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Succession to Exclusive Jurisdiction Clauses, and the fine line between Commercial and Insolvency Proceedings – ING Bank v Banco Santander

Posted on 15 January 2021

In ING Bank N.V. & Anor v. Banco Santander S.A. [2020] EWHC 3561 (Comm) (21 December 2020) the High Court recently examined two interesting issues in a dispute arising between two foreign-domiciled international banks: whether a successor party might be bound by an exclusive jurisdiction clause it did not expressly consent to; and how to characterise commercial proceedings that arise out of an insolvency situation for the purpose of establishing jurisdiction. In determining that the English court did not have jurisdiction to hear the claim, the decision highlights the lack of protection provided to a lender by an exclusive jurisdiction clause where the borrower enters into insolvency proceedings in another jurisdiction.

Background

In 2008 a syndicate of eight lenders, including the claimant, ING, entered into a loan agreement and related swap agreements with Marme Inversiones, a commercial real estate company (the "Marme Agreements"). The loan agreement and the swap agreements (the latter in ISDA Master Agreement form) expressly provided for English governing law and the exclusive jurisdiction of the English Courts to settle any disputes arising under them.

In March 2014, shortly after the loan and interest fell due, Marme entered into a voluntary insolvency process in Spain. As part of the insolvency procedure, a Liquidation Plan was approved by the Spanish court and a tender process commenced for the acquisition of Marme's assets and liabilities. Following a contested process, the Spanish Insolvency Court determined that an offer from Sorlinda (the "Sorlinda Offer") was the best offer received, and the Sorlinda Offer was implemented by agreement with the Marme Insolvency Administrator in July 2019.

In compliance with its commitment under the Sorlinda Offer to discharge Marme's contingent liabilities, Sorlinda procured two on demand bank guarantees from Santander (then a separate entity from Sorlinda) (the "Guarantees") in favour of ING. Those guarantees provided that ING was the beneficiary, and that Santander guaranteed Sorlinda's obligations to ING, and made no reference to Marme.

Sorlinda subsequently entered a plea in the Spanish insolvency proceedings that, as a result of a ruling of the Spanish Supreme Court, loan interest and swap interest had not properly accrued under the Marme Agreements, and were not payable by Sorlinda (the "Sorlinda Plea"). Sorlinda made payments to ING arising under the Marme Agreements, either directly or from Santander pursuant to the Guarantees, but did not pay interest under the swap agreements.

On 2 January 2020, Sorlinda merged into Santander, and Santander assumed all of Sorlinda's rights and liabilities. In February 2020, ING issued proceedings in the English High Court against Santander for payment of outstanding amounts it claimed to be due pursuant to Sorlinda's assumption of Marme's liabilities, relying on the exclusive jurisdiction clauses in the Marme Agreements.

On 21 April 2020, Santander applied for a declaration that the English Court did not have jurisdiction to hear ING's claim. Shortly thereafter, the Spanish Court dismissed a motion by ING to decline jurisdiction over the Sorlinda Plea on the basis that the English Court had sole jurisdiction to hear the plea.

Effect of the Marme Agreements

To decide whether Santander would be bound by the jurisdiction clauses contained in the Marme Agreements, the Court applied the legal test set out by Lord Sumption in Goldman Sachs International v. Novo Banco SA [2018] 1 WLR 3683 at [9], applying the test that he had set out in Brownlie v. Four Seasons Holdings Inc [2018] 1 W.L.R. 192, whereby the onus was on ING to show that it had a good arguable case that the English court had jurisdiction.

In order to determine the nature of Santander's obligations vis-à-vis the Marme Agreements, and therefore whether ING's claim related to a commercial contract or insolvency proceedings, the Court heard expert evidence on the scope and effect of the assumption of liabilities under Spanish law in the context of Marme's liquidation. The experts agreed that there had been no novation of the Marme Agreements, but disagreed as to whether there had been a succession of or assumption of direct liability under the Marme Agreements.

Whilst acknowledging that both perspectives were arguable, Mrs Justice Cockerill preferred the analysis of Santander's expert that, in the absence of clear an unequivocal consent of all Marme's creditors amongst other factors, Sorlinda had not become directly liable to ING under the Marme Agreements. The actual effect was that Sorlinda had assumed a commitment to the Marme Insolvency Administrator to pay sums to enable Marme's liabilities in the insolvency to be discharged.

The Jurisdiction Clause

The primary point of Santander's application was that ING could not rely on Article 25 of the Recast Brussels Regulation (Regulation (EU) No 1215/2012) because Santander was not a party to the Marme Agreements containing the exclusive jurisdiction clauses on which ING relied, and did not otherwise agree to be bound by them.

It was common ground that because the governing law of the Marme Agreements was English law, the question of whether Santander was bound by the exclusive jurisdiction clause was to be determined by English law. It was further agreed that because the Marme Agreements prohibited transfer or assignment without the consent of all lenders, there was no novation under English law.

