Reforming the process of sovereign debt restructuring a proposal for a sovereign debt tribunal
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Reforming the Process of Sovereign Debt Restructuring: A Proposal for a Sovereign Debt Tribunal. Panel Discussion on “Emerging Issues in External Debt Restructuring” Second Committee, United Nations General Assembly October 10, 2008 United Nations Headquarters, New York

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Reforming the process of sovereign debt restructuring a proposal for a sovereign debt tribunal

Reforming the Process of Sovereign Debt Restructuring: A Proposal for a Sovereign Debt Tribunal

Panel Discussion on “Emerging Issues in External Debt Restructuring”

Second Committee, United Nations General Assembly

October 10, 2008

United Nations Headquarters, New York

Christoph G. Paulus, Professor of Law,

Humboldt University, Berlin

Steven T. Kargman, President, Kargman Associates,

New York


Sovereign debt restructuring reform state of play
Sovereign Debt Restructuring Reform: State of Play Proposal for a Sovereign Debt Tribunal

  • Basic issue—need for more orderly, efficient and predictable process

  • Four major approaches

    • “Statutory” approach—IMF Sovereign Debt Restructuring Mechanism (SDRM) proposal

    • “Contractual” approach—collective action clauses (CACs)

    • Voluntary approach—Codes of Conduct

    • Existing institutions—Paris Club and London Club


Proposal for a sovereign debt tribunal
Proposal for a Sovereign Debt Tribunal Proposal for a Sovereign Debt Tribunal

  • Precedent: “Dispute Resolution Forum” in IMF SDRM proposal

  • Recent example: Iraq restructuring (verification/reconciliation of claims)

  • Desirability of comprehensive approach, but need to develop pragmatic approach in meantime


Proposal for sovereign debt tribunal cont d
Proposal for Sovereign Debt Tribunal (cont’d) Proposal for a Sovereign Debt Tribunal

  • Advantages of Sovereign Debt Tribunal

    • Based on consensus among key stakeholders

    • Neutral forum—”de-emotionalization” of disputes

    • Provides structure and cohesion to process

    • Create perception that there exists pool of experts to address these complex disputes


Where to situate sovereign debt tribunal
Where to Situate Sovereign Debt Tribunal Proposal for a Sovereign Debt Tribunal

  • Existing arbitration institution (e.g., ICC, LCIA, etc.)?

  • Multilateral institution (e.g., World Bank, IMF, etc.)?

  • ICSID?

  • International Court of Justice?

  • NGO proposal for ad hoc arbitration?


Where to situate sovereign debt tribunal cont d
Where to Situate Sovereign Debt Tribunal (cont’d) Proposal for a Sovereign Debt Tribunal

  • Basic requirements

    • International institution of sufficient standing

    • Institution which is not potential creditor

  • Need to gain widespread acceptance of choice of institution

  • One possibility: United Nations


Establishing the tribunal initial steps
Establishing the Tribunal: Initial Steps Proposal for a Sovereign Debt Tribunal

  • If UN selected, Secretary General’s role in selection of appointment panel or in direct appointment of arbitrators

    • see, e.g., SDRM model

  • Election of president of tribunal

  • Duties of president

    • Draft procedural rules

    • Decide on number of arbitrators for each case

    • Appoint arbitrators for each case


Jurisdiction of tribunal
Jurisdiction of Tribunal Proposal for a Sovereign Debt Tribunal

  • Duties can be manifold

  • Depends on ambitions of how far to extend influence of tribunal

  • But depends on what is delineated by parties in relevant debt instrument (e.g., bond indenture, etc.)


Jurisdiction of tribunal cont d
Jurisdiction of Tribunal (cont’d) Proposal for a Sovereign Debt Tribunal

  • Minimum: verification of claims and voting issues

  • Arbitration clause as a product of interaction between issuer and investors/underwriters

  • Just narrow, technical legal issues?

    • Legal validity of each claim

    • Legal validity of sovereign’s proposal


Jurisdiction of tribunal cont d1
Jurisdiction of Tribunal (cont’d) Proposal for a Sovereign Debt Tribunal

  • Other potential issues for tribunal

    • What constitutes “sustainable debt”

    • Whether underlying economic assumptions are reasonable

    • Satisfaction of commencement criteria

    • Whether parties have engaged in good faith negotiations

    • Feasibility and/or reasonableness of restructuring plan

    • Whether debt is “odious debt”—but note caveats on this subject


Who is to be bound by tribunal s decisions
Who is to be Bound by Tribunal’s Decisions Proposal for a Sovereign Debt Tribunal

  • Basic rule—only those creditors whose underlying debt instrument contains arbitration clause

  • Issue of inter-creditor equity

  • But limitation if no arbitration clause in debt instrument


Triggers for invoking arbitration
Triggers for Invoking Arbitration Proposal for a Sovereign Debt Tribunal

  • Triggers

    • Announcement of default

    • Consider whether “imminent insolvency” to be included

  • Who Can Pull Trigger

    • Sovereign alone, or creditors, too

    • But will sovereign be willing to be subjected involuntarily to arbitration?

    • Thus sovereign alone or sovereign and creditors acting in unison

    • Yet contractual freedom of parties to decide


Governing law and applicable insolvency rules and principles
Governing Law and Applicable Insolvency Rules and Principles Proposal for a Sovereign Debt Tribunal

  • Law of a particular jurisdiction?

  • If so, any role for public international law

  • Issue of inter-creditor equity where bonds issued under laws of different jurisdictions (NY law, UK law, German law, etc.)


Governing law cont d
Governing Law (cont’d) Proposal for a Sovereign Debt Tribunal

  • Specific insolvency rules and principles

    • Not one jurisdiction, but “law merchant”

  • General principles of insolvency set by multilaterals

    • UNCITRAL, World Bank, IMF texts on insolvency law

    • Need to adapt from commercial context


Representation of creditors in arbitral proceeding
Representation of Creditors in Arbitral Proceeding Proposal for a Sovereign Debt Tribunal

  • Need to avoid unwieldy process

  • Debt instrument would need to specify mechanism

  • Creditors’ committee?

  • Indenture trustee?


Mediation as precursor to arbitration
Mediation as Precursor to Arbitration Proposal for a Sovereign Debt Tribunal

  • Will mediation be formal prerequisite to invoking arbitration?

  • Potential role for mediation regardless of whether formal prerequisite

  • Complement to restructuring negotiation


Financing and support for tribunal
Financing and Support for Tribunal Proposal for a Sovereign Debt Tribunal

  • Need for sponsoring organization to provide secretariat and office space

  • Cost of any particular arbitration (including fees of arbitrators) to be borne by parties

  • Arbitration can be expensive process so parties need to factor into decision as to whether to arbitrate


Conclusion
Conclusion Proposal for a Sovereign Debt Tribunal

  • Attempt to develop pragmatic approach

  • Depends on prior contractual agreement of parties

  • Necessary to develop new approaches as globalization increase number of actors in sovereign finance

  • Possible confidence-building measure for embracing broader objectives


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