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State Intervention to Save Troubled Bank Leads to $835 Million Loan Dispute

The effect of state intervention in the banking sector, triggered by the financial crisis, has come under the spotlight in a High Court dispute in which lenders are seeking to recover an $835 million loan made to a troubled Portuguese bank.

The loan facility was agreed less than two months before the bank was partitioned by the Bank of Portugal (BoP) into a ‘good’ bank, to hold its healthy operations, and a ‘bad’ bank, to keep its toxic assets. The first repayment on the loan was missed and a group of financial institutions, as successors to the original lender, declared an event of default.

In seeking to recover the loan from the good bank, the group argued that the liability had passed to it on the break-up of the bank. However, the good bank insisted that there had been no such transfer and that the liability had remained with the bad bank. It pointed to the BoP’s subsequent ruling to that effect.

In those circumstances, the good bank argued that the Court had no jurisdiction to entertain the group’s claim. The BoP’s declaration that there had been no transfer of the liability to the good bank was decisive and the Court was bound to recognise that fact as a matter of English and European law.

However, in dismissing the good bank’s bid to set aside the proceedings, the Court noted that the loan agreement was subject to an English jurisdiction clause and that the good bank was not itself a public authority.

The group had persuasively argued that the good bank became subject to the loan agreement and the jurisdiction clause when the bank was broken up and that the BoP’s later ruling had not changed that position. With jurisdiction established, the group’s claim would proceed to a full hearing.