Locations
The Wealth Finance Brief - March 2015
- Lending to Individuals
- Execution of Guarantees
- Sovereign Immunity: considerations for lenders
- Duties to not facilitate fraud
- MiFID II: A Summary
- Taking Security Over IP
Sovereign immunity is a legal doctrine by which the sovereign or state cannot commit a legal wrong and is immune from civil proceedings or criminal prosecution. The doctrine stems from the ancient English principle that the monarch can do no wrong. In this article, we look at the key considerations for lenders when dealing with a sovereign or state in a transaction.
In general terms, lenders should consider the principle of sovereign immunity if a borrower or a subordinated creditor is either a foreign state (acting through its relevant administrative or public body) or a so-called quasi-public entity whose assets may be protected by sovereign immunity of the state they are originating from or a foreign head of state and his or her close relatives. Such entities or individuals may be allowed immunity from adjudication, enforcement and execution and the courts may be prevented from considering any claims or enforcing judgments against them. The property of such entities or individuals could also be immune from execution. In the UK, the international law principle of sovereign immunity is determined principally by the State Immunity Act 1978 (the "Act") and common law principles. In addition, the UN Convention on Jurisdictional Immunities of States and their Property attempts to codify the international doctrine of state immunity (currently not in force) which serves as a useful source for interpreting the Act in accordance with international practice.
Foreign state-controlled investments in the UK private sector are an ever-increasing occurrence resulting in the need for lenders to exercise a whole new area of control with regard to operating with these government-sponsored enterprises. For instance, Qatar's sovereign wealth fund has built up an impressive global portfolio with stakes in various UK blue-chip companies including Heathrow, No 1 Hyde Park and most recently winning the bidding to purchase Canary Wharf. Kuwait plans $5bn of investments in the UK through the Kuwait Investment Authority which has been responsible for managing funds on behalf of the State of Kuwait in the UK since 1953.
Quasi-public entities or government-sponsored (or owned) enterprises are hybrid organisations that have been assigned by law, or by general practice, some of legal characteristics of both the governmental and private sectors. From the lender's perspective, it is important to understand whether a borrower or subordinated creditor (usually a foreign investor investing in the UK), or any of its assets can benefit from sovereign immunity protection. If the borrower or any creditor which has subordinated its debt to the lender can claim the benefit of sovereign immunity, the lender will not be provided with any degree of protection upon enforcement.
Foreign heads of state and their close relatives can benefit from the sovereign immunity protection under the Act when acting in their personal capacity. In (1) HRH Prince Abdulaziz Bin Mishal Bin Abdulaziz Al Saud and (2) HRH Prince Mishal Bin Abdulaziz Al Saud v. Apex Global Management Limited [2013] EWCA Civ 642, the Court of Appeal confirmed that only close relatives of a head of state who form part of his or her household, in particular the spouse (or equivalent) and dependants, can benefit from immunity under section 20(1) of the Act. Section 20 of the Act confers limited immunity from the criminal, civil and administrative jurisdiction of a foreign (receiving) state upon "a sovereign or other head of state and members of his family forming part of his household". The respondents, two Saudi Princes, argued that they were part of the household of the King, despite being non-dependent adults with families of their own. The Court of Appeal approved the guidance issued by the Immigration Directorate of the Home Office allowing only a spouse (or equivalent) and dependent relatives being considered to form a part of the head of state's household and, therefore, concluded that neither Prince was entitled to claim immunity under section 20 of the Act.
Waiver of sovereign immunity
In relation to assets located in the UK, comprehensive waiver provisions and jurisdiction clauses contained within relevant documentation are a common solution to address this issue. In NML Capital Ltd v Republic of Argentina [2011] UKSC 31, the Supreme Court held that Argentina could not claim sovereign immunity in England in respect of proceedings to enforce a New York judgment on a bond issue under a fiscal agreement between Argentina and NML. Argentina was excluded from invoking state immunity under section 2 of the Act by virtue of the terms of the waiver and jurisdiction clauses in the underlying agreement pursuant to which Argentina had waived, and agreed not to plead, any claim that it might have to state immunity. However, whether such waiver provisions are sufficient to protect lenders outside the UK and could be enforced in a foreign court would depend on the relevant jurisdiction and type of assets concerned.
The Act also states that "a state is not immune as respects proceedings relating to a commercial transaction, entered into by the state". Commercial transaction includes "any loan or other transaction of the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligation" into which a state enters otherwise than in the exercise of sovereign authority.
Unfortunately there is no universal solution to address this issue. It is very important to have a clear understanding of the borrower's corporate structure, including potential subordinated creditors, and where its underlying assets are derived from. Advice of foreign counsel should also be obtained in advance of committing to a financing.