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A Supreme Court ruling recognises that a decision of the Portuguese central bank that, when it incorporated the respondent bank as a bridge institution and transferred to it the assets and liabilities of a failed bank, a liability to the appellants under a loan agreement had not, as a result of Portuguese law, been included in the transfer. Richard Salter QC and Jonathan Mark Phillips, of 3 Verulam Buildings, examine the decision.
Goldman Sachs and others v Novo Banco  UKSC 34,  All ER (D) 18 (Jul)
The UK Supreme Court, giving judgment in two appeals heard together, has provided clarity and certainty as to the efficacy under English law of measures taken under the laws of other EU states to rescue, reconstruct or preserve the operations of failing financial institutions.
Although the particular circumstances which gave rise to these claims are unlikely to arise again, the principles on which the English court—and courts throughout the EU—are bound to act have been firmly stated. Practitioners should be aware that the rights of their clients against foreign financial institutions, and even those written under English law, may be affected by reorganisation measures or other steps under foreign law and sometimes unfamiliar legal principles. The issue remains highly topical demonstrated by recent events in Italy and the resolution in Spain of the Banco Popular case, Case (2016) C-154/15.
Following the financial crisis of 2007/08, it was apparent that there was a need to enhance the emergency powers available to deal with failing or insolvent banks and financial institutions. The systemic risk to the banking system and the wider economy was too great to allow them simply to fail, but the need to ensure that the bankers were not simply bailed out was an equal economic and political imperative.
In the UK, powers were introduced under the Banking Act 2009. At a European level, steps were taken to establish a harmonised scheme for such rescues. This resulted in the European Bank Recovery and Resolution Directive 2014/59/EU (the Directive), which came into effect in July 2014. This requires each EU Member State to establish a ‘resolution authority’ (generally the central bank) and to provide that authority with powers to enable it to deploy one or more of four ‘resolution tools’. Within the Eurozone, resolution decisions are taken by the Single Resolution Board, headquartered in Brussels, which the resolution authority in the relevant Member State must then transpose—see Articles 18(6) and (9) of Regulation (EU) 806/2014.
The Directive contains provisions requiring Member States to give effect to transfers of such assets and liabilities, and which make clear that it is intended to provide that the ‘resolution’ of a bank by the resolution authority in one state is intended to be a unitary and universal scheme.
More generally, the Directive altered the terms of the earlier Reorganisation Directive 2001/24/EC (the Reorganisation Directive) by amending the definition of reorganisation measures expressly to include ‘the application of the resolution tools and the exercise of resolution powers provided for in Directive 2014/59’.
The Directive provides for the application in all Member States of ‘reorganisation measures’ taken in respect of a bank or credit institution in one of them. The key provision for present purposes is Article 3(2), which provides that:
‘The reorganisation measures shall be applied in accordance with the laws, regulations and procedures applicable in the home Member State, unless otherwise provided in this Directive.’
Under English law, effect is given to the Reorganisation Directive—and now the Directive—by the Credit Institutions (Reorganisation and Winding Up) Regulations 2004, SI 2004/1045, as amended with effect from 10 January 2015. A ‘directive reorganisation measure’ is effective ‘as if it were part of the general law of insolvency of the United Kingdom’, and is defined as ‘a reorganisation measure as defined in Article 2 of [the Reorganisation Directive] ... or any other measure to be given effect in or under the law of the United Kingdom pursuant to Article 66 of [the Directive]’.
These cases concerned the use of the ‘bridge institution’ tool, by which a successor is created into which are transferred the viable business of the failing bank and its important functions.
In August 2014 it became apparent that Banco Espirito Santo (BES), a prominent Portuguese bank, was in serious financial difficulties. The Bank of Portugal, exercising its powers under the relevant Portuguese legislation—and as a resolution authority for the purposes of the Directive—created the respondent bank, to which the bulk of the assets and liabilities of BES were passed.
Shortly before then, BES had entered into a loan facility with a structured lending vehicle known as Oak Finance SA under which it was due to repay sums of approximately $835m. The facility was governed by English law, and provided for the English courts to have exclusive jurisdiction in respect of any dispute related to the agreement. The transaction had been organised by one of the appellants, Goldman Sachs.
