English Court takes jurisdiction in $900 million claims against Portuguese rescue bank

10/08/15

The Commercial Court has rejected an application by Novo Banco SA, challenging jurisdiction in claims by Goldman Sachs International (“GSI”) and others.

Novo Banco is a “bridge bank” created by the Bank of Portugal (“BdP”) in August 2014 under the new EU “recovery and resolution” framework provided for under Directive 2014/59/EU, in response to the financial crisis that engulfed Banco Espírito Santo SA (“BES”), a major Portuguese bank.

In the same decision that created Novo Banco (the “August Decision”), the BdP transferred to it all assets and liabilities of BES with certain exceptions. In particular, it transferred all liabilities except those falling into certain defined categories (the “Excluded Liabilities”).

The liabilities of BES at the time of the August Decision included those owed under a facility agreement pursuant to which it had borrowed approximately US $835 million from a special purpose vehicle (“Oak”) pursuant to a securitisation programme arranged by GSI. The facility agreement was governed by English law and provided for the exclusive jurisdiction of the English Courts.

After the August Decision, both the BdP and Novo Banco informed GSI that BES’s liabilities under the facility agreement (the “Oak Liabilities”) had been transferred to Novo Banco by the August Decision. However, on 22 December 2014 (shortly before the first repayment instalment under the facility agreement fell due), the BdP issued a “ruling” (the “December Decision”) that the Oak Liabilities fell within the Excluded Liabilities and, therefore, had not been so transferred.

In the wake of the December Decision, the first repayment due under the facility agreement was not made, with the consequence that the loan was accelerated. Oak assigned its rights under the facility agreement to GSI and various other parties. GSI then issued proceedings against Novo Banco in the Commercial Court claiming its proportion of the sums owed. A similar claim was made (jointly) by Oak’s other assignees. These claims come to approximately $900 million including principal and interest.

Novo Banco contested the English court’s jurisdiction over both claims. The dispute turned substantially on the extent to which decisions of the BdP must, by virtue of the EU scheme (as implemented in the Credit Institutions (Reorganisation and Winding up) Regulations 2004, as amended), be given effect under English law.

Novo Banco argued that the Brussels Regulation (recast) did not apply because the claimants were seeking to challenge the December Decision, which was an “administrative matter”; that if the Brussels Regulation did apply the Court had no jurisdiction because it was obliged to give effect to the December Decision and thus hold that Novo Banco was not party to the facility agreement; and that even if the Court did have jurisdiction it should decline to exercise it because the claims were non-justiciable and/or raised the act of state doctrine, alternatively impose a case-management stay.

The Court accepted the claimants’ contentions that:

1. the Brussels Regulation applied, the December Decision forming no part of the Claimants’ claims; and even if it did not apply the Court had jurisdiction because Novo Banco had been validly served in England;

2. the claimants had the better of the argument that (a) the Oak Liabilities were not Excluded Liabilities; (b) the Oak Liabilities had therefore been transferred to Novo Banco at the time of the August Decision; and (c) by virtue of that transfer, Novo Banco had acceded to the English jurisdiction clause in August, such that whether or not the position was subsequently changed by the December Decision was a matter to be determined by the English Court in accordance with the jurisdiction agreement;

3. in any event the claimants also had the better of the argument that the December Decision had no effect in English law, as it was neither a transfer to be given effect under the Directive nor an exercise of the resolution powers thereunder;

4. even if the principle of non-justiciability/act of state could be invoked in the context of the Brussels Regulation (which was doubtful) it was not engaged because the Court was not being asked to adjudicate on the status or validity of the December Decision; and

5. there were no rare and compelling circumstances sufficient to impose a case-management stay; indeed, there were compelling reasons to the contrary.

The judgment is here.