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...