Recognition of EU bail-in rights in contracts governed by non-EU law
From 1 January 2016, EU financial institutions active in Africa will need to include a new clause in their non-EU law governed loan agreements, trade finance instruments and other agreements under which they have a liability – in other words, under which they have incurred debts or other obligations to pay such as guarantees or letters of credit - recognising the right of EU regulators to “bail-in” troubled EU financial institutions. The aim of the new clause is to reduce the likelihood of a creditor in a non-EU jurisdiction successfully challenging the bail-in rights of an EU regulator.
Broadly speaking, the clause must include express acknowledgement, agreement and consent by a counterparty that an EU financial institution’s liability to it may be subject to the exercise by the relevant regulator of powers to write-down debt and convert debt into equity, together with a description of those powers as set out in national law and the potential effects in terms of liability under the agreement.
The new requirement (implemented under Article 55 of the EU Bank Recovery and Resolution Directive (2014/59/EU) and transposed into national law of EU member states) has a potentially significant effect on EU financial institutions operating out of branches in Africa, for example, liabilities of a Nigerian branch of an EU financial institution which are governed by Nigerian law will be subject to the requirement (unless an exception applies).
One sector which has been particularly vocal in its objections to the new requirement is the trade finance industry (which has a huge presence in commodity-rich Africa). It will be difficult (if not impossible) to include recognition of bail-in clauses in trade finance instruments like letters of credit or demand guarantees and to obtain the requisite counterparty acknowledgement and acceptance of them, since these instruments are often unilateral in nature, based on standardised terms (such as UCP or URDG) and/or issued by SWIFT.