The Bank of Portugal transferred part of a failing bank’s business to Novo Banco, then ruled that a disputed loan liability had never passed. The English claims depended on Novo Banco being bound by the loan’s jurisdiction clause. The issue was whether an English court could recognise the first decision while disregarding the second.
The claimants relied on a facility agreement under which Oak Finance had lent Banco Espírito Santo about US$835 million. The agreement chose English law and gave the English courts exclusive jurisdiction.
The bridge bank and the two decisions
European bank-recovery legislation required member states to give their resolution authorities tools for dealing with failing banks. One tool was the power to transfer assets, rights or liabilities to a “bridge institution”. Portugal had implemented that tool in its Banking Law. Article 145-H(2) prevented a liability from being transferred to a bridge institution if it was owed to an entity holding more than 2 per cent of the failing bank’s share capital.
Law Teacher writing support
Writing a law essay?
We choose a writer who is an expert in your area of law and qualified to at least the academic level you select. Most of our writers hold a master’s degree or PhD, have teaching experience, or both.
Send us your question and, if you wish, any marking criteria. We’ll write an essay to your instructions.
On 3 August 2014 the central bank incorporated Novo Banco SA as the bridge institution and transferred specified assets and liabilities of BES to it. The Oak liability was not named, but it was included in the liability totals. The transfer decision also carried the statutory exception for liabilities owed to a holder of more than 2 per cent.
Further investigation changed the central bank’s view. An internal memorandum of 22 December 2014 recorded that Oak was thought to have acted for Goldman Sachs International, and that there were serious and grounded reasons to consider that Goldman Sachs held more than 2 per cent of BES. The board then decided that BES’s liability to Oak under the 30 June 2014 loan agreement was not transferred to Novo Banco, that this decision was effective as of 3 August 2014, and that both banks must adjust their accounts accordingly.
Goldman Sachs objected that it had arranged the facility but was not the true lender, and that it did not hold more than 2 per cent. On 11 February 2015 the central bank maintained its decision. Its minutes noted the objection and recorded that any issue about eligibility for transfer would ultimately have to be resolved by a court. Administrative proceedings in Portugal challenging the December decision were still unresolved when the Supreme Court heard the appeal.
The English jurisdiction dispute
On 26 February 2015 the claimants sued Novo Banco in the English High Court for sums due on the Oak loan. Their case was that the August decision had transferred the liability, so Novo Banco was bound by the English jurisdiction clause. Novo Banco applied to set aside service for want of jurisdiction. It said that the December decision conclusively determined that the liability had not been transferred.
The question was whether the claimants could establish jurisdiction over Novo Banco when they began proceedings. That depended on whether the bridge bank had ever become a party to the loan agreement.
For the jurisdiction issue, Portuguese law was largely agreed. Both decisions were valid administrative acts, binding and directly effective unless and until a Portuguese court annulled them. A public authority could amend its own act prospectively, interpret it with effect from the date it was made, or apply it to a particular case. The parties also agreed that the December decision took effect from 3 August 2014 and, subject to annulment, conclusively determined in Portuguese law that the Oak liability was not transferred. The claimants’ argument was that England had to recognise the August decision but not the December decision.
Why the whole Portuguese process had to be recognised
At common law, the discharge or modification of an English-law contractual liability is normally governed only by English law, so a foreign reconstruction is generally disregarded. The House of Lords had applied that approach to English-law bonds of a reconstructed Greek bank, while recognising an exception for universal succession. For credit institutions, that common-law position had been superseded by United Kingdom legislation giving effect to the European Reorganisation Directive, as amended by the Bank Recovery and Resolution Directive.
Article 3 of the Reorganisation Directive gives the home state’s authorities sole power to implement reorganisation measures, requires those measures to be applied under home-state law, and makes them fully effective throughout the Community without further formalities. The amended definition of reorganisation measures includes resolution tools. Article 66 of the Bank Recovery and Resolution Directive separately requires other member states to give effect to a transfer of assets, rights or liabilities and prevents local challenges to that transfer. Article 85 requires a right of appeal in the home state, but an appeal does not automatically suspend the resolution authority’s decision.
The High Court concluded that the claimants had the better argument on jurisdiction. Its analysis concentrated on the August transfer and on whether the statutory shareholding exception was engaged.
In the Court of Appeal, Banco de Portugal intervened and relied primarily on article 3 rather than article 66. The Court of Appeal allowed Novo Banco’s appeal. It held that an English court had to recognise the conclusive Portuguese-law effect of the December decision: the Oak liability had not been transferred.
Lord Sumption, with whom Lord Mance, Lord Hodge, Lady Black and Lord Lloyd-Jones agreed, described the claimants’ attempt to separate the two decisions as inherently implausible. Accepting both that the August decision was a reorganisation measure and a transfer, but ignoring the December decision, would require an English court to treat Portuguese law as having transferred the liability when a Portuguese court would not.
Article 3 required one home-state process for reorganising a bank. Treating a transfer as effective abroad in circumstances in which it was not effective at home would defeat that purpose. The English court had to recognise the effect that Portuguese law gave both decisions.
On its face, the December decision was neither an interpretation nor an amendment of the August decision, nor a transfer back to BES. It ruled that, under article 145-H(2) and the exception in the August decision, the Oak liability had never been transferred. Lord Sumption held that the precise classification did not matter. Because Portuguese law made the decision conclusive unless annulled, article 3 required the English court to treat the liability as never transferred. Novo Banco was therefore never party to the jurisdiction clause. It was unnecessary to decide the alternative argument that the December decision was itself a reorganisation measure or an implied retransfer.
The decision was not provisional
The claimants argued in the alternative that the December decision was only provisional, so an English court should look to what a Portuguese administrative court would decide about the true lender and the 2 per cent shareholding. Hamblen J had read the decision as asserting serious grounds for a conclusion while leaving the point to a court. Lord Sumption disagreed. The recitals explained the central bank’s reasons, but the operative part determined that the liability was not transferred and required the accounts to be restated.
The argument therefore depended only on the fact that the decision, like other administrative acts, could be reviewed in Portugal. Lord Sumption distinguished Guaranty Trust of New York v Hannay & Co, where a foreign judgment was merely evidence of foreign law as a question of fact. Here there was no dispute about the relevant Portuguese law or the status of the December decision: it determined creditors’ rights unless set aside. Whether its factual premise was right or wrong did not matter for recognition.
That conclusion also followed from the European scheme. Implementation of the reorganisation was for the home state’s authorities, appeals lay there, and an appeal did not automatically suspend the decision. Urgent reconstruction measures would be undermined if they could be challenged in every other member state merely because they could be challenged at home. Lord Sumption considered the relevant European-law propositions to be beyond serious argument and the decisive questions to be agreed matters of Portuguese domestic law, so there was no proper basis for a reference to the Court of Justice.
Verdict: The Court unanimously dismissed the claimants’ appeals. The December decision bound the English courts unless and until it was set aside in Portugal. Novo Banco had not become party to the jurisdiction agreement on which the English claims relied.
Source: Goldman Sachs International v Novo Banco SA [2018] UKSC 34
