So-called ”vulture funds” are also known by the less pejorative term ”distressed debt funds” on account of the fact that they traditionally purchase debt in default – very often sovereign debt.
Such debt acquisitions are typically made at a substantial discount to the face value of the debt, with a view to either enforcing the debt or selling it at a far higher price, thereby generating potentially significant profits.
Vulture funds have been widely criticised for using aggressive tactics to enforce the debts of impoverished countries, draining their already limited funds and preventing spending on public services. However, their defenders would argue that, in enforcing sovereign debts, vulture funds bring the accountability required for healthy credit markets, and that the litigation they commence often reveals corruption within the state against which they are seeking to enforce.
In 2010 the United Kingdom parliament significantly curtailed the activities of vulture funds in the jurisdiction, by passing the Debt Relief (Developing Countries) Act 2010, which limits the amount commercial creditors can recover from countries designated as having unsustainable external debts [1].
The official summary of the Act stated that it would ”restrict the activities of so-called ‘vulture funds’, which buy developing countries’ sovereign debt at discounted prices, then seek to recover its value in full through the courts”. Later, in 2012, Jersey parliamentarians followed the UK Parliament, passing the Debt Relief (Developing Countries) (Jersey) Law 2013 under the same terms as the United Kingdom Act (the “Jersey Act”) [2].
A recent example of distressed debt litigation came before the Jersey Courts (prior to the introduction of the Jersey Act), in La Générale des Carrières et des Mines v F.G. Hemisphere Associates LLC [2012] UKPC 27.
In that case, FG Hemisphere (FGH) sued the Democratic Republic of Congo (the DRC) in Jersey for recovery of $100m. FGH had purchased arbitration awards against the DRC which had arisen from loans originally worth US$3.3m from Yugoslavia to build power lines in the DRC, and sought to enforce the awards against assets in Jersey of La Générale des Carrières et des Mines (Gécamines) a state-owned mining company.
The Jersey Courts upheld FGH’s claim, ordering that the DRC’s debt be paid out of the assets of Gécamines.
However, the Privy Council overturned the decision of the Jersey Court of Appeal, holding that the circumstances in which a state-owned entity will be regarded as ”an arm of the State” (and thereby vulnerable to enforcement action by a creditor of the state in respect of state debt) are extremely narrow and that the strong presumption is that the separate corporate personality of a state-owned entity should be respected.
Following the decision in the Gécamines case and the introduction of the Debt Relief legislation, the Courts of England and Wales, Guernsey, Jersey and the Isle of Man are likely to be far less fruitful hunting grounds for vulture funds.
Sean McGuiness is an associate in the litigation & regulatory group at DLA Piper
[1] The Act limits successful claims to an internationally agreed level and apply equally to all commercial creditors and covers the 40 countries in the IMF/World Bank Heavily Indebted Poor Countries (HIPC) initiative.
[2] Legislation in the Isle of Man and Guernsey mirrors that of England and Wales and Jersey, whilst similar legislation has been passed in Australia and Belgium.
