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

Goldman Sachs, as assignee of Oak Finance, sued Novo Banco in England for a loan originally made to Portuguese bank BES. The Supreme Court held that a Portuguese Central Bank decision determining the loan liability was never transferred to Novo Banco must be recognised in England under the Reorganisation Directive, defeating jurisdiction.

Facts

Oak Finance Luxembourg SA entered into an $835m facility agreement with Banco Espírito Santo SA (BES) on 30 June 2014, governed by English law with an exclusive English jurisdiction clause. BES rapidly fell into serious financial difficulty, reporting losses exceeding $3.5 billion. On 3 August 2014, Banco de Portugal (the designated Resolution Authority under the EU Bank Recovery and Resolution Directive 2014/59/EU (EBRRD)) incorporated Novo Banco as a bridge institution and transferred specified assets and liabilities of BES to it. Under article 145-H(2) of the Portuguese Banking Law, liabilities owed to entities holding more than 2% of the failing institution’s share capital could not be transferred.

On 22 December 2014, shortly before the first repayment was due, Banco de Portugal decided that the Oak liability had not been transferred to Novo Banco, on the basis that Oak had acted on behalf of Goldman Sachs, which was believed to hold more than 2% of BES’s share capital. Goldman Sachs disputed both factual premises. The Central Bank maintained its decision on 11 February 2015. Goldman Sachs and other assignees commenced proceedings in England against Novo Banco, which challenged jurisdiction on the ground that the liability had never been transferred to it and it was therefore not bound by the jurisdiction clause.

Issues

The principal issue was whether the English court was required to recognise the December 2014 decision of Banco de Portugal, which under Portuguese law conclusively determined (unless annulled) that the Oak liability had not been transferred to Novo Banco. If recognised, Novo Banco would not be party to the English jurisdiction clause. A subsidiary issue was whether the December decision should be regarded as merely provisional pending determination by the Portuguese administrative courts.

Arguments

Appellants (Goldman Sachs and Guardians of NZ Superannuation Fund)

The appellants argued that the August 2014 decision transferred the Oak liability to Novo Banco and required recognition in England, but that the December decision did not fall to be recognised. They contended that Goldman Sachs was neither the true lender nor a 2% shareholder, and that the English court should treat the December decision as provisional, looking instead to what a Portuguese administrative court would ultimately decide. They relied on Guaranty Trust of New York v Hannay & Co [1918] 2 KB 623 for the proposition that foreign judgments are merely evidence of foreign law.

Respondent (Novo Banco) and Intervener (Banco de Portugal)

Banco de Portugal argued that article 3 of the Reorganisation Directive 2001/24/EC (as amended by the EBRRD) required recognition of the entire Portuguese reorganisation process. The August and December decisions could not be separated; whatever the correct analysis of the December decision, English courts were bound to give effect to its consequences under Portuguese law, namely that the Oak liability was never transferred.

Judgment

The Supreme Court (Lord Sumption delivering the leading judgment, with whom Lord Mance, Lord Hodge, Lady Black and Lord Lloyd-Jones agreed) dismissed the appeal.

Applying the test for jurisdiction set out in Brownlie v Four Seasons Holdings Inc [2018] 1 WLR 192, the Court identified that the question depended on the proper construction and effect of the Directives. Article 3 of the Reorganisation Directive, as amended, required that reorganisation measures be applied in accordance with the laws of the home member state and be fully effective throughout the Union. The Court held that it was inherently implausible and paradoxical to treat the August decision as having transferred the liability when Portuguese law itself, through the December decision, determined it had not been transferred.

Drawing on LBI hf v Kepler Capital Markets SA (Case C-85/12) and Kotnik v Državni Zbor Republike Slovenije (Case C-526/14), Lord Sumption emphasised that reorganisation measures must have in all other member states the effects which the law of the home state confers on them. An administrative act such as the August decision does not occur in a legal vacuum but within a broader public law framework, and it would be incoherent to recognise the reorganisation measure but not other provisions of home state law affecting its operation.

Regardless of whether the December decision was properly characterised as an interpretation, amendment, retransfer, or a ruling that the liability had never been transferred, it was agreed that under Portuguese law it conclusively determined the position unless annulled. The English court was therefore obliged to treat the Oak liability as never having been transferred, and Novo Banco was never party to the jurisdiction clause.

On the provisional decision argument, the Court rejected the reliance on Guaranty Trust v Hannay, distinguishing it on the basis that there was no dispute about the content of Portuguese law or the status of the December decision; the issue was one of private international law, not fact. Article 3(1) of the Reorganisation Directive assigns implementation exclusively to home state authorities, and article 85(4) of the EBRRD provides that appeals do not automatically suspend challenged decisions. The Directive scheme would be undermined if acts of a designated Resolution Authority could be challenged in every member state simply because they were challengeable in the home state.

The Court declined to refer the matter to the CJEU, finding the relevant propositions of EU law beyond serious argument.

Implications

The decision confirms that English courts must give full effect to reorganisation measures and related administrative acts taken by a designated Resolution Authority of a home member state under national law implementing the EBRRD and the Reorganisation Directive. The recognition obligation extends beyond the initial reorganisation measure itself to subsequent administrative acts of the home state that affect the operation of that measure, provided they are binding under home state law.

Practically, the judgment reinforces the principle that challenges to decisions of national Resolution Authorities must be pursued in the courts of the home member state, not collaterally in other jurisdictions where affected contracts or assets are located. This is essential to the efficacy of the pan-European bank resolution regime, which depends on mutual recognition to deal with systemic banking risks through a single unified process.

The decision is significant for creditors of failing European credit institutions, who must look to home state remedies for disputes about the scope of liability transfers, even where their contracts are governed by English law and contain English jurisdiction clauses. It also marks a clear departure from the common law position in Adams v National Bank of Greece SA [1961] AC 255, under which the discharge or modification of a contractual liability would ordinarily be governed only by its proper law. The judgment is a notable example of EU harmonising legislation displacing traditional English conflict of laws rules in the banking context.

Verdict: Appeal dismissed. The Supreme Court held that the December 2014 decision of Banco de Portugal, which determined as a matter of Portuguese law that the Oak liability had never been transferred to Novo Banco, fell to be recognised by the English court under article 3 of the Reorganisation Directive. Novo Banco was therefore not party to the English jurisdiction clause, and the English court lacked jurisdiction over the claims.

Source: Goldman Sachs International v Novo Banco SA [2018] UKSC 34