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04 June 2019
The High Court has struck out a claim by the beneficial owner of certain notes that had sought a declaration that an event of default had occurred. The resolution of this case involved the application of the Supreme Court's decision in Goldman Sachs International v Novo Banco SA ( UKSC 34), both in respect of factual and jurisdictional points. These cases illustrate how administrative decisions in a foreign state in relation to EU directives are recognised in the English courts and the reluctance of courts to make decisions based on the anticipated outcome of foreign proceedings.
The well-publicised collapse of the Portuguese bank, Espirito Banco, was preceded by actions undertaken by the Banco de Portugal to assist the ailing bank pursuant to the EU Bank Recovery and Resolution Directive (2014/59/EC). This included the transfer of liability as guarantor for some debt securities (the notes) to Novo Banco SA in its role as a 'bridge institution', as designated by Banco de Portugal in August 2014 (the August decision). A bridge institution is appointed to receive rights, assets and liabilities of a failing credit institution and was one of a number of tools introduced by the EU Bank Recovery and Resolution Directive to rescue failing banks and credit institutions in the wake of the financial crisis. The beneficial owner of some of the notes was a London-based hedge fund, Winterbrook.
Among the liabilities purportedly transferred to Novo Banco was a loan made by Oak Finance Luxembourg SA to Espirito Banco (the Oak loan). The loan was drawn down in July 2014.
However, following some further investigation into Espirito Banco's assets and liabilities, it was decided by Banco de Portugal on 22 December 2014 that the Oak loan could not be transferred to Novo Banco, since it had been entered into by Oak Finance Luxembourg SA on behalf of Goldman Sachs, which held more than 2% of Espirito Santo's share capital (the December decision). Such transfer would contravene Portuguese banking law and could therefore not be permitted. Goldman Sachs disputes this decision and there are currently administrative law proceedings in Portugal challenging the December decision (yet to be resolved).
Winterbrook sought a declaration that an event of default had occurred under the notes. In each case, the events of default that Winterbrook pointed to under the conditions were triggered by the failure to honour the obligations under the Oak loan. In essence, Winterbrook argued that this failure could be attributed to Novo Banco. NB Finance and Novo Banco applied to strike out the claim form pursuant to Civil Procedure Rule (CPR) 3.4 and/or for summary judgment pursuant to CPR 24.2 on the basis that Winterbrook's claim had no prospect of success.
The key issue for the court to decide was whether it was arguable that the failure in relation to the Oak loan could be attributed to Novo Banco.
The court struck out Winterbrook's claim. It considered that it was bound by the Supreme Court's reasoning in Goldman Sachs v Novo Banco SA in which it stated that as a matter of Portuguese law, the transfer to Novo Banco had never happened and that it is conclusive of that point "unless and until annulled by a Portuguese administrative court". The August decision must be interpreted in light of the December decision. Accordingly, the English court should treat the Oak loan as never having been transferred in the first place and thus Novo Banco was to be treated as never having been a party to the facility agreement's jurisdiction clause.
It followed that the Oak loan never affected Novo Banco and the proposition that Espirito Santo's default in relation to the Oak loan could be attributed to Novo Banco was unarguable. While the upshot of the August decision was that the Oak loan did not transfer to Novo Banco, the guarantee under the notes did. As such, Espirito Santo's default in relation to the Oak loan (which occurred after the August decision) could not give rise to any kind of default on behalf of the guarantor when this was (after the August decision) Novo Banco and not Espirito Santo. As such, the court commented that the Oak loan was distinct and separate from the notes and conditions – Winterbrook's attempt to find "a nexus" between them failed.
The court recognised that the present challenge against the December decision in administrative law proceedings in Portugal might change matters if it was successful, but refused to anticipate the outcome of those proceedings based on the Portuguese expert opinions which had been put before it. While the court accepted that a strike-out/summary judgment application should be determined on the facts as pleaded by the claimant, the court held that what the Portuguese courts might or might not do in future was not a question of fact, but a question of recognising a foreign legal determination.
These cases illustrate how administrative decisions in a foreign state in relation to European Union directives are recognised in the English court and demonstrate its reluctance to second guess a decision yet to be made by a foreign court.
Measures taken by banking authorities in the wake of the financial crisis have attracted long-running litigation. The resolution of this case involved a straightforward application of the Supreme Court's decision in Goldman Sachs, both on the factual point that the Oak loan was not transferred to Novo Banco and the jurisdictional point that the English court had no jurisdiction to consider the effect of the December decision, which was a matter to be decided by the Portuguese court.
For further information on this topic please contact Sarah Shaul or Chris Ross at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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