TWN Info Service on Finance
and Development (Feb07/03)
21 February 2007
THREAT TO DEBT-RELIEF COUNTRIES SHOWN BY ZAMBIAN DEBT CASE
A High Court in London
ruled on 15 February that a ‘vulture fund’ which bought a portion of
Zambia’s sovereign debt almost a decade ago had the right to enforce
the agreement but the judge in the case has criticised the fund’s manager
and his associates for their dishonesty and evasiveness in presenting
evidence in the case. It is also expected that the court will not order
to repay the full amount sought (in a hearing next month).
This case has brought
to light a growing problem of indebted developing countries whose multilateral
debts have been cancelled, only to face commercial litigation from so-called
‘vulture funds’ that exploit the poor countries.
Some analysts believe that the new wave of commercial creditor
litigation against developing countries is due to the perception that
those countries that have obtained debt relief are now more credit-worthy
and also are more capable of making payments to the vulture funds.
a report on the case brought against Zambia
by the investment company, Donegal International.
It was published
in SUNS #6193 Monday
19 February 2007.
With best wishes
Threat to Debt-Relief Countries Shown By Zambian Debt Case
By Celine Tan (Third
A High Court in London ruled
on 15 February that a ‘vulture fund’ which bought a portion of Zambia’s
sovereign debt almost a decade ago had the right to enforce the agreement
but the judge in the case has criticised the fund’s manager and his
associates for their dishonesty and evasiveness in presenting evidence
in the case.
It is also expected that the court will not order Zambia
to repay the full amount sought (in a hearing next month). Although
judge Mr Andrew Smith reiterated that he was considering the case based
on its legal merits, he alluded in his judgment to the “strong feelings”
that the case aroused due to Zambia’s
position as a poor and vulnerable country.
Zambia had acted
to dismiss the claims against it by US
investment company, Donegal International, which had sought to enforce
payments of up to $55 million in respect of a debt which the company
bought from Romania
in 1999 for $3.2 million.
This case has brought to light a growing problem of indebted developing
countries whose multilateral debts have been cancelled, only to face
commercial litigation from so-called ‘vulture funds’ that exploit the
Some analysts believe that the new wave of commercial creditor litigation
against developing countries is due to the perception that those countries
that have obtained debt relief are now more credit-worthy and also are
more capable of making payments to the vulture funds.
In this case, the amount claimed by Donegal International was equivalent
to the debt relief that Zambia
recently obtained from bilateral and multilateral official creditors.
Even if Donegal obtains only part of the claim it has demanded, this
would significantly offset the benefits to Zambia
of its debt relief.
Debt campaign groups have condemned the action taken by Donegal International.
The World Bank as well as UK
Chancellor, Gordon Brown have also voiced concerns about the opportunistic
activities of ‘vulture funds’.
According to news reports
and press statements, the debt in question stemmed from a loan to Zambia
in 1979 for the purchase of agricultural machinery and services. Zambia
was unable to keep up the repayments and the two countries were on the
verge of renegotiations to liquidate the debt for a payment of $3 million
when Donegal International bought the heavily discounted debt for $4
Donegal International, which is registered in the British Virgin Islands
and owned by US
businessman Michael Sheehan, then negotiated a settlement with the country
to repay the debt to the value of $15 million but the agreement included
severe interest penalties if Zambia
defaulted on payments under the settlement.
Donegal International proceeded to sue Zambia
for the full value of the debt plus interest and legal costs, a claim
which Justice Smith said was unlikely to be justified given the severe
nature of the penalties for default under the settlement contract and
the misleading nature of the evidence under which the agreement was
The BBC reported that those familiar with the case expect that the judge
will order Zambia
to pay Donegal International between $10 and $20 million, half its claims
against the country.
According to a report by The Lawyer.com, the judge had concluded that
Sheehan “had lied or misled the courts of three different jurisdictions
in relation to the debt, while his consultants were “dishonest and thoroughly
unreliable” and recommended that the injunction over Zambia’s
assets be discharged. Zambia’s
assets in London
had been frozen pending the case.
Justice Smith also criticised the “careless” and “cavalier” attitude
that Sheehan and his company displayed when presenting evidence on the
agreement and the company’s own business practices.
The judge however dismissed Zambia’s
claims that Zambia’s
agreement to the initial debt buy-out by Donegal International was secured
through bribery and corruption.
