Legislative efforts to address non-cooperative minority creditors

While collective action clauses (CACs) aim to reduce the ability of non-cooperating bondholders to undermine an otherwise agreed voluntary restructuring of sovereign debt, the success of ex post litigation has highlighted a gap in the architecture for debt crisis resolution. The Addis Agenda expressed concern about the ability of such creditors to disrupt the willingness of the large majority of bondholders to accept a sovereign restructuring, and noted legislative steps taken by some governments to prevent such disruptive activities.

The Addis Agenda specifically:

  • Encourages all Governments to take (legislative) action (on non-cooperative minority bond holders), as appropriate
  • Welcomes provision of financial support for legal assistance to LDCs and commit to boost international support for advisory legal services
  • Commits tore enhanced internatioo explnal monitoring of litigation by creditors after debt restructuring

Update from the 2017 Financing for Sustainable Development Report

While the new collective action clauses aim to reduce the ability of non-cooperating bondholders to undermine voluntary restructuring of sovereign debt, the success of ex post litigation has highlighted a gap in the architecture for debt crisis resolution. Largely in response to litigations in their courts, a few jurisdictions have passed or debated legislation to discourage hold-out creditors by limiting creditors’ potential profits from secondary market purchases, including the United Kingdom of Great Britain and Northern Ireland, Belgium, and most recently France. Most of this legislation has focused on limiting claims against countries that benefitted from debt relief under the HIPC Initiative. For example, in the United Kingdom of Great Britain and Northern Ireland, a law was passed in 2010 that prevents creditors from suing in the United Kingdom court to enforce payment on the sovereign debt of HIPC debtors on terms more favourable than agreed under the HIPC Initiative. Similar legislation was also adopted by Jersey and the Isle of Man in 2012 and debated in Australia and the States of Guernsey in 2012 and in the United States of America in 2008.

In contrast, a Belgian law adopted in 2015 is not restricted to heavily indebted poor countries. The law limits creditors’ ability to seek enforcement by Belgian courts of claims that are clearly disproportionate to the purchase price if the debt was purchased in the secondary market (the law applies to the debt of any sovereign). In order for this limit to apply, any one of a number of conditions must be satisfied, such as the creditor’s refusal to participate in a debt restructuring process, the creditor’s systematic use of legal proceedings to obtain payment on repurchased claims, or the creditor’s abuse of the weakness of the debtor state to negotiate an imbalanced repayment agreement.