See: Involving the Private Sector in the Resolution of Financial Crises—Standstills— Preliminary Considerations (SM/01/08, 01/09/01).
See: Seminar on Involving the Private Sector in the Resolution of Financial Crises—The Restructuring of International Sovereign Bonds—Further Considerations (EBS/02/15, 1/31/02); A Balance Sheet Approach to Financial Crises (WP/02/210); and Crisis Resolution in the Context of Sovereign Debt Restructuring—A Summary of Considerations (SM/03/40, 1/29/03).
Clearly, in cases in which members maintain very restrictive capital account regimes, the risk that default could trigger unstoppable capital flight is likely to be more manageable.
Of course, where only certain claims are in default, there is still a risk that other claims will also be accelerated through the activation of cross-default provisions or through default clauses that are triggered by the activation of the SDRM itself. As noted in the November paper, however, this risk is reduced when the claims that could be accelerated are being serviced and, as is proposed under the SDRM, the claims could be de-accelerated by the debtor at the time of the approval of the restructuring agreement (see paragraphs 146 and 181 of the November paper).
For example, one could envisage designing the rule where, in these circumstances, the litigant would actually be liable to the debtor for an amount equivalent to the value of the creditor’s enforcement recovery that exceeds the amount it would have received under the agreement. For example, in the event a creditor holding a claim with a face value of $10 million seizes assets worth $6 million through judicial enforcement, it would receive nothing under a restructuring agreement that provided for a 50 percent reduction in the original face value of the claim. Moreover, it would be liable to the debtor for $1 million, the amount by which the litigation recovery exceeds the amount that the creditor would have received under the agreement.
This feature may not become operational immediately upon activation since it may take some time for a representative committee to form. However, such delays could be reduced if the debtor successfully encourages creditors organize into a committee prior to activation.
During the workshop and the conference, some panelists also suggested that, by analogy with national judicial systems, the DRF could be given limited powers to impose non-monetary sanctions for a creditor’s actions, such as bad faith or abuse of the judicial process. This could include, for example, exclusion from the voting process. The purpose of such sanctions would be to ensure expeditious and cost-effective proceedings. The limited sanction powers of the DRF could be supplemented in the amendment by authorizing domestic courts to impose civil or criminal sanctions for fraud (e.g., forgery).
It is instructive to note the manner in which the bankruptcy rule-making process under U.S. law strikes a balance between the authority of the judicial organ to prescribe procedural rules and the oversight of the legislative body. Under U.S. law, the Supreme Court has the power to prescribe general rules on bankruptcy practice and procedure. The Supreme Court must transmit such procedural rules to Congress by May 1 of the year in which the rules are to become effective. Congress, in turn, has a statutory period of at least 7 months to act. If Congress does not enact legislation to reject, modify or defer the procedural rules, they take effect on December 1 of the year in which they were transmitted to Congress. (The Rules Enabling Act, Title 28 U.S.C. §2075)
Pending outcome on discussions regarding the treatment of official bilateral claims under the SDRM.
If official bilateral claims are included under the SDRM, they would also vote as a separate class for purposes of a stay on enforcement and priority financing.