In-default SL Govt. seeks stay of proceedings extension by five more months; Hamilton Reserve Bank opposes

By Ashwin Hemmathagama in New York

The legal saga unfolding in the Southern District Court of New York, between Hamilton Reserve Bank (HRB) and the Democratic Socialist Republic of Sri Lanka locked in a dispute with significant implications for international finance and sovereign debt restructuring, turned a new page on Friday with the defendant, Government of Sri Lanka requesting a further stay of proceedings for five months submitting a joint status letter to the court.

In the Memorandum of Law in Support of Defendant’s Motion for a further stay of proceedings, the Government of Sri Lanka cited ongoing debt restructuring efforts that are yet to be completed, attributing the delay to the complexity of multi-party negotiations. The country asserted that additional time is necessary for finalising agreements with official creditors and reaching consensus with private commercial creditors.

The Government was sued in July 2022 by HBR which sought full payment on over $ 250 million of Sri Lanka’s dollar bond that was due that month. HBR claimed it holds over 25% of the bonds, which would likely enable it to block any modification of the notes.

However on Friday, Sri Lankan Government told the US Court, “Sri Lanka had hoped to implement restructuring agreements by the fourth quarter of 2023, but now expects to do so by the completion of the IMF’s second program review in the coming months. Recent progress, facilitated by the stay of proceedings in this case, has made that possible. For instance, finalising terms with official creditors sets a baseline for ensuring comparability of treatment, thus helping to frame discussions with private commercial creditors. Consistent with this, the ad hoc bondholder group previously noted the importance of Sri Lanka’s application of the principle of comparable treatment in respect of the debt relief requested and obtained from all their remaining official bilateral creditors. An additional five-month stay of proceedings would provide critical assistance to that process, whereas an immediate judgment for HRB would severely undermine it.” 

According to Sri Lanka, in the November 2023 decision, the Court found that the discretionary factors strongly favoured a six-month stay of proceedings and the same principles strongly favoured an additional five-month stay at this point in time.

“In theory, HRB has an interest in seeking a prompt judgment. However, an additional five-month stay of proceedings would cause HRB minimal prejudice, at most. Even if HRB does not wish to participate in a voluntary restructuring, allowing that process to play out prior to a judgment ‘does nothing to vitiate Hamilton’s pre-existing contractual rights.’ And as the Court noted, any harm from delay can be remedied by prejudgment interest. Moreover, HRB’s claimed interest in expedition (even assuming it is a bona fide beneficial owner of the Bonds) should be heavily discounted. HRB purports to have purchased the Bonds well after it was clear that Sri Lanka was in dire straits. And as the United States has noted, HRB is the only alleged creditor in the world to have ‘jump[ed] the queue’ with a lawsuit against Sri Lanka, and ‘at an early stage in collective and ongoing negotiations.’ In addition, HRB’s repeated attempts to bully Sri Lanka—e.g., threatening to block IMF funding, and its unseemly touting of what it calls the ‘lucrative’ business of suing a sovereign in the midst of a debt crisis, should weigh against it,” the country added.

Outlining the possible harm the country would face absent a further stay of proceedings, given the risk to debt restructuring discussions and the IMF relief program, the Memorandum further stated, “As the Court has noted, a judgment prior to the completion of debt restructuring ‘would likely threaten the complex debt negotiations’ and would therefore also threaten ‘the successful economic rehabilitation of Sri Lanka.’ Indeed, a judgment for HRB would ‘incentivise other bondholders to engage in line-jumping litigation’ and to ‘forgo participation in voluntary restructuring. Although the restructuring process has been advanced significantly since November 2023, the process is not yet complete. Sri Lanka must formalise its agreements with official creditors and also reach agreements with private commercial creditors. Thus, the same risks to the process remain, a judgment could deter creditor participation at a critical moment and jeopardise the entire IMF-supported program, including the restoration of debt sustainability. Indeed, in support of Sri Lanka’s motion, this point is expressly reiterated by France, Canada, Japan, the Netherlands, Spain, and the United Kingdom.”

