Sovereign Immunity: Considerations For Lenders

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...