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Foreign bank resolution: effect on loan enforcement in England and Wales

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Amy Edwards

Senior PSL - Litigation


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30 January 2017

​This Court of Appeal ruling considers the effect of bank resolution measures on an English law governed facility agreement.  The question of whether the claimant was able to recover under the facility agreement depended on whether certain bank resolution steps taken in Portugal were recognised by the English Court.  The English Court concluded that a resolution measure taken in another Member State should be given the same effect in England that it would have had in that Member State: Guardians of New Zealand Superannuation Fund & 11ors v Novo Banco, S.A. [2016] EWCA Civ 1092. 

Struggling Portuguese bank

In June 2014, Oak Finance Luxembourg, S.A. (Oak), as lender, entered into a facility agreement with Portuguese bank Banco Espirito Santo, S.A. (BES), with English governing law and English jurisdiction clauses.  Under the facility, BES drew down approximately USD 784 million.  BES was facing financial difficulties, so the Portuguese central bank, Banco de Portugal (BdP), established Novo Banco, S.A. (Novo Banco) by resolution on 3 August 2014, and transferred to it some, but not all, of BES’s assets and liabilities.  Liabilities to shareholders holding at least 2% of BES shares were excluded from the transfer. The resolution also provided that BdP may “… transfer or re-transmit assets [or] liabilities … between BES and Novo Banco …” in certain circumstances.

Liability to Oak not transferred due to Goldman Sachs’ involvement

By late December 2014, BdP had concluded there were “… serious and well-grounded reasons to believe” that Oak had acted on behalf of Goldman Sachs International (GSI) in entering the facility, and GSI held at least 2% of the share capital in BES at the time.  On 22 December 2014, BdP resolved that, with effect from 3 August 2014, the Oak liability had not been transferred to Novo Banco.  It also resolved that consequential amendments be made to the accounts of BES and Novo Banco.

In February, September and December 2015, BdP purported to take further steps to affirm its December 2014 decision, transfer the liability back to BES (to the extent required for recognition under United Kingdom and other European Member State laws), and amend its original August 2014 decision to expressly exclude the transfer of the Oak liability to Novo Banco.

Oaks’ assignees claim under facility agreement

The respondents on the appeal, Guardians of New Zealand Superannuation Fund and others are assignees of Oak’s rights under the facility agreement.  They commenced proceedings in England against Novo Banco on 26 February 2015 (after BdP made its February 2015 decision). 

Novo Banco disputed jurisdiction on the basis the liability under the facility agreement had not been transferred from BES.  It alternatively sought to stay the English proceedings pending resolution of Portuguese administrative proceedings concerning the efficacy of the transfer.

Hamblen J decided that the respondents had established English jurisdiction because they had the better of the argument that the Oak liability had been transferred to Novo Banco by virtue of BdP’s 3 August 2014 decision.  Further, the judge decided that disputes about the effect of BdP’s December 2014 and February 2015 decisions fell within the English jurisdiction clause.

On appeal the main issue was the extent to which the August and December 2014 and February 2015 decisions (which purported to transfer the liability back to BES) should be recognised. 

Legislative framework for bank resolutions

Both Directive 2001/24/EC concerning the reorganisation and winding-up of credit institutions (the Reorganisation Directive) and Directive 2014/59/EC, the European Recovery and Resolution Directive (EBRRD), are part of the domestic law of Portugal and the United Kingdom.

In Portugal, the relevant legislation1 gave BdP power to transfer assets and liabilities from an institution under resolution (here, BES) to a bridge institution (here, Novo Banco), subject to a prohibition on transferring liabilities owed to certain creditors, including those (or those acting on behalf of those) who at the time of transfer owned 2% or more of the share capital of the institution under resolution.

The relevant United Kingdom legislation (including the Credit Institutions (Reorganisation and Winding up) Regulations 2004, the Bank Recovery and Resolution Order 2014 and the Bank Recovery Resolution (No. 2) Order 2014), in substance, recognises measures taken in relation to any debt or liability of an EEA credit institution as if it were part of the general law of insolvency of the United Kingdom.

On appeal, the parties accepted that BdP’s decision in August 2014, which established Novo Banco as a bridge institution, involved the application of a resolution tool so should be recognised by the English Court.