However, ING sought to argue that this situation fell within a line of cases concerning transfers of obligations in bills of lading cases, starting with the Tilly Russ [1985] 1 QB 931, so that Santander was bound by the exclusive jurisdiction clause in the Marme Agreements notwithstanding that it had not signed or accepted it. ING argued that if as a matter of fact a transfer of the rights and obligations of the Marme Agreement had taken place, then the English law should treat that as succession under English law. ING invited the Court to accept this latter submission notwithstanding that neither English law nor Spanish law provided that succession of those obligations had taken place.

Mrs Justice Cockerill had little difficulty rejecting ING's arguments on this point, finding that the Tilly Russ line of authority was indeed restricted to bills of lading; and that considering whether a de facto succession had taken place unacceptably stepped outside the rule which requires jurisdiction to be determined by the relevant national law.

The Insolvency Regulation/Brussels Regulation Dichotomy

Despite finding there was no exclusive jurisdiction clause to establish the English Court's jurisdiction under Article 25 of the Recast Brussels Regulation, Mrs Justice Cockerill proceeded to consider whether the Court's jurisdiction over ING's claim should be determined as a commercial dispute under the Brussels regime, or as matter arising out of insolvency under the Insolvency Regulation (Regulation (EC) No 1346/2000, as the Spanish insolvency proceedings were opened before 26 June 2017). The Recast Brussels Regulation provides at Article 1(2)(b) that it shall not apply to "proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings”.

ING argued the matter fell under the Brussels regime: although Sorlinda's rights and obligations originated in Marme's insolvency, now those rights had been assumed there was no longer any relevant link to the winding up, so Sorlinda's position was analogous to a third party who had taken assignment of a claim. ING relied inter alia on the case of F-Tex SIA v. Lietuvos-Anglijos UAB “Jadecloud-Vilma” [2013] Bus. L.R. 232 [18] to [51], in which an insolvent German company had made a pre-liquidation transfer to a third party in Lithuania. The liquidator assigned the insolvent company's claims to a creditor, who issued proceedings in Lithuania. The Court found this to be a case of a third party suing on a contractual right that it had acquired by assignment, and although it was derived from the liquidation it had become separate from that process.

Santander maintained the case should fall under the Insolvency Regulation, arguing inter alia that the relief sought by ING was based on matters that are core issues in the Spanish insolvency proceedings, and subject to the supervision, control and determination of the Spanish court. Further, the Spanish court had already given a judgment on the Sorlinda Plea in the Spanish insolvency proceedings, which was a judgment the English Court was required to recognise under Art 25 of the Insolvency Regulation.

The judge accepted that compelling cases could be made for both analyses, but considered that she had approach the issue in two stages. The first was to ask what the legal basis of the claim is - is it derived directly from the insolvency, and how closely connected is it with the insolvency?  Mrs Justice Cockerill looked to the formulation of ING's claim in the pleadings, which explicitly raised the issue of Sorlinda's liability to all of Marme's creditors, the Spanish insolvency proceedings, and to the Liquidation Plan. She determined that the legal basis of ING's claim was inextricably a part of the assumption of liabilities which made Sorlinda (subsequently Santander), liable to ING and (on ING's case) a party to the Marme Agreements.

The second stage was to review that analysis in light of established case law. The judge found this case was distinguishable the cases relied on by ING. It was accepted that similar points could be made to those in F-Tex, but in this case the link to insolvency was plainly closer, and unlike F-Tex the dispute could not be detached from the insolvency event. In this case, it could be established that there was a direct and close link to the insolvency process - albeit a more complex one than in the cases considered.

Accordingly, the claim was excluded from the Brussels regime, and jurisdiction determined by the Insolvency Regulation.

Post-Transition Period

It is interesting to consider what the outcome of ING's claim might have been if its claim had been issued on 1 January 2021. At the time of writing, the state parties to the 2007 Lugano Convention on jurisdiction are considering whether to accede to the UK's application to join the Convention in its own right. Notwithstanding the determination that Santander was not bound by the exclusive jurisdiction clause contained in the Marme Agreements, jurisdiction on the basis of a choice of court agreement would be determined under the 2005 Hague Convention. However, Article 2(e) of the Hague Convention also excludes matters of insolvency from its scope. If the UK accedes to the Lugano Convention, the same exclusion for insolvency is contained in Art 1(2)(b).

As to the status of the Insolvency Regulation, the Insolvency (Amendment) (EU Exit) Regulations 2019 (Brexit Regulations) and amendments thereto provide that the effects of the Insolvency Regulation will be retained where the main insolvency proceedings have been commenced before the end of the Transition Period. Santander's argument that the English Court was obliged to recognise the Spanish Court's judgment in the Sorlinda Plea would still be valid. However, there is no current mechanism obliging EU member states to recognise equivalent decisions in insolvency proceedings commenced in the UK.

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