Debtor Creditor Engagement in Sovereign Restructurings

Abstract

The NML v Argentina decision brought to the surface two problems which are potentially present in any sovereign debt restructuring. First, how to deal with activist holdout bond creditors once the vast majority of bond creditors and the sovereign debtor have agreed a restructuring. Second, how to ensure that the sovereign debtor engages with its bond (and other) creditors in an appropriate manner so as to resolve the insolvency and bring it to a finality. The former problem was resolved by the adoption by contractual collective action clauses. The latter problem remains largely unresolved not for lack of effort or proposals. At the heart of most proposals rests the injunction that the parties engage “in good faith”. The paper considers the proposals made so far and concludes that the good faith engagement cannot be assured or enforced contractually and it is unlikely that it will be imposed by any form of international treaty. Good faith engagement can only be done by reference to soft law guidelines, such as the ones found in the IIF “Principles” or discussed by the IMF in its recent policy papers. Ultimately, a proper engagement of a sovereign debtor with its creditors and other relevant stakeholders will very much depend on the behaviour of the sovereign debtor itself and/or its choice to seek an IMF program. Where the sovereign debtor acts in the rule-bound way of a “returning player” or allows the IMF to do so, it is likely that engagement with its creditors and other stakeholders will be appropriate and that the insolvency will be resolved with the required finality.