Author:Poornimah Devi Sookun
A law is something which must have a moral basis, so that there is an inner
compelling force for every citizen to obey.
Chaim Weizmann (1874–1952)
In an ideal world resolving the huge indebtedness of the HIPC countries by forgiving
their outstanding debt would be the best option for avoiding litigation. But in the real
world, especially with vulture fund creditors buying up sovereign distressed debt,
recourse to lawsuits is the only method through which creditors can recover their
money. This chapter will trace the historical evolution of vulture fund lawsuits and
the legal principles on which they are based.
When the IFIs and the wealthy nations called on creditors to participate voluntarily
in debt relief initiatives, not enough thought was given to the various categories of
creditors operating in the borrowing and lending market. The IFIs had no difficulty
forgiving or restructuring past debts, but there were many reluctant bilateral and
commercial creditors who were not willing to participate in debt relief initiatives. At
the same time, the market was full of potential investors who wanted to benefit
from a situation where there were disappointed creditors. Failure to participate in
the debt relief initiatives did not alter any of the legal rights of the creditors, or the
obligations of the sovereign debtor under an existing loan agreement. Nor could the
initiatives compel a dissatisfied creditor to continue to do business with a sovereign
debtor which was failing in its obligations. The possibility of obtaining a return for the
defaulted debt on the secondary market remained a strong option for the reluctant
creditor, albeit at a much lower return than that owed by the sovereign debtor.
A secondary creditor has no alternative but to lodge a proceeding in court in order
to obtain a windfall return on its investment. Lawsuits lodged by vulture funds
against sovereign debtors are simply exploitation of an investment space created by
the debt relief mechanisms. It has been observed that most vulture funds have been
established specifically with the aim of buying distressed debts.
The tactics adopted by vulture funds during lawsuits have disempowered sovereign
debtors and pose a serious threat to their ability to restructure their debt or to tackle
unsustainable debt. The lawsuits have affected countries in their relationships with
their business partners both on a national and international level. Countries’ reputa -
tions in the international market have been tarnished. Some investors have refrained
from proceeding with potential investments. Others who have already invested have
themselves been targeted by vulture funds. All in all, lawsuits have increased the
risk for investors. Vulture funds not only litigate against debtor countries. They also
pursue claims against solvent companies who are doing business in the HIPC coun-
tries, with the sole aim of recovering their money.
This chapter illustrates the historical evolution and legal principles which form the
basis of vulture fund lawsuits by looking at reported decisions. Most of the cases
analysed have taken place in the London and New York courts. They highlight some of
the legal principles involved and the effects they have on the economies of sovereign
The cases outlined in this chapter highlight:
• Legal defences that can be raised by the sovereign debtor, such as sovereign
immunity, the doctrine of international comity, and champerty and mainte nance
principles. Court appearances and appeals are also discussed (Section 3.1);
• Legal arguments supporting vulture fund claims in court, such as pari passu
clauses, assignment clauses and garnishee orders (Section 3.2);
• The effects of lawsuits on sovereign states and how they have affected the HIPC
countries in restructuring their debts by diverting resources freed under debt
relief, blocking money intended for economic development and even holding the
state hostage (Section 3.3).
3.1 Legal defences available to a sovereign debtor
Sovereign immunity
The question of state immunity often arises in the workshops held by the Legal Debt
Clinic. How can this legal principle help countries avoid falling into the clutches of
vulture funds? How can attachment orders against the proper ty of sovereign states
which are considered immune from any suit or attachment be avoided?
This section explains the doctrine of absolute and restrictive immunity.
It explains two types of sovereign immunity arising from this doctrine:
• immunity from jurisdiction;

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