Sovereign Immunity in Subscription Credit Facilities: UK
Executive Summary
Government pension plans, state endowment funds, sovereign wealth funds and other arms of sovereign states are often investors in funds which borrow under subscription credit facilities. These state and quasi-state entities may seek to resist liability and the enforcement of any claims (including in respect of the capital call security granted in connection with subscription credit facilities) on the basis they enjoy sovereign immunity, claiming that they cannot, therefore, be pursued through the UK courts. Given the prevalence of English courts or Cayman courts (which, together with the British Virgin Islands (BVI) and other offshore jurisdictions, apply UK immunity legislation) as preferred dispute resolution jurisdiction in funds documentation, this is a critical risk factor. A successful claim to immunity would mean an inability to pursue a claim for debt or damages.
Related to this, if a lender does manage to obtain a judgment, such entities may then claim their assets and property are immune from attachment and execution, thereby preventing any meaningful monetary recovery in jurisdictions where assets are identified.
For all these reasons, subscription credit facility lenders should have a good understanding of sovereign immunity principles to assess the enforcement and credit risk of state investors, and then strategize how best to manage this risk. Below we provide an in-depth overview of the principles of sovereign immunity under UK law (also applied in Cayman, BVI and other overseas territories) and how they impact subscription credit facilities where the investors’ obligations to the relevant fund are governed by UK law.
What to Know
The State Immunity Act 1978 (“SIA”) applies in the United Kingdom and in certain overseas territories of the UK including the Cayman Islands, Turks and Caicos Islands, Belize and the BVI pursuant to statutory order. Under the SIA, foreign states–including governments, government departments and heads of state–have immunity from suit in UK courts, subject to exceptions.
The SIA does not apply to the UK Government. The position of the UK Government before the UK courts is dealt with under the Crown Proceedings Act 1947.
Who can claim immunity?
Under UK law, the doctrine of sovereign immunity essentially provides that a foreign sovereign state, which includes its Head of State when acting in a public capacity, the government and any department of that government, cannot be brought before the UK courts, unless one of a series of exceptions applies.
Importantly, a separate entity from the state does not fall within the definition of a state in the SIA. However, a separate entity can claim immunity from suit if the proceedings relate to something it has done “in the exercise of sovereign authority” and the state would have been immune in respect of such activity. This definition of “state” is different from the position under US law where a foreign state includes a political subdivision of a state or an agency or instrumentality of a foreign state.
Sovereign wealth funds are often, but not always, established as separate legal entities from the state under applicable local laws. The prospect of a sovereign wealth fund claiming immunity on the basis it is conducting sovereign activity (and the state would have been immune) can give rise to complex factual and legal issues which should be considered carefully by fund managers/lenders.
Immunity from suit and immunity from enforcement
There are, broadly, two types of sovereign immunity: (1) immunity from suit (i.e., the ability to bring a claim before the UK courts), and (2) immunity from enforcement (i.e., being able to attach and execute against a state’s assets once a judgment is obtained). A waiver of immunity from suit does not constitute a waiver of immunity from enforcement. An effective waiver of immunity clause would need to include a waiver of both forms of immunity.
We consider both forms of immunity further below.
Exceptions to immunity
The state entity may be asked to provide a contractual “waiver” of its immunity; however, there may be resistance to the inclusion of such a waiver. Even if the principle of a waiver is accepted, the precise scope of the waiver may be heavily negotiated on some fund documents.
Given the above, it may be necessary to consider the exceptions to the principle of immunity, some of which may apply in the context of subscription credit facilities.
Immunity from suit–exceptions
In the context of subscription credit facilities (and other fund finance transactions), the following three exceptions to immunity from suit may come into play:
- Submission to the jurisdiction of the English court: Where a state party has submitted to the jurisdiction of the English court in a commercial contract (a choice of English law alone is insufficient), it is not immune from lawsuits related to that contract.
- Commercial transactions: If a state entity enters into a commercial transaction, it is not immune from lawsuits related to such a transaction. The term “commercial transaction” is defined widely in the SIA and covers, for example, any contract for the supply of services. While dependent on the facts, typically an investment in a subscription credit facility would fall within this definition as it is arguably a contract for the provision of investment services. However, parties can agree in writing to disapply this exception.
- Arbitration: Agreements to submit a dispute to arbitration in effect waive the state’s immunity from court proceedings relating to such arbitration. However, this exception does not apply if the parties have agreed otherwise.
Immunity from enforcement—exceptions
Under the SIA, a state’s assets are immune from enforcement with two exceptions: (1) where the state has consented to such enforcement generally in the “waiver” clause, or (2) if the assets are in use for commercial purposes.
As a practical matter, it may be difficult to establish that a particular asset such as a bank account held by the state is in use for commercial purposes. Further, under UK law, if the Ambassador of the state issues a certificate stating the account is in use for sovereign purposes and not commercial purposes, then this is generally determinative as to its use. A central bank’s assets are deemed not to be in use for commercial purposes.
For these reasons, it is generally preferable to obtain a waiver of immunity/consent to enforcement.
Considerations for Lenders in Subscription Credit Facilities
Sovereign immunity for government funds or quasi-governmental entities that lend to funds which borrow under subscription credit facilities and other fund finance transactions remains nuanced and fact-specific. However, there are contractual provisions that can help mitigate these risks. Moreover, a deep understanding of the immunity issues on any deal can help secure an accurate credit risk assessment. Further, self-help remedies remain unaffected by arguments on immunity as they do not require court intervention.
Mayer Brown’s lawyers have decades of experience advising clients relating to investments by states and quasi state entities.
