directive, although of course it would be unlawful were it to be inconsistent or detrimental to that purpose. (See also that distinction made by Waller LJ in R (on the application of Parker) v Bradford Crown Court (2006), EWCH 3213 Admin).

I do not agree, as has previously been suggested, that the words of the provision should be broadly construed. The words "arising out of" or "related to" are themselves broad and it is those statutory words which must be applied. It adds nothing to any argument to say that those words must be broadly construed. As Waller and May LJJ recognised, the only means of limiting the effect of section 2(2)(b) was by placing the words in section 2(2)(b) in their context; but if the context is the obligation of the United Kingdom under Article 10 of the Treaty to implement directly effective Community measures by enacting legislation for the purpose of such implementation, context is but an imperfect instrument for confining the power conferred by section 2(2)(b), since section 2(2)(b) permits secondary legislation which is consistent with but does not have the same purpose. The Court of Appeal's solution is to restrict the power by using the adverbs "naturally" and "closely", all tests which are difficult to explain in the abstract, as May LJ observed.

In the instant case, the real question is whether the extension went too far. How far is too far? Or as Mr Crowe, QC, put it, how close is close? Those questions can only be determined by examining the force of Cukurova's submissions as to why the Regulations represented a significant and radical departure from the provisions of the Directive.

Cukurova seek to demonstrate the extension was unlawfully implemented by reference to the purpose of the Directive and in particular the careful balance struck between the rights of unsecured creditors and those conferred on collateral-takers under the financial collateral arrangements covered by the Directive. They sought to discover the purpose by reference to the travaux préparatoires leading to the adoption of the Directive. Cukurova's essential submission is that the Directives' purpose was to ensure stability on the wholesale financial market. The Directives sought to achieve that stability by introducing common rules in relation to financial collateral arrangements. Those rules sought to minimise the effect of systemic risk by ensuring that financial collateral arrangements remained enforceable where they had been transacted by the major participants in the wholesale financial market, despite the insolvency of the counterparty.

The failure of a single participant in the wholesale financial market may, through interlinked transactions, cause other participants in the market to fail and thereby set off damage more generally to the financial community and the economy within the European Union. In pursuing that objective, the Directive recognised the effect on the rights of unsecured creditors who would have to cede parity to those who have entered into the financial collateral arrangements covered by the Directive. Striking the balance between the rights of unsecured creditors and those within the scope of the Directive was a matter for delicate judgment. The European Parliament, in order to achieve a correct balance, deliberately limited the personal scope of the Directive to those transactions where at least one party was a major participant in the wholesale financial market.

The Regulations went much further by exercising a different judgment as to the rights of unsecured creditors. By enlarging the scope, they made a different and greater inroad on those rights. The Treasury took no or insufficient account of the Community's previously-exercised fine judgment as to where the balance between the conflicting rights should be struck. The declared purpose of the Regulations was to enlarge the scope irrespective of those rights. Such an extension accordingly exceeded the power conferred by section 2(2)(b).

The starting point of the identification of the purpose of the Directive and the balance that was struck was the reference to the Strategic Action Plan which referred to collateral, in these terms:

It refers to the objective of the Directive it proposed as:

It is, however, noteworthy that the original proposal did not confine the scope to those described as the major players in the wholesale financial market. The scope included parties, neither of whom were what were subsequently identified as specified financial institutions but rather could be any non-natural persons provided they were of sufficient financial substance.

The original proposed Directive referred to the parties as either being a public authority or central bank, a financial institution under providential supervision, or a person other than a non-natural person whose capital base exceeds Euros 100 million or whose gross assets exceed Euros 1,000 million. (See proposed Article 4(c)). This extension relating to the capital assets of a party was subsequently removed. An important explanatory memorandum was attached to that proposal, dated 27 March 2001, which spoke of the intention of the action as being to satisfy the needs of the market with as little disturbance as possible to the legal framework currently in place in Member States.

The proposed Directive was designed, so it was said at paragraph 2.4, to enhance stability because:

The proposed Directive, in particular the provisions allowing reuse of pledged securities would, moreover: "enhance the liquidity in the market thus reducing volatility and enabling investors to buy or sell securities more easily at a fair price".

This important theme of seeking to minimise interference with the laws of Member States, a theme of subsidiarity, runs through the development of the proposal. It was recognised that the laws of Member States differed as to the rights of unsecured creditors in an insolvency. Thus in accordance with the fundamental principle of subsidiarity, which requires that interference with the domestic law of a member state be no more than that which cannot be achieved at national level, the proposal limited the effect on the rights of unsecured creditors to that which was essential for the objective of securing and maintaining a stable market.

Both Cukurova and the Treasury, supported by Alfa, seek to derive support from the rationale behind the decision to shrink from greater harmonisation. Cukurova contends that it demonstrates the fine judgment made to strike the balance between the rights of the collateral-taker when enforcing security and the rights of unsecured creditors protected according to the differing domestic laws of member states. Alfa contend that it represents no more than the effect of the general principle of subsidiarity, limiting interference with domestic law.

