Sovereign wealth funds and capital call facilities – the issues to consider

By Tom Highnam, Rita Pang, Jialu Xu
Banking & Finance Private Capital

Sovereign immunity risk small in Australia 10 min read

Sovereign wealth funds (SWFs) are investment funds or arrangements that are owned by general government (including central governments and subnational governments).1 They are created for a range of macro-economic purposes, although commonly are established to diversify from dominant or windfall assets (think oil-rich nations), for fiscal stabilisation reasons by investing foreign reserves (such as GIC in Singapore) or for paying unfunded superannuation liabilities of government employees (such as Future Fund in Australia).

As at the end of 2022, there were US$31.4trn in assets managed globally by SWFs and public pension funds.2 A significant proportion of those assets are by way of investments into closed-end investment funds. It is rare to encounter any significant cross-border capital call facility to a closed-end investment fund without seeing an SWF in the investor list. So this should be great news for financiers on capital call facilities—security over rights to call against highly creditworthy, quasi-governmental institutions! But no...

Financiers under capital call facilities take an inconsistent approach with SWF investors, including determining whether or not to include them in the borrowing base and whether advance rates need to be adjusted. This is principally down to one issue: the concept of state immunity.

In this Insight we set out the legal principles around state immunity and also outline the rules in Australia regarding immunity from jurisdiction and immunity from enforcement.

Key takeaways

  • State immunity asserted by SWFs and other government entities may limit the ability of a financier to bring proceedings against the investor ('immunity from jurisdiction') or to exercise remedies of enforcement against the assets of the investor ('immunity from enforcement') in particular jurisdictions.
  • Questions of state immunity are determined by the laws of the jurisdiction in which a financier decides to take proceedings against an SWF.
  • In Australia, the relevant rules are contained in the Foreign States Immunities Act 1985 (Cth) which provides that foreign states are immune from jurisdiction and from enforcement unless particular exceptions apply.
  • The exceptions which are likely to apply to most SWFs mean they are unlikely to benefit from immunity from jurisdiction or immunity from enforcement in relation to obligations associated with subscription agreements and side letters with Australian investment funds.

State immunity

State immunity is a principle of international law (typically codified in a country's national laws) based on the theory that all states are equal, and no state has the right to judge the actions of another state by the standards of its own national laws.

It is a principle of two, overlapping parts. It protects state entities by conferring both immunity from jurisdiction and immunity from enforcement.

  • Immunity from jurisdiction means that courts in a relevant jurisdiction will not hear cases against the relevant state entity.
  • Immunity from enforcement means that courts in a relevant jurisdiction will not provide for remedies of enforcement of any court judgment (ie from a court in another jurisdiction) available in the court's jurisdiction against a state entity.

Determining the relevant law

The jurisdiction in which a financier decides to take proceedings against an SWF is key to determining the issue of state immunity. For example, if a financier commenced proceedings in Australia, it would be Australian law (as the 'law of the forum') which would determine whether the Australian courts have jurisdiction against the SWF or whether the SWF is entitled to immunity from jurisdiction. If, having won that argument, the financier obtains judgment against the SWF, it then needs to enforce that judgment. If the financier wants to enforce that judgment in Australia, a separate question under Australian law will arise as to whether the SWF is entitled to immunity from enforcement. However, it may well be the case that the SWF does not hold significant assets in Australia and the financier needs to apply for enforcement proceedings in another jurisdiction. In that case, the laws of that other jurisdiction will determine whether the SWF is entitled to immunity from enforcement in that other jurisdiction.

So, what is the law?

What the law is, both in relation to immunity from jurisdiction and immunity from enforcement, depends on the jurisdiction in which you are taking action and/or enforcing judgment. These laws will differ, but fortunately there are similarities between jurisdictions, particularly in Australia, certain states of the USA, the UK, and those member states of the EU which have implemented the European Convention on State Immunity. We are qualified to summarise the rules as they apply in Australia only.

Australia: immunity from jurisdiction

The general rule which applies under section 9 of the Foreign States Immunities Act 1985 (Cth) (FSIA) is that a foreign state is immune from the jurisdiction of the courts of Australia in a proceeding. However, there are four exceptions to this general rule which may be relevant to foreign SWFs in connection with capital call facilities. They are:

1 - Not an agency or instrumentality of the state

The rule applying immunity from jurisdiction applies to foreign states and includes, under section 22 of FSIA, 'separate entities' of the foreign state. So a foreign SWF needs to fall within the definition of a 'foreign state' or, more likely, a 'separate entity of a foreign state' to benefit from immunity from jurisdiction under s9 of FSIA.

A 'separate entity' is a person or corporate body which is an 'agency or instrumentality of the foreign state'. The question as to whether an entity comprised a 'separate entity' for the purposes of FSIA arose in Garuda v ACCC (2011) 192 FCR 393. In that case, the airline Garuda was considered a separate entity of the state of Indonesia (and therefore subject to state immunity) with the determining factor being whether the entity 'is acting for, or being used by, the foreign state as its means to achieve some purpose or end of that state in the relevant circumstances'. In that case, the 'separate entity' test was applied broadly (though Garuda ultimately failed to assert immunity on account of the commercial transaction exception described below). Unfortunately there is no more guidance on this test in the courts.

