Restructuring Ruritania: Bankruptcy, Sovereign Debt, and the Equity Receivership

43 Pages Posted: 7 Dec 2023

Date Written: December 6, 2023

Abstract

The traditional legal story of sovereign restructuring goes something like this: Foreign governments cannot file for bankruptcy under domestic law. When faced with the need to restructure unsustainable debts, they must negotiate with each of their creditors. Since the late 1980s private debt has been held by increasingly diverse and dispersed bond holders, making renegotiation more difficult. Defaulting debtors face two basic problems: First, they have no process analogous to the automatic stay in bankruptcy, which can pause litigation by creditors and buy time for an orderly reorganization. More importantly, they have no process analogous to the cramdown provisions of Chapter 11, whereby new terms can be imposed on non-consenting creditors. As a result, sovereign reorganizations are at the mercy of holdout creditors, who can extract concessions at the expense of other creditors. This creates economic uncertainty with attendant lower growth rates and ultimately imposes additional hardship on the sovereign's tax payers. This article argues against the conventional wisdom, showing how it is possible for a sovereign debtor to use existing law to stay pending or future litigation and impose new terms on hold out creditors. This can be done with the venerable equity receivership, a legal device used to reorganize corporate debtors prior to the adoption of the first modern bankruptcy code in the 1930s. In effect, sovereign debtors can be treated like a 19th-century railroad in need of reorganization. To be sure this procedure would reach only American law governed debt, but the ability of sovereigns to resolve the hold out problem for all of their dollar denominated debt could dramatically simplify restructurings. Even if finance ministries are hesitant to avail themselves of such a novel and untested legal theory, the possibility of being able to cramdown new terms against holdout creditors may ease the process of negotiated restructurings.

Keywords: Bankruptcy, reorganization, Sovereign Debt, equity receiverships

Suggested Citation

Oman, Nathan B., Restructuring Ruritania: Bankruptcy, Sovereign Debt, and the Equity Receivership (December 6, 2023). Available at SSRN: https://ssrn.com/abstract=4656147 or http://dx.doi.org/10.2139/ssrn.4656147

Nathan B. Oman (Contact Author)

William & Mary Law School ( email )

South Henry Street
P.O. Box 8795
Williamsburg, VA 23187-8795
United States

HOME PAGE: http://www.nathanoman.com

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