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On 9 April 2015, an ICSID Tribunal ruled it had no jurisdiction to hear claims brought by a Slovakian bank (Poštová Banka) together with its Cypriot shareholder (Istrokapital) in relation to government bonds issued by the Greek government: Poštová Banka, A.S. and Istrokapital SE v Hellenic Republic, ICSID Case No. ARB/13/8. The Tribunal held that both claims failed as neither claimant had a qualifying investment for the purposes of the respective Bilateral Investment Treaty (BIT).
Factual Background
In 2010, Poštová Banka (the “Bank”) acquired on the secondary market, from primary dealers, interests in government bonds issued by Greece between 2007 and 2010 (the “Bonds”).
In 2011, the Bonds were downgraded by various ratings agencies, which prompted the Greek government to pass the Greek Bondholders Act 2012. This Act enabled the Bonds' terms to be amended by a two-third majority vote of bondholders, the quorum for the vote being set at half of the amount outstanding of all eligible titles.
Further to the restructuring of Greece’s sovereign debt in 2012, it was proposed that the Bonds be subject to a haircut by way of exchange for new securities worth less than half of their previous face value. Although the Bank voted against this measure, the exchange was approved by the requisite proportion of bond holders. In March 2012, the Bank therefore received the new securities in exchange for the Bonds it had previously held.
In May 2013, the Bank together with its Cypriot shareholder brought an ICSID claim against Greece. While the Slovakian bank claimed expropriation of its investment and alleged a failure to provide fair and equitable treatment under the Greece-Slovakia BIT, its Cypriot shareholder, Istrokapital, (the “Shareholder”) claimed that it had, as shareholder of the Bank, made an indirect investment in the Bonds and was entitled to protection under the Cyprus-Greece BIT.
Greece denied that the Bank and Shareholder had standing to bring claims under the BITs on the basis that they had not made qualifying investments which attracted the protection of the respective BITs.
The questions addressed by the Tribunal
The questions addressed by the Tribunal
The Tribunal had to decide whether the alleged investments qualified for protection under the respective BITs. First, could the Shareholder's alleged indirect investment in the Greek government bonds be protected under the Cyprus-Greece BIT? Second, could the acquisition by the Slovakian bank of Greek government bonds be considered as an "investment" under the Slovakia-Greece BIT?
The Tribunal also considered more generally whether the alleged investments constituted investments for the purposes of the ICSID Convention.
The Tribunal's ruling
On the first question, the Tribunal ruled that the Shareholder did not qualify as a protected investor under the Cyprus-Greece BIT.
The Tribunal ruled, in light of previous case law, that shareholders have no standing to assert claims arising from, or rights in, the assets of the companies in which they hold shares (para. 229). The Tribunal reiterated that a company is granted rights over its own assets, which it alone is capable of protecting (para. 230). The Shareholder had based its claim solely on the measures taken against the Bank's assets rather than on how these measures had affected the value of its shares in the company. As it did not have any rights over the Bank’s assets, it was not a protected investor under the Cyprus-Greece BIT (para. 246).
On the second question, the Tribunal ruled that government bonds could not qualify as a protected investment under the Slovakia-Greece BIT. The Tribunal conducted a close analysis of the text of the BIT but despite the broad definition of “investment” they still did not consider secondary government debt to constitute an investment.
Article 1 (1) of the BIT defined investment as follows:
""Investment" means every kind of asset and in particular, though not exclusively includes: a) movable and immovable property and any other property rights such as mortgages, liens or pledges, b) shares in and stock and debentures of a company and any other form of participation in a company, c) loans, claims to money or to any performance under contract having a financial value, d) intellectual property rights, goodwill, technical process and know-how, business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources."
The Tribunal noted that there was no express reference in the BIT to sovereign debt, public titles, public securities, public obligations or the like (para. 332). The only reference to protected bonds related to bonds issued by a company, which the Tribunal were not prepared to assimilate to sovereign bonds (para. 333).
The Tribunal further found that the protected "loans" under the BIT did not include government bonds since "loans and bonds are distinct financial products. The creditor in a loan is generally a bank or group of banks, normally identified in the pertinent agreement. Bonds are generally held by a large group of creditors, generally anonymous. Moreover, unlike creditors in a loan, the creditors of bonds may change several times in a matter of days or even hours, as bonds are traded […] loans involve contractual privity between the lender and the debtor, while bonds do not involve contractual privity. The lender has a direct relationship with the debtor - in the case of public debt, the State - as party to the same contract - the loan agreement - while in the issuance of bonds the contractual relationship of the State is with the intermediaries" (paras. 337-338).
The Tribunal also rejected the suggestion that government bonds could be considered "claims to money" arising from a contractual relationship under the BIT, since no contractual relationship existed in the present case. Greece had issued the Bonds in the primary market to a restricted number of primary dealers appointed by Greece, and the Bank had purchased the Bonds on the secondary market (paras. 341 et seq.).
The Tribunal also found that the Bonds did not constitute an investment under the Washington Convention. In the absence of a contribution to an economic venture (in the sense of economically productive activities) and in the absence of operational risk (in the sense of a risk depending on the success or failure of the economic venture concerned) the Bonds did not satisfy the "objective test" under the Washington Convention (paras. 360 et seq.).
The Bank has now applied for a partial annulment of the award.
Analysis
The importance of this decision lies in the analysis provided by the ICSID Tribunal on the nature of government bonds and sovereign debt
The Tribunal’s decision also goes against previous decisions of ICSID Tribunals, namely Abaclat and others v Argentina(ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility) and Ambiente Ufficio S.p.A and others v Argentina (ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility), in which ICSID tribunals had held that Argentinian government bonds did fall within the definition of protected investment under the relevant BIT.
The Tribunal distinguished the Abaclat and Ambiente Ufficio decisions on the basis that the definition of investment in the Slovakia-Greece BIT was significantly different from the definitions considered in those cases (see paras. 304 et seq.).
As ever, therefore, much will depend on the precise definition of investment in a given BIT, as well as the factual background to an alleged investment, in determining whether a purchaser of government bonds on the secondary market can claim under the BIT for expropriation of its investments and a breach of the fair and equitable treatment standard. It had been reported in 2012, that various German bondholders had considered bringing a claim under the Germany - Greece BIT. The claim does not appear to have been pursued yet, wich may be because the definition of investment under the BIT was considered not wide enough.
Perhaps of greater interest are the more general comments by a majority of the Tribunal that government bonds such as the Bonds at issue in this case would not objectively constitute investments under the ICSID Convention. Out of the three elements which form part of the objective definition of the term "investment" under the Washington Convention (namely (i) contribution of money or assets, (ii) duration and (iii) risk), the Tribunal found that government bonds lacked two of them. According to the Tribunal, investment in government bonds could not be considered as a contribution to an economic venture nor as involving any operational risk.
Whilst purchasers of sovereign debt on the secondary market may not consider an investment arbitration claim to be their primary means of recourse in the event of an unfavorable sovereign restructuring it can nevertheless be an important option to consider.
With new issues of sovereign bonds frequently containing collective action provisions preventing holdout creditors (such as those in the NML v Argentina litigation) from refusing to participate in a restructuring and exchanging old bonds for new ones, the scope for litigation and arbitration arising out of a sovereign haircut may leave bondholders with fewer options in the future.