“Judicial economy also supports the requested stay. A judgment at this time could ‘encourage a ‘rush-to-the-courthouse’ by private creditors holding Sri Lanka’s sovereign debt in an attempt to secure priority’ and would therefore greatly strain judicial resources. This Court has explained the risk that, with an immediate judgment, HRB may assert that it has ‘priority in recovery while the debt restructuring negotiations are ongoing.’ This would undermine the important comparability of the treatment principle to the detriment of official and private commercial creditors alike. Such a result would be particularly unfair to the many private bondholders that unlike HRB are engaging in the internationally-supported restructuring process. As before, the public interests of international comity and US policy overwhelmingly support a further stay of proceedings,” held Sri Lanka giving reasons to grant the further stay of proceedings.

However, the plaintiff HRB opposes Sri Lanka’s request for a second stay of an additional five months, amounting to a cumulative stay of nine months. Plaintiff in the joint letter held that Sri Lanka has provided no factual basis for another stay. “Starting on 16 February 2024, plaintiff’s counsel repeatedly requested information on the current status of Sri Lanka’s restructuring negotiations, including any substantive engagement with private creditors and any restructuring proposal Sri Lanka has made. The plaintiff sought this information in advance of this submission in an effort to confer with Sri Lanka and ensure that the parties are operating from a common set of facts to update the Court. However, Sri Lanka provided no information in response, leaving Plaintiff in the dark. On 23 February (a week later), Sri Lanka’s counsel sent a non-substantive response,” held the HRB.

“On 27 February, Plaintiff’s counsel again requested that Sri Lanka describe the status of its restructuring and the asserted factual basis for any further stay. Again, Sri Lanka provided no facts in response, responding on 28 February with a conclusory statement that it had made ‘progress.’ Once again, Plaintiff’s counsel requested the purported factual basis for any further stay and the current status of the restructuring, noting that Sri Lanka’s counsel had presumably gathered the facts already if they intended to seek another stay. Again, however, Sri Lanka refused to provide any facts. Instead, on 29 February, Sri Lanka stated that it expects to seek a further five-month stay and asserted that the facts are purportedly ‘in the public record, and will be explained in detail in the motion.’ Sri Lanka’s refusal to provide any facts strongly indicates that the restructuring remains at its earliest stages. Indeed, on 1 December 2023, the Ad Hoc Group of Bondholders issued a statement that ‘unfortunately, no substantive engagement has taken place between Sri Lanka and its private creditors to date,” held HRB with the opinion that no further stay is warranted and it will stand ready to oppose any further motions and renew its summary judgment motion.

Meanwhile, intervener’s Jesse Guzman, Ultimate Concrete, LLC, and Intercoastal Finance Ltd. filed a motion to intervene against the plaintiff HRB. Accordingly, US District Judge L. Denise Cote ordered that any opposition to the intervener’s’ motion shall be filed by 15 March 2024. The intervener’s’ reply, if any, shall be filed by 22 March.

Intervener Jesse Guzman is a resident and citizen of New Mexico, a state of the United States. 

Intervener Ultimate Concrete, LLC, is a Texas limited liability company with its principal place of business in Texas. It operates in Texas, New Mexico, Arizona and other states in the United States. Intervener Intercoastal Finance Ltd. is a company organised in Belize. Ultimate Concrete, LLC and Intercoastal Finance Ltd. are 100% owned by Jesse Guzman. In their original complaint against HRB, the intervener’s held that they are the beneficial owners of some of the Bonds made the subject of the original lawsuit brought by HRB against Sri Lanka. “Upon information and belief and unbeknownst to Interveners, HRB misappropriated Interveners’ $ 50,000,000.00, plus interest, to purchase Bonds. As such, Interveners are beneficial owners of Bonds claimed to be owned by HRB,” the Interveners held, claiming damages from HRB.