Uncovering the Hidden Realities of Sovereign Debt Disputes
Introduction
Sovereign debt disputes have always been a topic of intrigue and complexity. These disputes involve lenders and borrowers at the national level, and the dynamics behind them often remain obscured by layers of legalities and financial intricacies. In a recent dispute between Hamilton Reserve Bank and Sri Lanka, several intriguing developments have arisen, including questions about the true identity of the driving force behind the cause.
Lessons from the Past: Water Street Bank and Trust
To understand the current dispute better, it is useful to delve into the history of modern disputes between resistant creditors. Water Street Bank and Trust serves as a relevant case study. In the early 1990s, Water Street initiated lawsuits against several countries, including Ecuador, Côte d’Ivoire, Poland, Panama, and Congo, all relating to unpaid debts. However, Panama’s defense strategy threw a wrench into Water Street’s plans.
Panama’s defense uncovered an old common law doctrine that prohibited litigation driven by financial gain, requiring the disclosure of the true parties interested in the case. Water Street’s reluctance to reveal the individuals behind its holding companies and limited partnerships eventually resulted in their dismissal from the case. This episode highlights the significance of transparency and the repercussions of non-compliance with court orders.
Elliott Associates and the Game of Sovereign Debt Litigation
Water Street’s players, including those from its later incarnation as Elliott Associates, continued to play an influential role in sovereign debt litigation. Elliott’s victory against Panama marked a turning point, as the defense of champerty (litigation motivated by financial gain) was effectively dismantled in New York in 2004. Even though some attempts have been made to resurrect this defense, it remains defeated.
The Hamilton Reserve Bank’s Oversight: A Lesson Forgotten?
Keeping in mind the lessons from Water Street v. Panama, it seems that supporters of the Hamilton Reserve Bank may have disregarded the significance of Panama’s defense strategy. They might not have anticipated that the demand for identity disclosure by the true human beings behind the money would resurface. Sri Lanka, however, might have another card up its sleeve.
The Buried Weapon in Sri Lanka’s Tax Clauses
Within the tax clauses of sovereign bonds lies an often-overlooked weapon: the “tax grossization provision.” This provision promises that the borrower will make all principal and interest payments tax-free. However, there are exceptions. Lebanon’s 2015 prospectus, for example, states that no additional amounts will be due to bondholders who are liable for taxes due to their connection with the Republic.
Sri Lanka’s clause takes a different approach. It states that the country can request the true owner of the bond to disclose their “nationality, residence, identity, or connection with Sri Lanka” at any stage of the bond’s life. Compliance with this requirement may be necessary to be exempt from withholding or tax deduction. Sri Lanka can then assess overdue taxes if bondholders fail to disclose their identities and prove otherwise.
Implications for Hamilton Reserve Bank and Sri Lanka
In the ongoing dispute between Hamilton Reserve Bank and Sri Lanka, it is crucial to consider the potential consequences of Sri Lanka invoking its tax clauses. If Sri Lanka suspects that national residents are among the bondholders, it can withhold interest payments and assess overdue taxes on those bondholders until their identities are revealed and tax compliance is demonstrated.
Hamilton Bank may choose to forego interest payments and focus solely on receiving the principal amount owed. However, the longer the default continues, the more interest payments will be withheld. Additionally, if Sri Lanka suspects tax evasion by some bondholders, it can retroactively impose taxes until the bondholders disclose their identities and prove otherwise.
Conclusion
Sovereign debt disputes remain complex and multifaceted, intertwined with legalities, financial intricacies, and strategic maneuvers. The current dispute between Hamilton Reserve Bank and Sri Lanka offers valuable insights into the evolving dynamics of such disputes. Understanding the lessons from past cases, like Water Street v. Panama, and the potential implications of tax clauses, allows for a deeper appreciation of the complexities at play.
The Hamilton Reserve Bank’s supporters may have overlooked the significance of Panama’s defense strategy, while Sri Lanka’s tax clauses provide them with a potent weapon. By demanding full disclosure of bondholders’ identities and potential tax compliance, Sri Lanka has the power to withhold interest payments, impose overdue taxes, and compel transparency.
As sovereign debt disputes continue to unfold, it becomes increasingly evident that transparency and compliance with court orders hold immense importance. The lessons of the past must not be forgotten, and the implications of every clause in sovereign bond agreements should be thoroughly understood to navigate these intricate disputes successfully.
Summary
Sovereign debt disputes are complex and often shrouded in legalities and financial intricacies. The recent dispute between Hamilton Reserve Bank and Sri Lanka highlights the importance of transparency and compliance with court orders. Drawing lessons from past cases, such as Water Street v. Panama, provides valuable insights into the evolving dynamics of sovereign debt litigation. Sri Lanka’s tax clauses add another layer of complexity, potentially allowing the country to withhold interest payments and impose overdue taxes until bondholders disclose their identities and prove tax compliance. As these disputes continue to unfold, understanding these intricacies becomes increasingly crucial for all parties involved.
