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In the recent conjoined Novo Banco cases the court addressed jurisdiction over a loan agreement with an exclusive English jurisdiction clause and considered the interpretation and effect of the European Directive on Bank Recovery and Resolution.
Adam Sher, commercial barrister at Fountain Court and one of the junior counsel acting in the case, takes a look at what this judgment will do to clarify the law in this area.
Goldman Sachs International v Novo Banco SA; Guardians of New Zealand Superannuation as manager and administrator of the New Zealand Superannuation Fund v Novo Banco SA  EWHC 2371 (Comm),  All ER (D) 62 (Aug)
In the defendant bridge institution's application to set aside or stay the claimants' proceedings against it as successor of debts, the Commercial Court found that it had jurisdiction, under Regulation (EU) 2015/2012 (Brussels I (recast)), which it would not decline to exercise by reason of the principle of non-justiciability or act of state. Further, a stay would not be granted pending the decision of the administrative courts in Portugal, on the basis of case management.
What was the background to the application?
The claimants were successors to the rights of a Luxembourg SPV (Oak Finance) which had made a $835m loan (governed by English law and with an exclusive jurisdiction clause in favour of the English courts) to a major Portuguese bank, Banco Espirito Santo SA (BES). BES's parent company fell into financial difficulty, which led to the intervention of the Portuguese Central Bank (the Bank of Portugal), exercising powers conferred on it as a 'resolution authority' under the Bank Recovery and Resolution Directive 2014/59/EU (BRRD). Pursuant to those powers, and by a decision on 3 August 2014 (the August decision) the Bank of Portugal created a 'bridge bank', Novo Banco (literally New Bank) to which all liabilities of BES were transferred except certain specified categories of liabilities. On 22 December 2014 the Bank of Portugal issued a further decision (the December decision) 'ruling' that the liability under the Oak loan had not transferred to Novo Banco after all, on the basis that there was a 'risk' that it might have fallen within the excluded categories.
The claimants sued Novo Banco in England under the loan agreement, seeking repayment of the loan. Novo Banco disputed the jurisdiction of the English court on a number of grounds, including on the basis that, due to the combined effect of the August and December decisions, Novo Banco was no longer a party to the loan agreement, which it claimed remained with BES.
What were the legal issues the judge had to decide in this application?
The judge needed to determine whether the claimants had the 'better of the argument' that it had jurisdiction under Brussels I (recast), which in turn depended upon a number of matters, including the proper construction of the BRRD and its implementing legislation in the UK and in particular the Bank Recovery and Resolution (No 2) Order 2014, SI 2014/334, which in turn amended the Credit Institutions (Reorganisation and Winding up) Regulations 2004, SI 2014/1045 (the 2004 Regulations). Most crucially, the 2004 Regulations provided that certain acts of authorities of other member states under the BRRD would be given effect as if they were part of the law of the UK.
The court also needed to decide whether it should decline to exercise such jurisdiction as it had, either due to the 'act of state' doctrine or on the basis of a 'case management stay', so as to await the outcome of Portuguese judicial review proceedings (commenced by the claimants against the Bank of Portugal).
What were the main legal arguments put forward?
It was common ground between the parties that the August decision of the Bank of Portugal involved a 'transfer' pursuant to an 'EEA Insolvency Measure' (within the meaning of the 2004 Regulations) which was therefore to be given effect as a matter of UK law - in effect, as a form of statutory novation of the liability from BES to Novo Banco. It was also common ground that, pursuant to the August decision, all liabilities of BES except those falling within the excluded categories had been transferred to Novo Banco in this manner.
The claimants argued that the liability represented by its loan had not fallen within the excluded categories, with the consequence that the English-law governed loan agreement was treated as having been transferred from BES to Novo Banco by the August decision, thereby binding Novo Banco to the jurisdiction clause in favour of the English courts. The claimants further argued that even if there was some subsequent dispute about whether Novo Banco was still the borrower (which depended upon the effect in English law, if any, of the December decision), this was a dispute covered by the jurisdiction clause.
The claimants also argued that whether or not any act of a foreign resolution authority (in this case, the Bank of Portugal) was an act under the BRRD was a matter for the English court to decide and that here the claimants had the better of the arguments that what the Bank of Portugal had done in December had not been the exercise of any resolution power conferred by the BRRD and was therefore (unlike the August decision) not something which had any effect in English law (whatever its status in Portugal as a matter of Portuguese law).