In the UK, the test is slightly different. A 'separate entity' would only be entitled to foreign state immunity if it was action 'undertaken by the separate entity in the exercise of sovereign authority'. A typical SWF is likely to be considered a 'separate entity' in both the UK and Australia, but it may be that entry into subscription agreements and side letters in connection with closed-end investment funds the subject of capital call facilities does not constitute 'an exercise of sovereign authority' (being the UK test), but would be 'achieving some purpose or end of that state' (being the Australian test).

Further consideration should also be given to how the SWF structures its investments. Often, a separate subsidiary vehicle of the SWF is the party that enters into the relevant subscription agreements and side letters in connection with closed-end investment funds. The question will therefore be whether that subsidiary vehicle constitutes a 'separate entity' of the applicable foreign state to determine whether state immunity can apply.

2 - Submission to the jurisdiction

Section 10(1) of FSIA provides that a foreign state is not immune in a proceeding in which it has submitted to the jurisdiction. This is an important exception. If, in a subscription agreement, trust deed or side letter, a SWF has submitted to the jurisdiction of the courts of Australia, it will be prevented from claiming immunity from jurisdiction in Australia.

This is different from agreeing that the laws of Australia shall be the proper law of any of those contracts. That is insufficient (see s10(2) of FSIA).

3 - Commercial transactions

An SWF will not be immune from jurisdiction in so far as the proceeding concerns a commercial transaction. Section 11(3) of FSIA goes on to describe a commercial transaction as 'a commercial, trading, business, professional or industrial or like transaction...and...includes a contract for the supply of goods or services'.

In most circumstances, the entry into subscription agreements and side letters in connection with a closed-end investment fund the subject of a capital call facility would likely be considered commercial transactions and therefore be an exception, in Australia, to a claim of immunity from jurisdiction by a foreign SWF. This is backed up by statements from Firebird Global Master Fund II v Republic of Nauru (2015) 258 CLR 31 where it was stated that; 'a wider meaning should be given to "the proceeding concerns a commercial transaction" in order to give effect to the restriction on immunity which s11(1) seeks to achieve'.

4 - Membership of bodies corporate

A further exception to immunity from jurisdiction applies in section 16 of FSIA which is particularly relevant to capital call facilities. That section provides that an SWF is not immune from jurisdiction insofar as the proceeding concerns a right or obligation relating to its membership of a body corporate, an unincorporated body or a partnership which is established in Australia and has at least one other investor which is not a foreign SWF or the Commonwealth of Australia.

This would cover claims under subscription agreements executed by foreign SWFs subscribing into Australian fund entities over which capital call financiers have security.

However, care in relying on this exception needs to be made on account of section 16(2) of FSIA. That provides that where a provision is included in any other instrument regulating the investment fund or partnership, or between the parties to the proceeding, which is inconsistent with the exception referred to above, then that other provision prevails. In short, if a side letter executed by a foreign SWF with the relevant investment fund or partnership expressly reserves the SWF's state immunity, then this particular exception to the rule on state immunity will not apply.

Australia: immunity from enforcement

If an SWF is immune from jurisdiction, the proceedings will not be heard in Australian courts and so questions on immunity from enforcement are not relevant (see section 7(4) of FSIA). Immunity from enforcement is therefore relevant to provide an added layer of potential protection to a foreign SWF where, because one of the exceptions described above applies, it is not immune from jurisdiction.

The general rule is under section 30 of FSIA. It provides that the property of a foreign SWF is not subject to any process or order of Australian courts for the satisfaction or enforcement of a judgment, order or arbitration award. However, insofar as this applies to foreign SWFs in connection with capital call facilities, there are three exceptions which are relevant:

1 - The 'separate entity' rule

For immunity from enforcement, 'separate entities' are treated very differently to how they are treated for immunity from jurisdiction (where, as discussed above, they are treated the same as the foreign state itself). A 'separate entity' will only enjoy immunity from enforcement if it has submitted to the Australian jurisdiction and would otherwise have been immune from jurisdiction (ie none of the other exceptions from immunity from jurisdiction would have applied) (see section 35(2) of FSIA).

Most foreign SWFs are likely to be 'separate entities' given the typical corporate structures used to establish them. However, most are also likely to fall within either the 'commercial transaction' or 'membership of body corporate' exception from immunity from jurisdiction described above. As a result, the application of section 35(2) of FSIA will result in very few SWFs being able to enjoy immunity from enforcement in Australia in relation to a subscription into an investment fund over which a capital call facility might exist.

2 - Waiver of immunity from jurisdiction

A foreign state may, at any time, waive immunity from enforcement by agreement. The waiver cannot be withdrawn other than in accordance with the terms of the agreement, so if it is stated to be irrevocable, it will be.

3 - Execution against commercial property

Immunity from enforcement does not apply to 'commercial property' of a foreign state (unless that was a specific condition to the foreign state submitting to the jurisdiction of the Australian courts). Commercial property is property that is in use by the foreign state substantially for commercial purposes. It would likely include bank accounts and other liquid investments unless the foreign state can show that they have been set aside for non-commercial purposes.


The capital call facility market displays a wide degree of concern when the issue of state immunity arises. However, as the rules apply in Australia (which appears largely consistent with a number of other jurisdictions), the corporate structure of foreign SWFs and the manner in which they subscribe for locally incorporated investment funds likely means that the sovereign immunity risk is small.


  1. International Working Group of Sovereign Wealth Funds, Santiago Principles, page 3.

  2. Global SWF, 2023 Annual Report.