US Court sets deadlines for Hamilton Reserve Bank vs SL Govt. case

By Ashwin Hemmathagama in New York

In a critical update to the ongoing litigation between Hamilton Reserve Bank Ltd. (HRB) and the Democratic Socialist Republic of Sri Lanka, the Court has set deadlines to address Sri Lanka’s motion for a 45-day additional stay moved recently. 

The requested stay aims to facilitate the completion of Sri Lanka’s sovereign debt restructuring, a process the nation asserts is at a critical juncture and essential to its recovery.

 

Earlier this week Judge Denise L. Cote of the US District Court for the Southern District of New York ordered HRB to file its opposition by 11 December 2024, with Sri Lanka’s reply due by 16 December 2024.

This litigation centres on HRB’s claim for $ 250 million in Sri Lankan international sovereign bonds (ISBs), which matured in 2022. Sri Lanka defaulted on these bonds during an unprecedented economic and humanitarian crisis. While HRB has pursued legal action, Sri Lanka has worked to restructure its debt to meet the requirements of an International Monetary Fund (IMF)-supported recovery program. The program’s objectives include restoring debt sustainability, stabilising the economy, and safeguarding vulnerable populations.

Sri Lanka’s prior Court-granted stays have been instrumental in enabling progress on its restructuring efforts. Agreements reached with official bilateral creditors in June 2024 and private bondholder groups later in the year have been critical milestones. These negotiations addressed complex issues, including aligning creditor terms with IMF program parameters and ensuring equitable treatment among stakeholders. 

On 25 November 2024, Sri Lanka launched a debt exchange process allowing bondholders to swap existing bonds for restructured securities. The exchange has received strong support from major creditor groups, local financial institutions, and the IMF, all of whom urged broad participation.

Sri Lanka further argues that the additional stay is essential to finalise the debt exchange. The Government contends that an immediate judgment in favour of HRB would discourage creditor participation and derail the restructuring process. Such a judgment could also incentivise other creditors to file lawsuits, creating legal chaos and undermining the country’s recovery efforts. Sri Lanka further asserts that the stay would not harm HRB, as any delay would be compensated with accrued interest.

The broader implications of this case extend beyond Sri Lanka’s borders. The restructuring effort relies on maintaining a delicate balance of interests among creditors, financial institutions, and international policymakers. An adverse judgment could disrupt this balance, violating the comparability of treatment principle, which ensures that all creditors are treated equitably. This principle is central to the success of the IMF-supported program, which aims to foster sustainable recovery while addressing Sri Lanka’s financial challenges.

In its Memorandum of Law in Support of the Defendant’s Motion for a Further Stay of Proceedings, Sri Lanka’s legal team has also highlighted its request’s alignment with international comity and US policy objectives. US policy supports giving sovereign States negotiating in good faith the opportunity to resolve disputes consensually before enforcement of judgments. Granting the additional stay would uphold this principle and demonstrate respect for the international community’s cooperative efforts to assist Sri Lanka during its crisis. The Court’s role in managing such cases reflects its ability to weigh the broader public interest against individual claims.

Despite these efforts, HRB’s litigation poses a significant obstacle. By refusing to engage in restructuring discussions, HRB has chosen a path that contrasts with the cooperative approach of other creditors. Its actions, including threatening to block IMF funding, have raised concerns about prioritising individual claims over collective recovery efforts. If allowed to proceed, such tactics could set a troubling precedent for handling sovereign debt disputes, undermining the collaborative framework necessary for successful resolutions.

The Court’s decision on the 45-day stay will have significant implications. Beyond its immediate impact on this case, the ruling will influence how sovereign debt disputes are managed globally. It could shape how courts balance creditor rights with the practical realities of addressing defaults in nations undergoing economic recovery. By granting the stay, the Court would enable Sri Lanka to focus on completing its debt exchange, thereby advancing its fiscal recovery and upholding the principles of equitable treatment among creditors.

The stakes are high as Sri Lanka works to meet the IMF program’s requirements. Completing the debt restructuring is critical to stabilise the economy and ensure long-term growth and well-being for its citizens. The Court’s decision on this motion will affect Sri Lanka’s path forward and set a precedent for the international community’s approach to resolving sovereign debt crises.

However, criticisms of Sri Lanka’s current administration, led by President Anura Kumara Dissanayake, have overshadowed these efforts. Despite promises of transparency and efficiency in managing the debt crisis, the Government has been criticised for failing to address allegations of corruption and inefficiency in State institutions, which many argue have exacerbated the nation’s fiscal woes. Critics claim the administration has been slow to implement essential economic reforms, including reducing public sector inefficiencies and curbing excessive State expenditures. These delays have raised concerns about whether the Government can successfully navigate the restructuring process and deliver on its commitments to both domestic and international stakeholders.