The subsequent arguments as to the personal scope of the Directive demonstrate the conflict between those who wished to widen the scope so as to include smaller, medium-sized entities and those who sought to limit the parties to public authorities, central banks and financial institutions. The rationale for those in favour of limiting the personal scope was expressed clearly in the European Parliamentary Committee opinion of 16 October 2001:

The report of the European Parliament's Committee on Economic and Monetary Affairs, issued on 23 November 2001, suggested amendments which would remove the financial thresholds for non-natural persons. Such amendments would in the future, it complained, require updating and, as the rapporteur explained, should not be a matter for a committee of the Commission, which he called "comitology". The justification, he said, for the broader scope of the legislation was the benefits of mitigating risks in relation to collateral which would be extended to as wide as possible a range of institutions.

At the same time it was recommended that the range, once the financial asset limit was removed, should be restricted to transactions where one party at least was what became a specified financial institution. The rationale for such a restriction was explained by the rapporteur:

The opinion of the European Economic and Social Committee ascribes the need for the Directive to legal uncertainty; it was as important to limit the scope of the Directive to activities performed by bodies employing professional specialists so as not to undermine its objectives. (See the specific comments at 3.3).

The Common Position adopted by the council on 5 March 2002, EC Number 32 of 2002 reflected the earlier discussion, particularly the debate in Parliament on 12 December 2001. It set out the objective:

In relation to the option under Article 1(3), it said:

Thus the rationale for permitting Member States to restrict the application of the Directive to transactions where both parties were specified financial institutions was to permit any individual member state to strike the balance which it believed to be appropriate between the conflicting rights of collateral-taker and unsecured creditors in an insolvency. The Council explicitly acknowledged that the aims of the Directive, namely reducing risks on the financial market by the protection of financial collateral arrangements from insolvency rules were in conflict with the rights of unsecured creditors in an insolvency.

The process by which that conflict was resolved was summarised by the Commission in its communication to the European Parliament dated 12 March 2002, (particularly at page 5), and, in its conclusion, it recorded that the Directive was essential for the participants "in the wholesale market" and for achieving an integrated securities market by the end of 2003, (see page 8, my emphasis).

The point was summarised by Cukurova in its written argument:

This purpose, it is said, is reflected in the recitals to the Directive. Recital 1 refers to the importance of:

Recital 3 refers to the Community regime as:

Recital 12 refers to:

Recital 17 emphasises:

Recital 22 refers to the fact that the Directive is merely creating a minimum regime in accordance with the principles of subsidiarity within Article 5 of the Treaty.

These recitals partly reflect the purpose for which Cukurova contends, namely ensuring the stability of the market by protecting certain financial collateral arrangements from insolvency rules. Whether it limits that market to the wholesale financial market is a matter I shall have to consider later. It is of note that since the Directive was enacted the Commission has resisted proposals to widen its personal scope (see its evaluation report on the Directive dated 20 December 2006, COM 2006 833).

The Treasury accepted that, when implementing the Directive, it proposed to extend the scope and usefulness of financial collateral arrangements as widely as possible. It referred, and with some opacity, to some doubts as to how they might implement such purpose.

In its appendix to "the Directive on financial collateral arrangements, initial policy and legal questions", at paragraph 11, it said:

These doubts are reflected in the commentaries of legal experts in the field, in particular Professor Graten of Edinburgh University, who expressed doubt as to the power to implement the Regulations under section 2(2)(b) at page 212 of his article entitled "Financial collateral and fundamentals of secured transactions". Linklaters, in the article to which I have already referred, commented on the doubts that had been expressed as to whether the legislation went further than permitted by section 2(2)(b). No less a commentator than Professor Goode expressed such doubts in the 3rd Edition, the 2005 edition, of Principles of Corporate and Solvency Law (see footnote 62 at paragraph 1.34).

The difficulty with giving weight to such views as those of Professor Goode is that, in support of his view, he refers to the very case that was overruled by the Court of Appeal, namely what he described as the interesting judgment of the deputy judge in Oakley. That was of course based on a Johnsonian view of section 2(2)(b). Added to those views must of course be the views of Professor Cranston whose august status at that time did not, however, have the same persuasive effect as the coordinate jurisdiction of his current position.

Of perhaps greater force is the resistance to implementation expressed in 2003 by the Insolvency Service. They, when invited to comment on the Regulations, said:

It does not seem to me that Cukurova establishes a compelling case by reference to the purpose of the Directive. The important objective of the Directive in achieving stability is reflected in the recital at 17 but that makes no reference to wholesale financial markets. Wholesale financial markets are not defined in the Directive. The line to be drawn between a wholesale financial market and a financial market generally is blurred and difficult to identify. In particular, the impact on the financial market of the collapse of a party to a transaction due to the inadequacy of a financial collateral arrangement requires no emphasis at a time when, daily, we can see the consequences of unregulated and uncontrolled transactions in debt, whether the parties are specified financial institutions or not. We can, in short, see daily what the Directive described, at recital 17, as "contagion effects" in case of the default of a party to a financial collateral arrangement.