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Ruth Mason and Mitu Gulati both teach at the University of Virginia Law School.
There have been many intriguing developments in the recent dispute between Hamilton Reserve Bank and Sri Lanka, not least the growing questions about who he is Truly behind the cause, as Alphaville explored earlier this month.
This film has already been broadcast. Digging into the archives on the evolution of modern disputes between resistant creditors you will find reference to Water Street Bank and Trust. In the early 1990s, Water Street filed lawsuits against Ecuador, Côte d’Ivoire, Poland, Panama and Congo for unpaid debts (for a history, see the opinion in Elliott against Peru, Here).
However, the Panama litigation suffered a major blow when Panama’s lawyers found a cunning foothold in theirs championship defense – an old common law doctrine that prohibited litigation motivated by the goal of financial gain – requiring disclosure of the True parties interested in the case.
After some back and forth, Water Street’s reluctance to reveal who was actually behind its holding companies and limited partnerships led to the firing. The judge expressed his frustration this way:
In response to each of my orders, the plaintiff reluctantly revealed another link in an elaborate chain of 100% holding companies. It should have been made very clear to the plaintiff that I had directed him to reveal the identities of the human beings who ultimately owned the plaintiff. If this was not clear from my order of December 1, it should be clear from my subsequent orders and at the latest during the oral argument on the sanctions motion. In response to a direct question, the plaintiff’s attorney could not articulate any discernible prejudice to his client resulting from revealing who really owned his client. Plaintiff’s disobedience and evasive compliance with this Court’s orders have gone on too long.
Sovereign debt fanatics know some of these dramatis personae on Water Street he later moved to Elliott Associates – and that’s when the real game of sovereign debt litigation began. Panama ultimately lost to Elliott, and Champerty’s defense was killed in New York by law in 2004 (although some are currently trying to do so). resurrect him).
Perhaps supporters of the Hamilton Reserve Bank have therefore forgotten the lesson Water Street v. Panama. Or maybe they didn’t think Panama’s strategy of demanding the identity of the real human beings behind the money would work again?
Sri Lanka may have another arrow in their quiver though; one he might want to use before the bond is converted into a judgment. Buried in the tax clauses is a weapon we have rarely seen in a sovereign bond (with the caveat that reading the tax clause is not something we jump to when opening a bond document).
First, some basics about this creature.
Called the “tax grossization provision,” the standard version of the provision promises that the sovereign borrower will make all principal and interest payments free of withholding or other taxes. In the event that there is some legal change that results in a tax by the sovereign, the country will pay the bondholder these “additional amounts”.
Each version of the tax clause we’ve seen will therefore list a handful of exceptions to the above. Chief among these, as Lebanon’s 2015 prospectus shows, is as follows:
[N]or such additional amounts will be due. . .[to a bondholder]who is responsible for these taxes. . . because of his connection with the Republic other than the simple possession of such note, receipt or coupon.
In other words, domestic residents cannot escape income taxes by purchasing foreign currency sovereign bonds.
Some rulers pose the question differently than in Lebanon. For example, in a 2017 issue South Africa states that reimbursement of additional amounts will not be made unless the holder makes an explicit declaration of non-residence. But the basic idea is the same.
And then there is the Sri Lanka clause. He expresses the question differently:
[The Issuer shall not pay additional amounts if] at the reasonable request of the Issuer. . .[the]the beneficial owner did not comply. . . any identification. . . requirement relating to. . . nationality, residence, identity or connection of the beneficial owner with Sri Lankaif compliance with such requirement is required by any statute or regulation of Sri Lanka as a precondition for exemption from withholding or deduction of taxes.
It’s delicious.
Unlike the South African clause which requires the bondholder to make a declaration of residence, this one says that Sri Lanka, at any stage in the life of the bond, can ask the true owner of the bond to disclose “nationality, residence, identity or connection with Sri Lanka”.
Assuming there are interest payments due as part of the Hamilton Reserve Bank claim (and there are), Sri Lanka may withhold payments on suspicion that there may be national residents among the owners of these credits and requires full disclosure of all identities. to make your own tax determinations.
Now, Hamilton Bank might be willing to say, “Forget about interest payments; simply pay us the principal amounts you owe. But the longer the default continues, the more unpaid interest will be withheld.
Furthermore, if Sri Lanka suspects that some of these people are national residents who have been skipping taxes for a while, it can assess those overdue taxes (until the holders reveal their identities and prove otherwise).
As one of our tax law professors would sometimes say: “For the government, it is never too late to tax!”
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