Zhongshan Fucheng Industrial Investment v. Nigeria – a sovereign enforcement case study

It has been a challenging year for Nigeria’s government and its president Bola Ahmed Tinubu. Nigeria has been experiencing its worst economic crisis in years owing to rampant inflation, record debt and high unemployment. Amid this, news broke last month that a French court had allowed the Chinese company Zhongshan Fucheng Industrial Investment to seize three of its presidential jets as part of a long-running dispute with the west African nation.

The prospect of recovering from a sovereign debtor can be seen as daunting when one thinks of the complications posed by, among other factors, so-called alter ego arguments and the rules governing sovereign immunity. We have previously discussed some of the challenges associated with sovereign enforcement (see here), as well as the more creative methods to which creditors might eventually resort to recover a debt (see here). However, the Zhongshan case shows that there can be a comparatively straightforward route to recovery – and, potentially, to exerting pressure on a debtor to pay up.

Attachable assets: the golden ticket

Zhongshan’s dispute with Nigeria concerns a 2007 contract to develop a free trade zone in the country’s Ogun State. After the contract was revoked in 2015, there followed a lengthy legal battle which resulted in the Chinese company winning a USD 74.5 million award against Nigeria in London-seated UNCITRAL arbitration in 2021.

Winning a judgment or award against a sovereign state is only part of the battle, however. While a state may hold ample assets directly in its name, sovereign immunity may protect them from attachment. In many cases, a creditor would have to demonstrate that an asset has a commercial use for it to be a viable target for enforcement. Further, for a creditor to attach the assets of a state-owned enterprise, it would need to produce a convincing alter ego argument (i.e. demonstrating that the enterprise is indistinguishable from the state itself).  Parties looking to enforce a USD 16 billion judgment against Argentina have been looking to formulate an alter ego argument which would in turn allow it to pursue assets of the majority state-owned oil company YPF. However, this can be challenging and therefore time consuming and costly, and may still end up with an SOE successfully arguing that its activities are sufficiently detached from the state in question.

So what assets might be more easily available to a holder of a sovereign debt? A good enforcement strategy will prioritise finding and pursuing lower-hanging fruit – i.e. assets held directly in the name of the state or its government agencies, particularly those which have a commercial use. These might comprise shares, real estate, prized moveable assets such as aircraft, or even certain financial assets. In this article, Wallbrook considers the Zhongshan case and what it tells us about routes to recovering from a sovereign debtor.

Down with a bump: the seizure of Nigeria’s prized aircraft

Last month, the Paris Judicial Court granted Zhongshan interim attachment orders over three Nigerian aircraft stationed in France as security for its award. The aircraft, which included an Airbus A330 purchased in June for over USD 100 million, were all owned by Nigeria and formed part of its presidential fleet. They were in France to undergo maintenance.

The seizure of the aircraft was humiliating for the Nigerian government and shone a spotlight on President Tinubu’s lavish spending as the country faces severe economic difficulties. Zhongshan later released one of the jets as a goodwill gesture.

The attachment of Nigeria’s presidential jets is a reminder not to underestimate the importance of emotions in attempting to satisfy a judgment or award. This is particularly important in the context of a dispute with a sovereign state or prominent SOE, given the international scrutiny enforcement efforts can bring. For instance, the state-owned Pakistan International Airlines (PIA) rapidly settled its USD 14 million lease dispute with the Irish aircraft broker Peregrine Aviation Charlie Limited after a PIA-owned Boeing 777 was impounded at Kuala Lumpur Airport. After the aircraft was seized in January 2021, the parties settled and the plane was released in under two weeks – the timing of course suggesting that the seizure was instrumental to the settlement.

A well-planned enforcement strategy should therefore consider targeting assets where interference via court process might embarrass a debtor (potentially also portraying it as an unreliable business partner). The seizure of Nigeria’s aircraft may in turn encourage a resolution of its dispute with Zhongshan.

Real estate: a prime target

Zhongshan has also had success in enforcement against another asset class: real estate. In June 2024, the London Commercial Court granted Zhongshan final charging orders over two residential properties owned by Nigeria in Liverpool, UK, worth approximately GBP 1.7 million. The unencumbered properties were used as guest houses.

Real estate owned by a sovereign state is immune from attachment when it is used for diplomatic purposes (thus preventing the attachment of prestigious assets such as embassies or ambassadors’ residences). However, as we will now see, not all state-owned real estate has such a function. Although Nigeria objected to the charging orders by claiming the real estate was used only for consular services, diplomatic events and as residences for Nigerian officials and was thus protected by sovereign immunity, the court dismissed its arguments and found that the real estate was commercially rented to residential tenants, and that no consular or diplomatic activities took place there.

This shows that finding real estate owned by a sovereign debtor is only the first step: one should then closely examine the properties in question to establish whether they have a commercial use which can void an appeal to sovereign immunity. How can an investigator help determine this? Firstly, they should consider whether any businesses are using the property as an office (or other commercial premises) and therefore likely to be paying rent to the debtor (a fact which would have allowed the Swiss commodities company Trafigura to target a London office building owned by the Republic of Ghana in 2023). Secondly, they can look to understand if a residential property is listed for rent on the open market, and / or look at the profiles of current or former residents to understand if they could be diplomatic or consular staff, or private tenants.

Similar to identifying prized moveable assets, finding and attaching real estate can also encourage settlement and a swift resolution to a dispute. For instance, in the long-running tax row between the UK oil firm Cairn Energy and the Republic of India, the former was permitted to freeze 20 India-owned real properties in Paris. India, which markets itself as an attractive investment destination, had already suffered reputational damage during the dispute which may have rendered it more amenable to a settlement. The freezing of its real estate in July 2021 may have been the last straw: Cairn and India settled four months later.

Another asset class still

Zhongshan has also obtained interim attachment over a GBP 20 million costs order which  Nigeria is owed by the BVI-registered Process & Industrial Development (P&ID). A thorough investigation aiding the enforcement of a judgment or award will examine cases to which the debtor has been party to look for receivables already owed, or which are contingent on a case’s success.

This is the route which the investment firms Antin Infrastructures Luxembourg and Antin Energia Termosolar chose in their attempts at enforcing a EUR 120 million award against Spain. In 2022, the English High Court granted them an interim third-party debt order over a EUR 925 million payment which Spain was due in compensation from the London Steam-Ship Owner’s Mutual Insurance Association.

Conclusion

It is unarguably challenging to enforce against a sovereign state. Sovereign immunity rules and, increasingly, debtors’ stubbornness can make the process drawn out and costly. However, as the Zhongshan case shows, attachable assets can be found. While every state’s asset profile is different, investigators can work with counsel to develop a robust enforcement strategy aiming to bring about as swift a resolution as possible, including by applying pressure to reach a settlement. Following the international embarrassment and scrutiny which President Tinubu has faced in recent weeks, settlement may not seem so unattractive to Nigeria…