The Zambian legal team, led by UK
Prime Minister Tony Blair’s brother, William Blair QC, had claimed that
Donegal International paid $2 million into former Zambian President
Frederick Chiluba’s favourite charity in return for a favourable deal.
Sheehan had denied that this payment was a bribe, responding to a BBC
Newsnight reporter that it was “a charitable donation” to “a low income
housing initiative” in Zambia.
Debt campaigners have reacted furiously to the case although the High
Court decision itself received mixed reactions. Although welcoming the
decision that Zambia
should pay a much-reduced sum to the claimants, campaign groups such
as the Jubilee Debt Campaign (JDC), UK
and Oxfam Great Britain,
are angry that the case was ever brought to court.
Trisha Rogers, director of JDC which campaigns for Third
World debt cancellation, called the claims by Donegal International
an “opportunistic profiteering of the worst kind” while Oxfam GB’s director
of campaigns Adrian Lovett called the case “an outrageous injustice
which could and should be addressed by the international community”.
Lovett said that while the judge was unable to dismiss the case against
Zambia on legal grounds, there was clear evidence that the claims were
“immoral” since it was “unconscionable to pursue an inflated claim for
debt that should have been written off years ago” and against a country
as poor as Zambia “in desperate need of money to pay for basic services
like health and education”.
Meanwhile, Gail Hurley, policy officer with the European Network on
Debt and Development (Eurodad) said: “The ruling comes as a big blow
and gives legitimacy to some of the most predatory and immoral banking
practices out there. It is not acceptable for companies such as Donegal
International to undermine poverty reduction efforts in one of the world’s
most impoverished nations”.
The Zambian case has highlighted the increasing problem of commercial
litigation faced by many indebted countries which have, ironically,
been recently freed of much debt by international debt cancellation
programmes. It has also exposed the practices of the so-called ‘vulture
funds’ that prey on vulnerable countries.
The term ‘vulture fund’ is used to refer to investment companies which
buy up debt on the international markets at below market value with
the objective of enforcing claims of repayment at full value plus interest
at a later date.
The debt is usually heavily discounted because of its low chance of
repayment. However, with countries such as Zambia
being recently freed from much of its official debt due to debt cancellation,
there is a concern that this may serve as an incentive for such practices.
Gordon Brown, who also chairs
the International Monetary and Financial Committee (IMFC), the political
governance body of the International Monetary Fund (IMF), has previously
condemned such ‘vulture funds’ and a Treasury official contacted by
The Guardian newspaper yesterday called the depletion of developing
country resources in this manner “socially irresponsible”.
The total amount claimed by Donegal International was equivalent to
the debt relief secured by Zambia
through the Heavily Indebted Poor Countries (HIPC) initiative and the
recent Multilateral Debt Relief Initiative (MDRI) from bilateral and
multilateral official creditors.
has had to undergo strict economic restructuring under the supervision
of the IMF and the World Bank, including the implementation of strict
economic policy conditionalities, for six years before becoming eligible
for debt relief under these schemes.
Observers and debt campaigners have suggested that it is due to the
increased creditworthiness of countries which have had their debt cancelled
that is prompting a new wave of commercial creditor litigation against
The World Bank has also expressed concern over such practices, calling
such behaviour ‘free riding’ as creditors take advantage of the fiscal
space freed up by debt relief from other creditors. Countries are also
having to spend a great deal of resources on defending such claims on
them, funds which could be better used for developmental purposes.
called for the establishment of “a fair, comprehensive and binding framework
for dealing with poor country debt, which will ensure that commercial
creditors will never again have the chance to profit in this way”. She
also called upon Brown to use his position to put a stop to the “predatory
practices” of the ‘vulture funds’.
JDC and other debt groups, such as Eurodad, have also repeatedly called
for a principle of “creditor co-responsibility” to be established as
practice in debt transactions to hold creditors responsible for loans
made to developing countries without due diligence or under spurious
circumstances or for dubious purposes.
According to these debt campaigners, debt that is disbursed without
regard for the economic situation of the country involved or assumed
through corrupt transactions, without regard to the needs of its citizens,
should be declared as “illegitimate” and should not be repaid.
Last year, the Norwegian government unilaterally cancelled $80 million
worth of debt owed by five developing countries in acknowledgement that
the debt was extended irresponsibly and without due regard for the developmental
needs of the recipient countries.
For more details on the Zambian case, see: Oxfam press release:
BBC News Report:
TO MAIN | ONLINE
BOOKSTORE | HOW TO ORDER