In March 2022, the International Monetary Fund (the “IMF”) assessed Sri Lanka’s public debt to be unsustainable after the country entered the pandemic with thin reserve buffers, high debt levels, and no fiscal space. The IMF’s determination prompted Sri Lanka to begin restructuring its debt the following month. As part of that process, Sri Lanka adopted an “Interim Policy” of suspending debt service on the following affected debts:

• outstanding series of bonds issued in international capital markets;
• all bilateral credits excluding swap lines between the Central Bank of Sri Lanka and a foreign central bank;
• all foreign currency-denominated loan agreements or credit facilities with commercial banks or institutional lenders for which Sri Lanka or a public sector entity is the obligor or guarantor; and
• all amounts payable by Sri Lanka or a public sector entity following a call upon a guarantee issued in respect of a third party’s debt.[1]

One such debt impacted by the Interim Policy was the 2022 $1 billion bonds maturing in July 2022 (the “Bonds”) of which Hamilton Reserve Bank Ltd. (“Hamilton Bank”) beneficially owns $250 million. In response to Sri Lanka’s proposed plan, on May 4, 2022, Hamilton Bank demanded that Sri Lanka exclude the Bonds from the Interim Policy and make immediate payment.[2] When Sri Lanka refused, Hamilton Bank filed a complaint in the Southern District of New York seeking damages for breach of contract arising out of Sri Lanka’s default on the Bonds and a mandatory injunction requiring Sri Lanka to pay Hamilton Bank ratably whenever a payment is made to the holders of external indebtedness (“Complaint”).[3]

After unsuccessfully moving to dismiss the Complaint (as amended), and after the government’s motion for summary judgment was denied, on July 17, 2023, Sri Lanka filed a motion to stay the proceedings (“Stay Motion”). As part of the Stay Motion, Sri Lanka noted that it was still operating with depleted reserves with no access to the international capital markets, relying on exchange and capital controls, and rationing fuel and electricity in the country.[4] Further, in response to its debt crisis, Sri Lanka obtained a 48-month extended fund facility of approximately $3 billion with the IMF, which funds only would be disbursed subject to Sri Lanka achieving certain milestones and implementing certain reforms, including “restoration of public debt sustainability, including through a debt restructuring.”[5] As a result, Sri Lanka argued that Hamilton Bank’s actions would “cripple” and “jeopardize” Sri Lanka’s “urgent and immediate needs to secure loans from the IMF, World Bank, and other international entities.”[6] Further, Sri Lanka advanced the concern that if Hamilton Bank obtained a judgment before a debt restructuring occurred, other creditors might refuse to defer outstanding debt amounts and/or might file their own lawsuits against Sri Lanka, leading to a breakdown of the restructuring process. Finally, Sri Lanka asserted that granting a stay to allow the country to continue its restructuring process would be in line with U.S. policy that “encourages participation in, and advocates the success of, IMF foreign debt resolution processes.”[7]

In response, Hamilton Bank argued that a stay was not warranted because of the prejudice it would suffer compared to the speculative prejudice claimed by Sri Lanka as well as the public interest in judicial efficiency and adjudicating the parties’ rights promptly.[8] Hamilton Bank took the position that granting the stay would invite applications for additional stays, possibly for years, during which Sri Lanka might seek to undermine Hamilton Bank’s position.[9] Hamilton Bank also asserted that granting the stay would be against the U.S. policy of allowing creditors to recover promptly on foreign debt.[10]

In support of Sri Lanka’s position, the United Kingdom and France, as members of the Paris Club (but who also happen to be creditors), filed an amicus curiae brief (“Paris Club Brief”). In the Paris Club Brief, the U.K. and France argued that a judgment in favor of Hamilton Bank before completion of the restructuring process would jeopardize ongoing negotiations by creating an incentive for holdout creditors to not participate in those negotiations. They also acknowledged that Sri Lanka had consistently engaged in good faith to facilitate the restructuring process, including by facilitating the formation of a creditors’ committee and engaging early with creditors.[11]

The United States later filed a Statement of Interest that also supported Sri Lanka’s position (“U.S. Statement of Interest”). The U.S. Statement of Interest clarified that where a sovereign cannot meet its debt obligations, the U.S. Government’s position has long been that the best policy is the orderly and consensual restructuring of sovereign debt in conjunction with appropriate macroeconomic adjustments.[12] The United States also elucidated another reason for supporting the stay – it considers Sri Lanka a partner in the Indo-Pacific region and, thus, supporting Sri Lanka’s economic recovery would help increase the stability and security of the country, and advance the U.S. Government’s Indo-Pacific strategy.[13]

The court exercised its discretion and granted the stay. The court weighed five factors set forth in the Loftus[14] decision and found that all five factors weighed strongly in favor of a stay.[15] The Court analyzed the following:

