The judgment delivered by the Court of Appeal in Guardians of New Zealand Superannuation Fund & Ors v Novo Banco SA [2016] EWCA Civ 1092 on Friday 4 November 2016 is good news for the resolution and the private international law communities. In overturning the High Court decision in Goldman Sachs v Novo Banco [2015] EWHC 2371 (Comm) the Court of Appeal correctly restored the principle of automatic mutual recognition of resolution actions within the EU. The Court of Appeal’s judgment supports the effectiveness of the cross-border resolution regime and avoids the risks of a fragmented framework that were embedded within the High Court decision.

The facts can be summarized as follows. By a decision of 3 August 2014, the Bank of Portugal (BoP) put Banco Espirito Santo (BES) in resolution and set up a bridge bank, Novo Banco, to which certain ‘good assets’ and liabilities were transferred. This decision limited itself to stating that the assets and liabilities covered by statutory exclusions set out in Portuguese banking law were not covered by the transfer, and provided for the possibility of BoP transferring back to the ailing bank (BES) at any time the assets transferred to Novo Banco. Subsequently, by a decision of 22 December 2014, BoP specified that the financial facility entered into by BES with Oaktree Finance, and later assigned by the latter to Goldman Sachs, had not been transferred to Novo Banco since it fell into one of statutory exceptions. Goldman Sachs then sued in the English High Court claiming repayment of the financial facility.

The English High Court retained the jurisdiction to hear the matter on the basis that the financial facility contained a choice of English law and jurisdiction clause. It dismissed the Portuguese claim that the assumption of jurisdiction by the English court was barred by the administrative nature of the resolution decisions taken by BoP, and therefore fell outside the scope of application of Regulation (EU) No 1215/2012 on civil jurisdiction and recognition of judgments (the Brussels I Regulation). The High Court instead took the view that the matter was of a contractual nature, since the claim focused on the non-performance of a payment obligation, and that the retention of English jurisdiction was justified by the circumstance that the contract was subject to English law. In other words, the High Court preferred a private law characterization of the claim, and disregarded the administrative/resolution law implications and their impact on the succession of the bridge bank (Novo Banco) in the rights and obligations of the ailing bank under resolution (see Anna Gardella, La risoluzione dei gruppi finanziari cross-border nell'Unione europea, 2016,173). The relevant provision is set out in Article 40(9), second sub-paragraph, of Directive 2014/59/EU on bank recovery and resolution (BRRD), which provides that ‘resolution authorities may require that a bridge institution be considered to be a continuation of the institution under resolution, and be able to continue to exercise any right that was exercised by the institution under resolution in respect of the assets, rights or liabilities transferred’ (emphasis added). On the basis of this provision, it has to be inferred a contrario that the continuation cannot be presumed and, with regard to the case at hand, that Novo Banco could not be assumed to be bound by the financial facility, absent a clear transfer by the resolution authority.

This private law approach of the High Court was coupled with the neutralization of the cross-border effectiveness of BoP’s decision of December 2014. On the one hand the High Court disputed the nature of the resolution action of BoP’s December 2014 decision, arguing that it did not purport to transfer assets and liabilities as per Article 66 BRRD, but limited itself to clarifying the transfer perimeter; on the other hand, such an extremely restrictive view taken by the High Court of Article 66 BRRD, relating to the mutual recognition of transfer resolution decisions, is at odds with the broader resolution framework, in particular the interaction with the umbrella regime laid-down in Directive 2001/24/EC on reorganization and winding-up of credit institutions (Winding-up Directive) which provides for the mutual recognition of reorganization measures. As a matter of fact, the Winding-up Directive has not been repealed by the BRRD, rather it has been amended in order to expressly include the BRRD resolution tools within the definition of ‘reorganization measures’ so as to ensure their automatic cross-border effect. The formalistic approach taken by the High Court has been the object of criticism (see eg Matthias Lehman, Bail-in and Private International Law: How to Make Bank Resolution Measures Effective Across Borders, 2016, 31; Anna Gardella, Bail-in and the Two Dimensions of Burden-Sharing, 2015, 223).

The Court of Appeal’s decision has remedied the pitfalls of the High Court’s ruling and has the merit of ‘rescuing’ the mutual recognition of resolution actions by correctly emphasizing the EU legislator’s intent and the rationale of the new resolution framework. By reversing the High Court’s judgment, the Court of Appeal dismissed the English court’s jurisdiction in favor of the Portuguese courts. To achieve that result, the Court of Appeal rejected the private law approach and correctly framed the claim under a mutual recognition perspective by placing the overarching framework of the Winding-up Directive at the center of the disputed claim (see [2016] EWCA Civ 1092, at [6]).

The Court of Appeal acknowledged that the BRRD resolution tools, such as the setting up of a bridge bank and the transfer of assets and liabilities, amounted to ‘reorganization measures’ covered by Article 2 of the Winding-up Directive, as amended by Article 117 of the BRRD, and enjoy EU-wide automatic effectiveness in accordance with the law of the home Member State pursuant to Article 3 of Directive 2001/24/EC. The Court of Appeal supported this conclusion by making reference to the recent Kotnik judgment in which the Court of Justice acknowledged that burden-sharing measures amount to reorganization measures within the meaning of the Winding-up Directive (CJ, 19 July 2016, C-526/14, Kotnik and Others, points 103-114, ECLI:EU:C:2016:570). Building on that broad interpretation of reorganization measures, the Court of Appeal overcame the formalistic arguments put forward by the respondents and endorsed by the High Court. In this respect the Court of Appeal rightly pointed out that the December 2014 decision “purported to clarify the effect of the August decision and was therefore very closely connected to it. In those circumstances […] the December decision is to be regarded as, or as part of, a reorganization measure and is entitled to universal recognition under the Reorganization [Winding-up] Directive’.

By this judgment, the Court of Appeal has removed potential obstacles to the mutual recognition of resolution actions and has re-established legal certainty, paying the necessary attention to Article 3 of the Winding-up Directive.

Anna Gardella is an Expert in Resolution at the European Banking Authority. She is a qualified Associate Professor of Commercial Law, Private International Law and EU Law in Italy and is currently on leave from the Catholic University of Milan.