Groundbreaking verdict in unpaid Cuban loan dispute

It is rare that after a judge's verdict both sides — plaintiff and defendant — talk of victory. The High Court in London on Tuesday ruled that private investment firm CRF I had unpaid debt from the Banco Nacional de Cuba (BNC), the country's former central bank. At the same time, the court said that the Cuban government is not responsible.

CRF was established in the Cayman Islands in 2009, and had sued Cuba and BNC in 2020, demanding repayment of around €72 million ($78 million) for two loans and overdue interest.

These loans go all the way back to 1984 and were granted by European banks Credit Lyonnais and Istituto Bancario Italiano. After a 2018 out-of-court settlement didn't materialize the case ended up before the British court.

A scramble around the courthouse

The High Court case was about four issues: can CRF sue in the UK, did CRF properly acquire the debts, can the Cuban central bank be sued, and is the Cuban government the final guarantor of these debts.

Before the trial began, the new central bank, Banco Central de Cuba, called CRF a "vulture fund" and claimed that it had illegally acquired the debt, even bribing a senior bank official in the process. 

It also claimed that the debtor, BNC, was no longer a central bank. Banco Central de Cuba was founded in 1997 and took over many of the functions of the old central bank, still it is a separate entity.

CRF denied the allegations, saying it had tried for years to negotiate a debt restructuring deal with Cuba without receiving a response.

The CRF fund was set up to invest in distressed Cuban government bonds. Today, it is now Cuba's largest private creditor and had a bond portfolio worth €1.2 billion in 2017, according to court documents. Such investors typically buy up debt portfolios cheaply and then try to sue the debtor in international courts for full repayment. It can be a very profitable business.

In her ruling, Justice Sara Cockerill said that CRF had lawfully acquired the debt from ICBC Standard Bank, a UK subsidiary of Chinese bank ICBC.

At the time, BNC consented to the assignment of its rights and obligations under the agreement. However, it lacked the authority to consent on behalf of Cuba. As a result, Cuba is no longer part of the court case since it is not a guarantor for the debt, according to the London court. CRF has the right to demand payment of the debt from the BNC, but not from the Cuban state itself.

Should a court order Banco Nacional de Cuba to repay the more than €70 million, Tuesday's ruling means that the sum can only be recovered from BNC's assets and resources. Assets owned by the Cuban government, such as oil tankers or offshore companies, would be safe from eventual confiscation in the event of nonpayment.

Both sides see themselves as the winner

Accordingly, Havana called the London judgment a success. "Republic of Cuba wins lawsuit in London: CRF is not a creditor to the Cuban State," headlined the state-run daily Granma. And Cuban President Miguel Diaz-Canel tweeted: "Cuba also won in London. Once again, the nation's enemies have lost. Their lies met with a professional and respected court."

But CRF's CEO David Charters, also spoke of a "complete victory for CRF." The English High Court recognized CRF as a responsible creditor and did not confirm any allegations of bribery.  

"CRF remains committed to finding a solution with Cuba that has zero impact on its budget for at least five years, recognizing the difficult economic situation the country is facing," Charters said after the verdict. "BNC was the central bank of Cuba and remains responsible for managing these unpaid Cuban debts."

Other creditors waiting in the wings

John Kavulich, president of the New York-based organization US-Cuba Trade and Economic Council, shares this view. "Reading all of the judgement, 94 pages, Cuba still owes the money. That is important."

According to Kavulich, previous and current Cuban governments were not exonerated by the court's decision. "To the contrary, now there is more focus than ever upon what the government of Cuba owes, to whom the government of Cuba owes, and that the country provides a woefully inadequate environment from which the public sectors and private sectors from outside of Cuba can expect to be repaid within the terms that monies were initially provided."

The Cuban government, on the other hand, has repeatedly declared that it will meet its repayment obligations. In the summer of 2021, it agreed to a deferral of payments with the Paris Club, a group of countries that coordinate repayments by debtor countries.

Because of the crisis triggered by the COVID-19 pandemic and the tightening of the US blockade, Cuba was no longer able to service its debts. Cuba has not yet reached an agreement with the London Club, an informal group of private creditors. This means they have been excluded from the international capital markets.

CRF is expected to proceed with the lawsuit against BNC. Repayment of the debt would then be decided in a separate case. But first it will likely appeal the current decision.

Cuba's justice minister, Oscar Silvera, said Wednesday that BNC will appeal the verdict. It has until May 19 to do this. "We believe that CRF is not a legitimate creditor of the BNC, because the act of recognizing it was unlawful," Silvera said.

The case will continue to be closely followed by other Cuban creditors who are trying to recover a total of $7 billion worth of sovereign debt from Havana.

This article was originally written in German.