Novo Banco argued that Brussels I (recast) did not apply at all, on the grounds that the claim was in reality an attempt to invite the English court to adjudicate on public law matters in Portugal and therefore was not a 'civil and commercial matter' to which Brussels I (recast) applied. Alternatively, it argued that even if Brussels I (recast) did apply, it had the better argument in that Novo Banco had not agreed to any jurisdiction clause in favour of England, chiefly on the grounds that the English court could not have regard to the August decision without also taking into the December decision which purported to reverse it--as Novo Banco put it, the claimants could not have the 'plums' (the August decision) without the 'duff' (the December decision).
Novo Banco also argued that:
What did the judge decide and why?
Mr Justice Hamblen (now Lord Justice Hamblen) rejected all of Novo Banco's arguments.
Following well-established European case law, he dismissed Novo Banco's argument that a claim on a loan was not a 'civil and commercial' matter.
He also accepted the claimants' arguments that they had the 'better of the argument' that Novo Banco had agreed to the jurisdiction clause for the purposes of Brussels I (recast), art 25 on the basis that the effect of the August decision (which it was common ground was to be given effect in English law) had been that Novo Banco replaced BES as the party to the loan agreement. The judge explained that Novo Banco had 'no principled answer' to the argument that even if there was some subsequent dispute as to whether Novo Banco was still a party to the loan, that dispute was one which the parties had agreed would be adjudicated in England.
Were that to be wrong, he also went on to reject Novo Banco's interpretation of the BRRD and, in particular, found that the BRRD envisaged that only certain acts of resolution authorities were to be given effect in other member states and that if (as the claimants had shown to the requisite standard), the Bank of Portugal's actions in December had not been an exercise of any power under the BRRD, then it followed that the English court was under no duty to recognise that action as part of UK law. Moreover, he accepted (following case law concerned with Directive 2001/24/EC on winding up of credit institutions) that it was for the English court to decide whether or not an action taken by a foreign resolution authority had constituted an exercise of a power under the BRRD to which effect needed to be given.
The judge also rejected Novo Banco's arguments based upon 'act of state' on the grounds that the claimants' claim did not invite the court to sit in judgment upon the validity of any decision of the Bank of Portugal (which was in any event not an emanation of the Portuguese State as required).
Finally, the judge declined to exercise the court's inherent power to stay proceedings, following the decision of Collins J in Mazur Media Ltd v Mazur Media GmbH  EWHC 1566 (Ch),  All ER (D) 110 (Jul) that the scope for exercising such power in a case within Brussels I (recast) was 'extremely limited' and would only be exercised in 'rare and compelling circumstances' which were not present in this case.
To what extent is the judgment helpful in clarifying the law in this area?
As regards the rejection of Novo Banco's arguments based upon the inapplicability of Brussels I (recast), and also those based upon 'act of state' or for a 'case management stay', the judge's decision was the application of very well established law, at both the European and domestic level.
The judgment is particularly significant insofar as it is believed to be the first time the English courts have considered the proper interpretation of the BRRD. In so doing, the judge illustrated the English court's approach of carefully and systematically analysing the issues according to their applicable law, and deciding for itself whether acts of foreign resolution authorities in fact constituted the exercise of powers under the BRRD, on the basis that it was only such actions which were to be given effect as a matter of English law. In this case the judge was not persuaded that what had been done by the Bank of Portugal by its December decision constituted an action under the BRRD to which English law was bound to give recognition as part of the European bank recovery regime--that being so, it followed that, however Portuguese law chose to analyse the Bank of Portugal's action and whatever effect the December decision may have had as matter of Portuguese law, it had no effect on the identity of the parties to the English-law governed loan agreement
The views expressed in this article are personal and do not reflect the views of any clients or instructing solicitors.
Adam Sher is a barrister at Fountain Court. As part of his broad-based commercial practice, he has particular experience of litigation and arbitration in the banking and financial services context, including disputes arising from syndicated lending, derivatives, structured products and alleged LIBOR/EURIBOR manipulation. A large proportion of his practice is international in dimension, and often involves disputes as to jurisdiction and choice of law.
Interviewed by Janine Isenegger.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
First published on LexisPSL Restructuring and Insolvency
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