English court should follow approach of Portuguese court

Moore-Bick LJ held that it was necessary to give BdP’s August 2014 decision the same effect in the United Kingdom as it would have in Portuguese law.  Hamblen J had decided that the December 2014 decision was effective in Portuguese law until set aside by the Portuguese administrative Courts.  As such, Moore-Bick LJ decided that the English courts, under the Reorganisation Directive, EBRRD and the implementing legislation in the United Kingdom, were bound to give the December 2014 decision the same effect as it had in Portugal – and, as such, it (when considered alongside the August 2014 decision) effectively precluded a transfer of the Oak liability to Novo Banco.

December 2014 decision susceptible to recognition as a reorganisation measure in its own right

Secondly, Moore-Bick LJ considered whether the December 2014 decision could, on a standalone basis, be a reorganisation measure that was susceptible to recognition under the Reorganisation Directive.

Article 2 of the Reorganisation Directive defines ‘reorganisation measures’ as, among other things “… measures which are intended to preserve or restore the financial situation of a credit institution and which could affect third parties’ pre-existing rights …”.  Moore-Bick LJ referred to the European Court of Justice decision in Kotnik & ors v Državni zbor Republike Slovenije (Case C-526/14), where ‘burden sharing measures’, akin to bail-in measures under the EBRRD, were held to be ‘reorganisation measures’ for the purposes of the Reorganisation Directive.  In contrast to the position in Kotnik, BES was not intended to continue to operate as a going concern and the December 2014 decision was “… no more than one element in a process leading to its orderly winding up”.  However, as it was accepted that the August 2014 decision was a reorganisation measure, and the December 2014 decision purported to clarify the August 2014 decision, Moore-Bick LJ held that it should be recognised as, or part of, a reorganisation measure that is to be recognised under the Reorganisation Directive.

Novo Banco could not rely on subsequent events

Thirdly, Novo Banco sought to rely on its decisions in September and December 2015 to further its position that the Oak liability was either not transferred to Novo Banco or had been re-transferred to BES.  Moore-Bick LJ determined that, as to jurisdiction, the position must be judged at the time the proceedings were commenced in February 2015.  As such, Novo Banco was refused permission to rely on those decisions on appeal.

As to the timing of BdP’s decisions, Sales LJ took the view that the August 2014 decision gave rise to a transfer of the Oak liability to Novo Banco which took effect, and was to be recognised in the United Kingdom, under Article 3 of the Reorganisation Directive and Article 66 of the EBRRD, from 3 August 2014.  As such, Sales LJ’s view is that, from 4 August 2014, “… everyone knew that it was Novo Banco who was the debtor in respect of the Oak liability”.  Accordingly, by the December 2014 decision, Sales LJ’s view is that BdP ‘rewrote history’ by transferring back the Oak liability, as it was entitled to do under Portuguese law, but that doing so was consistent with and permissible under European law.

While Sales LJ’s comments are consistent with the decision to refuse Novo Banco permission to rely on the September and December 2015 decisions, it is to be contrasted with Moore-Bick and Gloster LJJ’s view that the proper construction of the August 2014 decision was that the Oak liability was not transferred at all.


The overriding point to come out of the judgment is that in view of the desire to facilitate recognition of bank resolution measures in each of the European Union Member States, where a bank resolution step is taken that is valid under domestic law, it is likely it will be recognised as a valid exercise of that domestic law in relation to foreign law obligations; here an English law governed loan.

As to jurisdiction, in circumstances where an English law obligation (eg, to repay a loan) subject to an express English jurisdiction clause is said to be transferred to a new creditor under a foreign bank reorganisation law, the English court will recognise the effect of the transfer by reference to the position under the foreign law in the jurisdiction where the transfer is purportedly made.  In short, if a transfer is ineffective as a matter of the relevant foreign law, the English court will decline jurisdiction in proceedings against the purported new creditor.  In making that judgment, all events taking place prior to the commencement of proceedings will be taken into account by the English Court, but parties disputing jurisdiction will be unable to rely on subsequent events.

We may see more disputes concerning restructured banks, given the amount of restructuring in some parts of Europe caused by the global financial crisis.  See, for example, recent claims by investors in Spain: 


1 Title VIII of the Legal Framework of Credit Institutions and Financial Companies Decree-Law No. 298/92 of 31st December 1992 by Decree-Law 31-A/2012 of 10th February 2012.Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Amy Edwards, or tel +44 20 3088 3710.