The German Federal Supreme Court (Bundesgerichtshof) recently held that creditors cannot bring claims against the Hellenic Republic before the German courts in the context of Greece's debt restructuring in 2012 , finding that Greece enjoys immunity from jurisdiction before the German courts (decision of 8 March 2016; docket number VI ZR 516/14).
Background and facts
In the case before the Bundesgerichtshof, the claimants had acquired ISIN GR bonds through a German bank in the years 2010 and 2011. The terms and conditions stipulated that the bonds were subject to Greek law.
When the bonds were originally issued they were registered in the book-entry system of the Greek Central Bank. Only registered participants in this book-entry system could actually acquire the bonds which were then transferred to the participant's account with the Greek Central Bank. The claimants were not the original purchasers of the bonds and had purchased them through a German bank on the secondary market.
The bonds did not contain a so-called Collective Action Clause, which would have allowed for a restructuring of the bonds. As a result, in 2012, the Greek parliament passed a law which stipulated that the terms and conditions of the bonds could be changed retroactively (Greek law No 4050/2012 of 23 February 2012). In order for this to happen the majority of the bondholders first had to agree to a change of the terms and conditions. The Greek government then had to declare this majority vote binding for all bond holders.
And this is exactly what happened in the case before the Bundesgerichtshof. Whilst the claimants did not consent to the change of terms and conditions, the majority of the bondholders agreed that the bonds be converted into new bonds with a lesser value of 53 percent and a prolonged term. This majority vote was declared binding by the Greek government for all bond holders and the bonds which the claimants had acquired were converted.
Like the first and second instance court, the Bundesgerichtshof dismissed the claim for lack of jurisdiction. Whilst the instance courts had based their decisions on two grounds, namely a lack of jurisdiction because of the principles of state immunity and a lack of jurisdiction under the applicable Brussels I regulation, the Bundesgerichtshof emphasised the principle of state immunity in its judgment.
Unlike, for instance, the United Kingdom or the United States, the principle of state immunity is not expressly codified in Germany. However, the principle of state immunity is incorporated into German law as part of international customary law (Art 25 of the Grundgesetz, i.e. the German Constitution). This has repeatedly been upheld by the Bundesgerichtshof as well as by the German Federal Constitutional Court (Bundesverfassungsgericht). Under the principle of state immunity sovereign states enjoy unfettered immunity from proceedings before the courts of a distinct state as far as their sovereign acts are concerned. German courts are bound by this principle.
The key question was therefore whether the claim before the Bundesgerichtshof concerned Greece's acts of sovereign nature (acta iure imperii) as opposed to mere commercial conduct (acta iure gestionis) which would not enjoy immunity. The Bundesgerichtshof held that, whilst the issuing of bonds by a foreign state does not constitute a sovereign act but is rather subject to private law, the acts in question were in the sphere of sovereign acts. According to the Bundesgerichtshof the crucial questions in this case were not the legal relationship arising out of the bond. The crucial question, and the basis for the claim, was whether the conversion of the bonds held by the claimants was valid. This conversion was only made possible by the law which allowed for a retroactive change of the terms and conditions by majority decision of the bondholders and the Greek government's decision to make this decision legally binding for all bondholders. These two acts, according to the Bundesgerichtshof, qualified as sovereign act. A simple decision of the majority of the bondholders, in contrast, would not have led to a conversion of the bonds. Because the acts were of a sovereign nature, the German courts lacked jurisdiction and, as a consequence, the claims brought before the German courts were inadmissible.
The recent decision of the Bundesgerichtshof reinforces the applicability of the principle of state immunity under German law. With respect to the specific facts of the case, it is in line with previous decisions rendered by lower courts in Germany which are concerned with Greece's debt restructuring since 2013. This decision by the highest German civil court should therefore provide all parties concerned with certainty and a road map to the lower courts.
However, it is interesting to consider whether the Bundesgerichtshof would have reached the same conclusion if the terms of the bonds had included a Collective Action Clause that Greece had relied on. It is certainly arguable that in these circumstances the claims would not have been inadmissible because a conversion of the bonds under a Collective Action Clause would not, on the reasoning of the court, qualify as acta iure imperii. Whilst the court's ruling is impeccable from a legal standpoint, it may seem unsatisfactory for bond holders. Those bond holders who invested in bonds without a Collective Action Clause would only be able to seek legal protection before the Greek courts while holders of bonds with Collective Action Clauses might find themselves able to turn to potentially any court outside of Greece. The reasons for the decision of the Bundesgerichtshof have not been released yet and it remains to be seen whether this issue is tackled by the court.
The reasoning contained in the decision is also awaited to see whether, and if so how, the Bundesgerichtshof deals with the preliminary ruling of the CJEU in Fahnenbrock et al / Hellenic Republic (decision of 11 June 2015 – C-226/13).
For further information, please contact Mathias Wittinghofer, Partner, Tilmann Hertel, Associate or your usual Herbert Smith Freehills contact.