The English High Court1 has upheld a collateral-taker's appropriation of shares under the Financial Collateral Arrangements (No 2) Regulations 2003 (the "FCARs"), rejecting arguments raised by the collateral-provider.  The shares were the subject of a share charge in favour of the collateral-taker which constituted a "security financial collateral arrangement" under the FCARs.  The collateral-taker had enforced the share charge by appropriating the shares. 

What is appropriation?

The FCARs implement into English law Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements. The FCARs introduced the concept of "a security financial collateral arrangement" (where a security interest is granted in the financial collateral) and the self-help remedy of appropriation (which a collateral-taker may exercise without a Court order). 

Pursuant to Articles 17 and 18 of the FCARs, where a security interest is created or arises under a security financial collateral arrangement on terms that include a power for the collateral-taker to appropriate the financial collateral, the collateral-taker may exercise that power in accordance with the terms of the security financial collateral arrangement, without any order for foreclosure from the courts.  The power to appropriate is subject to a duty on the collateral-taker to value the collateral and account for the difference if the value of the collateral exceeds the relevant secured financial obligations.  The collateral-taker must value the financial collateral in accordance with the terms of the arrangement and in any event in a commercially reasonable manner. The FCARs do not provide any guidance as to what is meant by "commercially reasonable" in this context.

In this decision, the High Court considered and gave guidance on the requirement that the valuation of the financial collateral (the shares, in this case) be carried out in a commercially reasonable manner. 

The Judgment

The Judge confirmed that all that was required pursuant to Regulation 18(1) of the FCARs was that: the valuation which was carried out was done in a commercially reasonable manner; and that such commercially reasonable manner was one that is permitted by (ie, “in accordance with”) the terms of the arrangement.

The requirement in Regulation 18(1) that the valuation to be conducted in a commercially reasonable manner enabled the court to review the valuation after the event. However, compliance with this requirement was not a pre-condition to an effective appropriation.  Instead, should a valuation be deemed non-compliant with Regulation 18(1), the primary remedy would be for the court to set aside the valuation, substituting it with a compliant one, and making any other consequential orders necessary.

The Judge held that there is no requirement for the collateral-taker to act in good faith and no room for the implication of any of the equitable or other duties associated with the law of mortgage in English law.  Instead, "the statutory simply that the valuation must be made "in accordance with the terms of the arrangement and in any event in a commercially reasonable manner" – no more, no less".

However, the duty of valuation always remains with the collateral-taker regardless of whether a third-party valuer conducts the valuation. The collateral-taker cannot discharge that duty simply by employing an apparently competent third-party valuer. If the third-party valuer does not carry out the valuation in a commercially reasonable manner, the requirements of Regulation 18(1) will not have been satisfied.

Regulation 18(1) requires that the manner in which the valuation is conducted must be commercially reasonable. However, this does not mean that the result must be a commercially reasonable one.

The requirement in Regulation 18(1) that the valuation to be made in a commercially reasonable manner imports an objective standard. The subjective view of the collateral taker (or of its third-party valuer) about what is commercially reasonable is irrelevant.

The question of what, in any given case, is commercially reasonable is fact sensitive.


This case is the first to consider the meaning of "commercially reasonable" in relation to appropriation under the FCARs.   It provides helpful guidance as to the way in which commercial reasonableness will be assessed and the implications for an appropriation if the valuation is not compliant.

1  ABT Auto Investments Limited v Aapico Investment Pte Ltd and others [2022] EWHC 2839 (Comm)