At first it was assumed that as a result of the Bank of Portugal’s August decision, the liability had passed to the respondent. However, by December 2014 the central bank came to the conclusion that the liability was in fact not one which was permitted to be transferred to the respondent under the relevant Portuguese law, and which was therefore excluded from the transfer by the terms of a general exclusion in the August decision. Accordingly, on 22 December 2014, the Bank of Portugal made a formal decision stating that the liability to Oak Finance had not been transferred by its resolution of August.
The appellants disputed the Bank of Portugal’s December decision. The bank rejected the appellants’ representations and, in a further formal decision in February 2015, confirmed the December decision.
It is important to note that (at least by the time of the appeals) it was common ground that the Bank of Portugal’s decisions were valid administrative acts under Portuguese law, and that as such they defined the legal rights of the parties to whom they were addressed unless and until annulled by an administrative court in Portugal. All relevant decisions were and are the subject of pending challenges before the Portuguese court.
The English proceedings
Immediately following the Bank of Portugal’s rejection of its challenge, the appellants, as assignees of the rights of Oak Finance, commenced proceedings in England against the respondent.
The respondent disputed jurisdiction, asserting that it was not and had never been party to the Oak Finance facility, or therefore the jurisdiction clause. It relied simply on the effect of the December decision as determinative of the position under Portuguese law, rather than inviting the English court to examine the merits of the Bank of Portugal’s decision.
The appellants argued that the debt of BES had been transferred to the respondent in August 2015, and that this was a transfer which was directly effective under English law, so that from that date the respondent became the debtor under the facility agreement and party to the jurisdiction clause. They argued that the December decision, in contrast, was neither a transfer nor the application of a resolution tool or exercise of a resolution power within the Directive, and so did not have any effect under English law, but even if it did, the respondent was by then a party to the contract, so that the effect of it fell to be determined in England.
Hamblen J in 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), was persuaded by these arguments at first instance (though the arguments before him focused on the Directive rather than the Reorganisation Directive).
The respondent appealed successfully to the Court of Appeal (Guardians of New Zealand Superannuation Fund (as Manager and Administrator of the New Zealand Superannuation Fund) and others v Novo Banco SA; Goldman Sachs International v Novo Banco SA  EWCA Civ 1092,  All ER (D) 63 (Nov)), which found in its favour on various grounds, with the Bank of Portugal intervening in support of its position.
The appellants were granted permission to appeal to the Supreme Court.
In an admirably short judgment, Lord Sumption disposed of the matter on the basis of the primary argument advanced by the respondent and the Bank of Portugal, and upheld the principal ground of the Court of Appeal decision.
Centrally, consistently with Artice 3 of the Reorganisation Directive, and the Directive itself, the August decision as a reorganisation measure must, and could only, have the same effect under English law as under the law of Portugal. Moreover, its effect in Portugal (and therefore in England, and all states to which the Directives applied) was defined not merely by the terms of the Directives or the relevant banking law, but by the general law, including the power of the Bank of Portugal as an administrative authority to make a legally binding decision. Lord Sumption applied two decisions of the Court of Justice of the EU in point—LBI hf v Kepler Capital Markets SA Case C-85/12,  All ER (D) 301 (Oct), and Kotnik v Drzavni zbor Republike Slovenije (2016) C-526/14,  All ER (D) 122 (Jul).
A subsidiary argument of the appellants—that the English court should proceed on the basis that the challenges before the Portuguese administrative court would be successful—was roundly rejected in principle and as contrary to the Directive scheme: ‘In the first place, it is not for an English court to decide what would amount to an appeal from an administrative act of the Portuguese Central Bank.’
While difficult issues may yet arise in other cases, the decision is an important and robust affirmation of the scheme of the Directives. It emphasises—as those Directives provide—the primacy to be accorded to the exercise of emergency powers by the authorities in the home state over the private law rights, under any law, of the parties affected. It is a landmark decision for the resolution framework established by the Directive.
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Richard Salter QC and Jonathan Mark Phillips appeared for the respondent in this case.
Interviewed by Robert Matthews.
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Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.
Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.
Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.
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