1. The public interest. The court relied on the U.S. Statement of Interest to conclude that granting a stay would be in the public interest. This was because the stay would be aligned with U.S. public policy by encouraging the use of the IMF foreign debt resolution procedures and the enforceability of valid debts under the principles of contract law.[16]
2. The private interests of and burden on the defendants. The court found that this factor was significant given that a judgment for Hamilton Bank would threaten the ongoing negotiations and, therefore, threaten Sri Lanka’s successful economic rehabilitation and the wellbeing of its citizens.[17]
3. The interests of the courts. For Hamilton Bank, the court agreed that Hamilton Bank’s motion for summary judgment was ripe for determination and delaying its resolution was not an efficient use of resources. This issue, however, was strongly outweighed by the potential for a rush-to-the-courthouse by private creditors of Sri Lanka’s sovereign debt in order to secure priority.[18]
4. The interests of persons not parties to the civil litigation. The court found that a stay would benefit the interests of Sri Lanka’s bilateral creditors and private commercial creditors by ensuring a comparability of treatment among creditors. This comparability of treatment was described in the Paris Club Brief as the “bedrock for obtaining creditors’ consent to the debt restructuring.”[19] Were judgment entered for Hamilton Bank, it may assert priority in recovery and hamper ongoing negotiation efforts.[20]
5. The private interests of plaintiffs in proceeding expeditiously balanced against the prejudice to the plaintiffs if delayed. For this factor, the court found that the prejudice to Hamilton Bank was limited because if the bank prevailed on its claim at some future date, any judgment would be subject to pre-judgment interest.[21] This reasoning ignores the reality that Sri Lanka may not have enough money after the restructuring to pay Hamilton Bank. 

Thus, based on these factors, the court granted the stay to permit Sri Lanka to proceed with its restructuring notwithstanding the private interest of Hamilton Bank to be paid its contracted for amounts.

Take Aways

Hamilton Bank’s Complaint is an interesting case where a holdout creditor made themselves known early on in the process. Unfortunately, being aggressive early in Sri Lanka’s restructuring process backfired on Hamilton Bank as it is now subject to a stay and may, as a result, be further sidelined in any restructuring negotiations. Indeed, Sri Lanka has since reached a preliminary debt restructuring agreement with its non-Chinese bilateral creditors that include India, Japan and France.[22] The IMF has also completed its first review under its 48-month extended fund facility and found Sri Lanka’s performance to be satisfactory.[23] With the stay of its proceedings and the restructuring process well under way, there is not much more that Hamilton Bank can do now except to engage in the restructuring process already afoot. Therefore, any private creditor holding distressed sovereign debt should carefully consider all options before rushing to seek judicial intervention as the restructuring of sovereign debt, while holding many similarities with private restructurings, has unique qualities that may render favorable judicial intervention challenging.

[1] Interim Policy Regarding the Servicing of Sri Lanka’s External Public Debt, Apr. 12, 2022.

[2] Defendant’s Memorandum of Law in Support of its Motion to Stay Proceedings, Case No. 1:22-cv-05199-DLC, Dkt No. 54, p 6.

[3] Complaint, Case No. 1:22-cv-05199-DLC, Dkt No. 1.

[4] Defendant’s Memorandum of Law in Support of its Motion to Stay Proceedings, Case No. 1:22-cv-05199-DLC, Dkt No. 54, p 8.

[5] Defendant’s Memorandum of Law in Support of its Motion to Stay Proceedings, Case No. 1:22-cv-05199-DLC, Dkt No. 54, p 9.

[6] Defendant’s Memorandum of Law in Support of its Motion to Stay Proceedings, Case No. 1:22-cv-05199-DLC, Dkt No. 54, p 3.

[7] Defendant’s Memorandum of Law in Support of its Motion to Stay Proceedings, Case No. 1:22-cv-05199-DLC, Dkt No. 54, p 17.

[8] Plaintiff’s Memorandum of Law in Opposition to Defendant’s Cross-Motion for Stay, Case No. 1:22-cv-05199-DLC, Dkt No. 62, pp 3-4.

[9] Plaintiff’s Memorandum of Law in Opposition to Defendant’s Cross-Motion for Stay, Case No. 1:22-cv-05199-DLC, Dkt No. 62, pp 3, 14.

[10] Plaintiff’s Memorandum of Law in Opposition to Defendant’s Cross-Motion for Stay, Case No. 1:22-cv-05199-DLC, Dkt No. 62, p 7.

[11] Brief for France and the United Kingdom as Members of the Paris Club as Amicus Curiae in Support of the Republic of Sri Lanka’s Petition for a Motion to Stay Proceedings, Case No. 1:22-cv-05199-DLC, Dkt No. 69, pp. 2 and 4.

[12] Statement of Interest of the United States of America, Case No. 1:22-cv-05199-DLC, Dkt No. 73, p 17.

[13] Statement of Interest of the United States of America, Case No. 1:22-cv-05199-DLC, Dkt No. 73, p 14.

[14] Loftus v. Signpost Inc., 464 F. Supp. 3d 524, 526 (S.D.N.Y. 2020).

[15] Opinion and Order, Case No. 1:22-cv-05199-DLC, Dkt No. 77, pp 9 and 10.

[16] Opinion and Order, Case No. 1:22-cv-05199-DLC, Dkt No. 77, pp 12 and 13.

[17] Opinion and Order, Case No. 1:22-cv-05199-DLC, Dkt No. 77, pp 10 and 11.

[18] Opinion and Order, Case No. 1:22-cv-05199-DLC, Dkt No. 77, p 10.

[19] Brief for France and the United Kingdom as Members of the Paris Club as Amicus Curiae in Support of the Republic of Sri Lanka’s Petition for a Motion to Stay Proceedings, Case No. 1:22-cv-05199-DLC, Dkt No. 69, p 6.

[20] Opinion and Order, Case No. 1:22-cv-05199-DLC, Dkt No. 77, pp 11 and 12.

[21] Opinion and Order, Case No. 1:22-cv-05199-DLC, Dkt No. 77, p 10.

[22] Benjamin Park, “Sri Lanka agrees debt restructuring with Paris Club Creditors”, Financial Times, November 29, 2023.

[23] IMF, IMF Executive Board Completes the First Review Under the Extended Fund Facility Arrangement with Sri Lanka, IMF Press Release No. 23/439, December 12, 2023