Hamilton Reserve Bank requests US Court to deny SL’s cross-motion

By Ashwin Hemmathagama

Plaintiff Hamilton Reserve Bank Ltd., (HRB) has recently filed a ‘Memorandum of Law in Response to the Statement of Interest and AMICUS Brief’ opposing the cross-motion to stay the defendant Government of Sri Lanka requested from US District Court, Southern District of New York.

In its Memorandum of Law, the HRB requests that the court deny the cross-motion to stay Sri Lanka wants, whereas, for decades, courts in the respective District have denied stay orders to defaulting sovereign debtors. The amicus brief of two other creditors, the Republic of France and the United Kingdom, filed in support of Sri Lanka, helps a stay request on the basis that entering judgment now could impede Sri Lanka’s voluntary debt restructuring with other creditors. But disagreeing with the amicus brief and stay request, the plaintiff held “the arguments remain wholly speculative, and fail to make out a clear case of hardship or inequity in being required to go forward.” 

“First, both submissions ignore that a stay is unnecessary because this litigation is not impeding Sri Lanka’s restructuring in any way. Sri Lanka’s own State Minister of Finance stated on 11 August 2023, that its restructuring will be completed ‘without major concern’ from this litigation. Recently, Sri Lanka’s largest creditor, China, agreed to restructure $ 4.2 billion in debt, and the Ad Hoc Bondholders Group made its own restructuring proposal to Sri Lanka. The restructuring process is thus proceeding apace. And the Ad Hoc Bondholders Group’s restructuring proposal is structured as an exchange offer, meaning participation is purely voluntary; like other private creditors, Plaintiff is free not to participate and to seek full repayment on its Bonds. For these reasons, no stay is necessary,” held the Counsel for Plaintiff, Jenner & Block LLP in its Memorandum of Law.

The memorandum further argued that a stay is also unwarranted because the remaining challenges are complex geopolitical issues unrelated to this litigation and outside Plaintiff’s control. Highlighting two recent developments illustrating the complexity, the Counsel held in the memorandum, “In September 2023, the IMF denied Sri Lanka its second tranche of funding because it failed to meet its economic reform commitments, while concluding that Sri Lanka has ‘systematic and severe governance weaknesses and corruption vulnerabilities across state functions.’ The fact that Sri Lanka failed to secure IMF funding for reasons entirely unrelated to this lawsuit counsels against a stay supposedly necessary to protect such funding.”

“Recent reports also demonstrate that China, not Hamilton or any other private bondholders, has been a major roadblock to Sri Lanka’s restructuring. China is Sri Lanka’s largest creditor with $ 7.3 billion in loans and reportedly would not negotiate with other creditors, such as India, to maximise its leverage. The Economist reported on 28 September that IMF ‘officials flew back from Colombo without releasing a dollar,’ and ‘the problem was two-fold: Sri Lanka’s tiny tax take and China, which is the country’s biggest creditor’. By refusing to take a haircut on its debts, China is holding up Sri Lanka’s restructuring, as it is in other indebted countries, too. There was no mention of Hamilton. China’s position is due in part to its strategic competition with India for influence in Asia. And as Sri Lankan President Wickremesinghe stated, we are caught in a geopolitical rivalry. While recent reports that China has agreed to restructure $ 4.2 billion in debt indicate progress, Plaintiff’s legal ‘rights cannot be put on hold pending geopolitical developments that may or may not come to pass, and which courts are ill-equipped to assess,” it added.

As the second and the third arguments, it is held that no actual holder of Sri Lanka’s International Sovereign Bonds has supported a stay or taken issue with this case. “If Hamilton truly were a cog in the wheel, other ISB holders would have supported a stay. And the other holders include sophisticated parties (such as Fidelity and BlackRock) who surely are aware of this lawsuit and know how to make their voices heard. By contrast, France and the United Kingdom are official creditors who do not hold ISBs and speak only for themselves. Far from being aligned with private creditors, these official creditors simply seek to delay this litigation and cannot deny that, as a competing class of creditors, it is in their economic self-interest to do so. The United States’ support for a stay breaks with four decades of precedent without any factual support, and thus should be accorded the lowest level of deference.”

For decades, the Second Circuit has cautioned courts against granting stays to foreign sovereign litigants based on indeterminate debt restructuring proceedings in the face of clear United States policy allowing creditors to recover on foreign debts. Although the United States advocates negotiations to effect debt reduction and continued lending to defaulting foreign sovereigns, it has long been the law that creditor participation must be on a strictly voluntary basis and debts must remain enforceable throughout the negotiations.

“There is no factual basis to depart from this precedent. The United States simply asserts in

conclusory fashion that a ‘stay would facilitate an orderly and consensual sovereign debt restructuring’, but offers no showing that Plaintiff has impeded Sri Lanka’s restructuring in any way or that entering judgment would do so. Nor does the United States show that any general interest in supporting a restructuring should outweigh Plaintiff’s specific, material interest in timely enforcing its Bonds. Because the United States’ position is based on the ‘identical, erroneous premise’ advanced by Sri Lanka, that a judgment could complicate a restructuring, despite no evidence that it will ‘considerably less deference is owed.’ Indeed, this Court has rejected similarly evidence-lacking arguments where, as here, the United States did not ‘contend that the lawsuit is frustrating or will frustrate United States foreign policy,” the Plaintiff’s Counsel asserted.

Further, in the past, the United States has argued that respecting private creditors’ contractual rights is critical to support future growth of indebted nations, and it does not explain how this time is different. As it cautioned in 1984, for the courts to try to dictate the terms of contractual agreements between debtors and private creditors would jeopardise the cooperation of private creditors in the future, which is critical to the economic growth of debtor countries. “Sri Lanka will surely need new financing to grow. But when Sri Lanka seeks to re-enter the international capital markets, what investor would lend to Sri Lanka if its debt cannot be timely enforced? Delaying the enforcement of Plaintiff’s contractual rights will simply increase Sri Lanka’s cost of capital and undermine New York’s status as a global financial centre,” the memorandum added.

Sri Lanka was sued in the United States by a bondholder after the government defaulted on its debt for the first time in history while struggling to stop an economic meltdown where HRB, owns over $ 250 million in principal amount of $ 1 billion worth of Sri Lanka’s 5.86% International Sovereign Bonds (ISBs) issued in 2012, filed the lawsuit in June last year in a New York federal court seeking full payment of principal and interest. The Bonds matured on 25 July 2022. Hamilton alleged that due to Sri Lanka’s default, it is owed $ 250.19 million in principle and $ 7.35 million in accrued interest (before accounting for pre-and post-judgement interest). Sri Lanka in mid-April announced a moratorium on foreign debt repayments, including the Bonds and since then has made no payments on the Bonds. The government of Sri Lanka filed a motion in September 2022 to dismiss on the grounds that the plaintiff lacks contractual standing.