Client Alert

English Law Routes Exhausted for Banco Espirito Santo Creditors:

English Law Challenges to EU Bank Restructurings Firmly Closed off by U.K. Supreme Court

23 Jul 2018

Summary – Decision of U.K. Supreme Court

The U.K. Supreme Court has closed off a challenge to the restructuring of Banco Espirito Santo (BES) under English law. Through an emergency liquidity facility creditors had previously found success in the High Court (read our summary here). Now the U.K. Supreme Court[1] have confirmed the automatic pan-European effect, under the EBRRD, of actions effective under the domestic laws of Portugal that were taken by the Portuguese authorities following their initial ‘Reorganisation Measure’.  Aggrieved creditors will need to challenge European bank restructurings under the administrative law of the bank’s resolution authority or before the European Court in Luxembourg rather than the jurisdiction pertaining to the governing law of the loan or other debt instrument.

Takeaways for EU bank creditors

Going forward, creditors of EU banks should be mindful that:

  • All measures taken under the law of the home state that affect a reorganisation measure previously made will themselves be given automatic effect under the EBRRD; it is irrelevant whether those subsequent measures themselves are ‘reorganisation measures’ provided they have effect under the domestic law of the home state. 
  • Challenges to resolution authority measures are to be pursued under the administrative law of the bank’s resolution authority.
  • Challenges against the Single Resolution Board may be brought before European courts.
  • Act promptly if you are aggrieved by reorganisation measures taken under the EBRRD. There are extremely tight limitation periods within which to bring administrative law challenges in most jurisdictions (e.g. within two months for challenges to decisions of EU bodies).

Recap of facts

As it applied to the emergency liquidity loan (“Oak Loan”), the BES restructuring involved decisions taken by the resolution authority for BES, Banco de Portugal, in August 2014 (“August Decision”) and December 2014 (“December Decision”). The August Decision involved Banco de Portugal exercising the bridge institution tool under the European Bank Resolution and Recovery Directive (“EBRRD”), thereby transferring assets and liabilities of BES to Novo Banco. The December Decision (couched as clarificatory) provided that the Oak Loan was never transferred to Novo Banco in August. As a matter of domestic Portuguese law, the December Decision was effective.

The Oak Loan lenders’ primary case was that, while the August Decision was a reorganisation measure made under the EBRRD and afforded automatic pan-European recognition, the December Decision was not a reorganisation measure and therefore could not be afforded automatic pan-European recognition. It would follow that the retransfer of the Oak Loan from Novo Banco back to BES did not have effect under English law, and so Novo Banco would be liable for repaying the Oak Loan.

The U.K. Supreme Court’s approach affirmed the Court of Appeal’s approach

The U.K. Supreme Court acknowledged that Banco de Portugal’s December Decision had immediate effect as a matter of Portuguese administrative law and therefore held that this was determinative of the issue. There was no need to consider whether the December Decision itself was a ‘reorganisation measure’, since it was beyond doubt that the August Decision was such a measure. The Supreme Court referred to the two fundamental principles of the EBRRD:

24.     The first is that its purpose, as recital (119) of the EBRRD records, is to ensure that ‘all assets and liabilities of the institution… are dealt with in a single process in the home member state and that creditors in the host member states are treated in the same way as creditors in the home member state. This can be achieved only by taking the process as a whole and applying the legal effects attaching to it under the law of the home state in every other member state.

27.     Secondly, an administrative act such as the August decision does not occur in a legal vacuum. It occurs in the context of a broader framework of public law. Article 3 does not only give effect to ‘reorganisation measures’ throughout the Union. It requires them to be ‘applied in accordance with the laws, regulations and procedures applicable in the home member state, unless otherwise provided in this Directive’, and to be ‘fully effective in accordance with the legislation of that member state’. In this legal scheme it cannot make sense for the courts of another member state to give effect to a ‘reorganisation measure’ but not to other provisions of the law of the home state affecting the operation of a ‘reorganisation measure’. This is so, whether or not that other provision is itself a ‘reorganisation measure’.[2]

The Supreme Court therefore held that it did not matter what the correct analysis of the December Decision was, as long as it is accepted that, as a matter of Portuguese law, it concludes the question as to whether the Oak Loan was or was not transferred [para 28]. The Supreme Court went on to observe that it was therefore unnecessary to consider whether the December Decision was itself a ‘reorganisation measure’. Having determined that the issues in dispute were a matter of Portuguese domestic law (in respect of which there was agreement), the Supreme Court determined that that was an end to the matter.

The decisions are therefore afforded pan-European recognition unless later annulled as a matter of Portuguese administrative law. As a result, English law recognises that the Oak Loan sits with BES and the lenders cannot look to Novo Banco for a recovery.

The Oak Loan lenders are continuing their challenge of the December Decision before the Portuguese courts. If they are successful, perhaps the saga of the Oak Loan will return to the English courts again under the English law Oak Loan.

[1] Goldman Sachs International v Novo Banco SA [2018] UKSC 34.

[2] Emphasis added.



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