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In their latest version of the Sovereign Debt Restructuring Mechanism) SDRM the staff of the IMF seem to have changed its view on stays. They had proposed before that the Fund be given the right to endorse a stay triggered by the debtor's demand for insolvency relief, that the approval of a required majority of creditors might be needed to maintain the stay beyond a maximum period (cf. Krueger 2001a), or that the stay might be activated by creditors (IMF 2002a, p.6). On a first, quick reading of the new version presented and discussed at the Conference on 22 January 2003 there appears to be a fundamental change (IMF 2002b, p.9, para 20; italics in original):

"Activation would not automatically trigger any suspension of creditor rights. There would be no generalized stay on enforcement and no suspension of contractual provisions, (including provisions relating to the accrual of interest). However, and as a means of
ensuring inter-creditor equity, if creditors eventually approved a restructuring agreement under the SDRM, amounts recovered by a creditor through litigation would be deducted from its residual claim under that agreement in a manner that neutralizes any benefits of such litigation vis-a-vis other creditors."

However, this is not really a fundamental change, as one can demonstrate by the simple example of a tray of oranges. A generalised prohibition to take and eat them would preclude people from doing so. Without such prohibition but with the following additional rules that
a) oranges already eaten will be deducted from the ones each member of the group will finally get, and 
b) that people who are assumed to be able to take more oranges than they are assumed to get in the end will have their hands handcuffed on their backs if and when actually reaching out for the tray
no oranges will be grabbed. This would assure the same result, though arguably in a more tantalisingly cruel way.

While any creditor would retain the right to litigation this right would become meaningless, in the sense that it would normally not produce better economic results than those obtained by a generalised stay. Those more critical than I might suggest that this proposal makes fun of creditors. Two mechanisms assure that the outcome as far as recovering money is concerned will generally be identical, although one cannot exclude the odd out, lucky litigant, who might actually make a hit. But beating the system, e.g., by being quick or otherwise, can never be totally excluded.

The Hotchpot Rule
The IMF (2002b, p.36, para 134) presents it as follows:

"The advantage of this approach (which, as described in Box 1, is referred to as the 'hotchpot' rule in the nonsovereign context) is that would discourage litigation without imposing a limitation on enforcement rights..... Creditors exercising forbearance would have some assurance that litigation prior to the restructuring would not provide an undue advantage to the litigant."

Pursuant to the hotchpot rule any amount recovered due to litigation would be deducted from the sum this creditor would finally be entitled to receive. Footnote 17 (IMF 2002b, pp.36f) presents an absolutely clear numerical example. A creditor due to receive $ 4 million through litigation and entitled under the SDRM to 50% of his/her original claim with a face value of $ 10 million would only receive $ 1 million (= $ 5 million minus the $ 4 million recovered). Assuming that this creditor would have to pay his/her legal fees (s)he would be worse off than by not litigating in the first place.

The IMF (2002b, p.36, para 136) correctly notes that there is one potential problem. If and to the extent that "vultures" get more than what they would get under the final settlement (e.g.$ 6 million instead of $ 4 million in the IMF's example above) the hotchpot rule would be inapplicable. The IMF considers a "clawback rule" (i.e. forcing successful litigants to surrender their recoveries), but finally comes down against it as this would "require the use of substantial compulsory legal powers" (ibid., p.37) - in plain English: one would have to send a bailiff to the litigant in order to get the money.

The Additional Safeguard - The Good, Old Stay 
The IMF therefore proposes "an additional measure that would further discourage litigation" (ibid. p.36, para 136, italics in original):

"The SDRM could provide that, upon the request of the debtor, the SDDRF would have the authority - but only with the approval of creditors - to issue an order that would require a court outside the territory of the sovereign to enjoin specific enforcement actions if a determination was made that such actions seriously undermined the restructuring process. Circumstances where such an order would be warranted would include, for example, situations where there is a risk that creditors may attach assets of a sufficient value that they could circumvent the operation of the above 'hotchpot' rule."

Obviously, if other creditors have reason to think that a litigant might get more than what is likely to be the result of the SDRM, they will be in favour of a stay. Very possibly they would even urge the debtor to demand it, as any money recovered over and above the amounts resulting from the SDRM would be recovered at their expense. Assuming normal economic behaviour they will try to avoid this outcome. The IMF rightly remarks that there will be a delay before a vote by qualified majority could be considered and proposes therefore that a representative creditors' committee could have this authority until creditors are sufficiently well organised to act collectively.

One may therefore argue that the economic effect is de facto the same as that of a general stay.

Logically possible exceptions, such as the one quick litigant just succeeding or all/many creditors suing and winning titles which add up to more than can be received from the debtor (which would call for some rule how to reduce these) seem of no real practical importance.

In practice possible outcomes boil down to two scenarios:

Either "vultures" are unable to recover more than they would get anyway. In this case they may litigate but will have no advantage. Unless they do so in a jurisdiction where the winning party also may get legal expenses refunded from the other side, the litigant is even definitely worse off. As IMF staff do not go into this detail one cannot say whether these expenses would be deducted from the total sum recovered before the rest of the amount recovered by the litigant is deducted from the amount to which the litigant would finally be entitled under the SDRM. Even in this best case, however, the litigant would not be better off and would have had all the trouble of litigation. PhD students eager to get practical experience of the law they study seem the only group prepared to litigate if we assume reasonable behaviour.

If the litigant is really likely to gain pecuniary advantage, a stay would be triggered by the economic interests of other creditors.

Legal possibilities to limit the scope for litigation exist already. The IMF rightly points out that vulnerability to litigation might be further limited by depositing with institutions and in jurisdictions where enhanced protection from legal processes is available. Thus the logically possible case that a creditor may be quick enough actually to litigate, win and cash in before the stay becomes even less relevant. The IMF (2002b, p.34, para 129) explicitly states that a creditor "who has obtained a judgement - but has not yet collected on it - could still have its claim restructured through a vote of a qualified majority." This narrows the theoretical possibility of pecuniary success by litigation further down. Since litigation is seldom extremely quick, and US courts - as a participant at the IMF's Conference on 22 January 2003 pointed out - are not disinclined to wait a bit longer if negotiations are going on between creditors and the debtor, this logical possibility seems virtually excluded in practice. Thus the right to litigate degenerates to a mere "nudum ius", a right without any consequences but additional costs. Economically the present solution is as intrusive, though more complicated. Legally, one may see it as less intrusive because useless litigation is not prohibited by any generalised rule.

The IMF's explanation is thus highly unconvincing:

"The views of many market participants is that a generalized stay would constitute a significant erosion of contractual rights in an environment where contractual rights against a sovereign are already quite fragile. While many of these participants have acknowledged that subjecting the activation of a stay to an affirmative vote of a qualified majority of creditors would be a preferable alternative, they are of the view that any generalized stay on enforcement would still be an unnecessary interference of contractual claims, particularly given the limited history of sovereign litigation."

To avoid misunderstanding the IMF closes its deliberations on the enforcement of a stay and unsecured claims:

"In any case, this feature could not be used to address cases where the litigation undermines the debtor's normalization of its relations with international financial institutions."



IMF (2002a) "Sovereign Debt Restructuring Mechanism - Further Considerations", (14 August) (mimeo)
IMF (2002b) "The Design of the Sovereign Debt Restructuring Mechanism - Further Considerations", Prepared by the Legal and Policy Development and Review Departments (In consultation with the International Capital Markets and Research Departments) November 27 (mimeo)
Krueger, Anne (2002a) "New Approaches to Sovereign Debt Restructuring: An Update of Our Thinking", (1 April), http://www.iie.com/papers/krueger0402.htm