Moreover, the wider scope of the Regulations covers transactions which may have similar effect on the stability of financial markets as those covered in the Directive. One has only to consider syndicated loan agreements which may start within the scope of the Directive but, following syndication, end up as a financial collateral arrangement between two non-natural persons who are not specified financial institutions, for example transactions between two hedge funds.

True it is that the Directive identifies, in Article 1(a) to (d), most of the major players on the wholesale financial market but by no means all. Cukurova, particularly at paragraphs 108 to 109 of its written argument, refer to the identification within the personal scope of the Directive as a pragmatic compromise and accepts that hedge funds are "missing participants". Since it must be acknowledged that hedge funds fall outwith Article 1(a) to (d), it must also be acknowledged that their transactions have a major effect on all financial markets. Moreover, the original inclusion of parties who are not specified financial institutions, yet whose capital base exceeded a certain limit, demonstrates that transactions involving financial collateral arrangements could have an effect on all financial markets including the wholesale financial market.

It seems to me that the greater the width of protection of financial collateral arrangements from the rules of insolvency, the better the maintenance of stability on the financial market. This was recognised by the Commission and in the ensuing debate, particularly in December 2001 when the Commission, in its Explanatory Note, referred to a broader scope as:

The Regulations tend, in my view, to further the essential aim of the Directive by widening the scope of the protection. They certainly did not undermine those objectives. Were it otherwise, the EU would not have permitted Member States to extend the personal scope of the Directive.

Nevertheless that provides no complete answer to the objection of Cukurova. The Regulations undoubtedly struck a different balance between the rights of unsecured creditors and collateral-takers in the event of default under a financial collateral arrangement covered by the Directive. The extent to which that represented a greater infringement on the rights of unsecured creditors cannot be ascertained but it can be said with confidence that by far the greater inroad on such rights had already been caused by the Directive since financial collateral arrangements, involving at least one specified financial institution, are far more common than financial collateral arrangements made between two institutions, neither of which fall within that description. It is worth quoting Cukurova's own argument to establish that factual proposition. At paragraph 53, they say:

The Treasury contend that the subject matter is the same and the purpose is consistent. Neither argument seems to me adequate to establish connection of the kind identified in Oakley. Reference to the subject matter being the same is far too wide and inexact a test since the subject is merely financial collateral arrangements or, even more vaguely, the stability of financial markets. But the more limited inroad on the rights of unsecured creditors than that already caused by the Directive is of some importance. It lessens the impact of the difference between the Directive and the Regulations

I take the view that the arguments advanced by Cukurova are far from being of sufficient strength to drive me to the conclusion that justice demands an extension of time. The Regulations widen the protection afforded to financial collateral arrangements and thus add to the stability of financial markets. They avoid the difficulty in drawing the line between wholesale and other financial markets.

Moreover, they integrate the provisions of the Directive within existing provisions in domestic law, which regulates financial collateral arrangements without distinction as to personal scope. Were it not for the widened scope of the Regulations, two parallel but distinct systems would be in operation.

For those reasons, I have considerable doubts as to whether Cukurova would succeed. Their prospects of success are certainly not such as to demand an extension of time to avoid almost inevitable injustice. I am not shifted from my initial view that, apart from the merits, an extension should be refused. Accordingly, I refuse permission.

LORD JUSTICE MOSES: With the lateness of the hour, I might be forgiven for not being very lengthy in this judgment of costs.

The case raises, as these cases so often do, the question of whether Cukurova, on what was at least in part a permission application although to be followed by a substantive application and which was argued, if I may say so, as if it was a substantive application, should have to bear both the costs of the Treasury and of the interested party, Alfa.

Alfa clearly had an acute interest in the outcome of the proceedings which compelled it to use its most powerful forces to demonstrate that the application was out of time; that, while Mr Crow is correct, although an argument adopted by the Treasury was not at the forefront of the Treasury's argument, who understandably sought to justify the vires of their regulations.

In the particular circumstances of this case, where Alfa had such detailed knowledge of the interstices of the underlying commercial dispute, which could never have been properly advanced merely by putting in a witness statement, with that factor in mind and its interest and the amount that was at stake for every party, it seems to me entirely proper that Cukurova should pay the costs of both parties. It was, in my view, almost inevitable that there would be arguments and different arguments from both parties, once it launched its belated attack on the vires of the regulations.

In those circumstances, I shall order Cukurova to pay both the Treasury and Alfa's costs.

I shall merely remark that, as it turned out, whatever support he provided behind the scenes, the major part of the argument on behalf of Alfa was focused, both in writing and orally, by Mr Beloff, on the question of the timing of this application, Mr Smith's arguments echoed those of Mr Swift and those involved in the detailed assessment or seeking to reach agreement as to the amount of costs ought to take in mind my view that it was unnecessary therefore to have two leading counsel.