Court of Appeal: Novo Banco resolution directive claims must be heard in Portugal

The case is significant as it was the first in which the English courts had been asked to consider how they should interpret decisions made by another EU member state's resolution authority when exercising its powers under the EU's Bank Recovery and Resolution Directive, according to Stuart McNeill of Pinsent Masons, the law firm behind Out-Law.com, who was part of the team which advised Novo Banco during the case.

"The directive is intended to provide a pan-European approach to rescuing banks and other financial institutions in difficulty, requiring member states to respect decisions of the resolution authorities – many of which are central banks," McNeill said.

"The Court of Appeal's judgment highlights the obvious danger – indeed, potential chaos – of different courts interpreting the same decision of a single resolution authority in different ways. This decision will be warmly welcomed by resolution authorities across Europe and support their attempts to preserve financial stability while rescuing institutions," he said.

Novo Banco was set up by the Portuguese central bank, the Bank of Portugal, in August 2014, using its resolution powers under the Bank Recovery and Resolution Directive. The directive sets out EU-wide rules on how to wind up or restructure failing financial institutions, in particular banks; and ensures mutual recognition of measures taken for this purpose by the regulators in one member state in all other member states.

The bank Goldman Sachs International and a group of investors attempted to bring claims worth around $850 million against Novo Banco. These claims related to obligations of BES under a facility agreement with Oak Finance, which included an English jurisdiction clause. The investors argued that these obligations had transferred to Novo Banco as a result of the actions of the Bank of Portugal; while Novo Banco and the central bank argued that these obligations had not transferred and therefore remained with BES.

In August 2015, the High Court ruled in favour of Goldman Sachs and the investors. However, the three judges sitting as the Court of Appeal unanimously decided that the High Court judge should not have done so. As a matter of Portuguese law, Novo Banco is not a party to the Oak Finance facility agreement and does not owe any money, according to the judges. Any challenge to this position therefore had to be brought in the Portuguese courts, said Lord Justice Moore-Bick, giving the judgment of the court.

It was irrelevant for these purposes that the obligations in the Oak Finance facility agreement were governed by English law, as giving effect to the Bank of Portugal's resolution measures meant that the agreement did not bind Novo Banco. Recognising this was "fundamental to the scheme adopted by the EU for dealing with the widespread and potentially disastrous consequences of the failure of a major financial institution", he said.

"[T]he fundamental principle underlying the reorganisation and winding up of financial institutions within the European Union is that it is for the home member state to decide how to deal with a failing institution and that its decisions are to be accorded universal recognition," he said. "If that object is to be achieved it is essential that member states give reorganisation and resolution measured the effect which they have under the domestic law of the home state."

"If in the present case it were open to the English courts to hold that the effect of [the decisions taken by the Portuguese central bank] is other than that which it has under Portuguese law ... there would be a violation of the principle of universal recognition on which the law in this area is based. Moreover ... it does not follow that a decision which does not fall within the scope of the [Recovery and Resolution Directive] cannot amount to a reorganisation measure and so be entitled to universal recognition for that reason alone," he said.