The British Court of Appeal has told investors including TDC Pension, the Danish telecommunications pension scheme, and the New Zealand Superannuation Fund (NZSF) that their legal action to reclaim a $785m (€711m) loan against a failed Portuguese bank should be resolved in Portugal.

The loan was made to Banco Espirito Santo (BES) in July 2014 to finance a refinery project for the Venezuelan state oil company.

The money was lent by Oak Finance Luxembourg, a special purposes vehicle set up by Goldman Sachs (GS), which raised funds from investors, issuing them with fixed rate notes.

In August 2014, BES collapsed and was bailed out by the Banco de Portugal (BDP), the country’s central bank.

Assets and senior debt were transferred to Novo Banco (NB), the successor to BES and the designated ‘good bank’, leaving other items in BES, now the ‘bad bank’, to be liquidated.

However, on 22 December 2014, the BDP announced it was reversing the transfer of the loan, since it regarded the original deal as a related-party transaction because of GS’s small shareholding in BES.

Related-party assets and liabilities are being kept within the ‘bad bank’, with little chance of repayment.

The loan had been arranged under a facility agreement between BES and Oak Finance, which contained an express choice of English law and English jurisdiction. 

NZSF’s own exposure to the loan is $150m.

The group of investors, led by NZSF and including investment funds such as Silver Point Capital and FFI Fund, filed debt-recovery proceedings against NB in the English courts in February 2015.

In August that year, the High Court dismissed an attempt by NB to have the case heard in Portugal.

But the Court of Appeal has now reversed that ruling.

When BES collapsed, the BDP bailed it out using its own resolution powers under the EU Bank Recovery and Resolution Directive (EBRRD). 

The English courts were asked to rule on how the directive, and therefore the BDP’s decisions, should be construed.

Also in play was the directive that covers the reorganisation and winding-up of credit institutions – the Reorganisation Directive.

This generally requires that measures that may affect third parties’ existing rights be given effect by every other member state.

In its ruling, the court said the decisions of the BDP should be given the effect they have under Portuguese law and that the correct place to challenge those decisions was in Portugal. 

Lord Justice Moore-Bick, one of three judges hearing the appeal, said: “To do otherwise would undermine the scheme of universal recognition of measures taken by the home member state to deal with failing financial institutions, which is fundamental to the scheme of European law in this field.”

Stuart McNeill, partner at Pinsent Masons, who represented NB, said: “The EBRRD is intended to provide a pan-European approach to rescuing banks and other financial institutions in difficulty, requiring member states to respect the decisions of the resolution authorities, many of which are central banks.”

He continued: “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.”

The investors have also filed a similar action against BDP in the Portuguese courts, while GS has filed proceedings against NB in the English courts.

A spokeswoman for the NZSF said: “We are currently considering the judgment and our ongoing action in [the UK]. We expect the legal process to be a long one, and our related legal actions in Portugal are also ongoing.”