The Government has requested the US District Court for the Southern District of New York to extend its stay of proceedings in the case filed by Hamilton Reserve Bank (HRB) over its $ 250 million in principal and interest in International Sovereign Bonds (ISBs).
In its request, the Government pledged to provide an update by 6 January 2025, by which time it anticipates confirming the successful conclusion of its restructuring efforts.
According to the Defendant, the Democratic Socialist Republic of Sri Lanka, this extension is crucial for finalising the process and ensuring the country’s economic recovery, a core goal under the IMF-supported program. However, HRB, the Plaintiff in the ongoing litigation, has filed a partial opposition, adding complexity to the matter.
Moving a reply Memorandum of Law in support of the Defendant’s motion for further stay of proceedings, the Attorneys for the Defendant confirmed to the court that Sri Lanka’s restructuring initiative has made significant progress. Accordingly, the Exchange Offer and Consent Solicitation launched on 25 November, has garnered strong participation, with 73% of holders of the 2022 Bonds agreeing to the exchange. Other Bond series have seen participation rates exceeding 95%. Despite this progress, HRB, which holds 25% of the 2022 Bonds, has refused to participate in the exchange, maintaining its legal claims.
In its Memorandum, the Government emphasises that continued court stays have been instrumental in facilitating negotiations with creditors in the past. These stays have allowed Sri Lanka to align creditor terms with IMF requirements and ensure equitable treatment across stakeholder groups. Agreements reached with bilateral creditors and private bondholders earlier in 2024 laid the groundwork for the current debt exchange.
HRB, however, argues that the rationale for a stay no longer applies after the debt exchange’s 12 December 2024, deadline. According to HRB’s partial opposition, all Bondholders, including HRB, have already decided whether to participate, rendering the extension unnecessary. HRB asserts that post-deadline steps — such as announcing results, issuing new bonds, and making payments — are procedural and unrelated to the litigation. HRB has requested that the court deny any stay extending beyond 12 December.
HRB’s position also highlights a critical distinction: the restructuring process does not directly impact HRB’s holdings of the 2022 Bonds. The bank has confirmed its refusal to participate in the exchange, and Sri Lanka has acknowledged that the terms of the 2022 Bonds will remain unchanged. This confirmation strengthens HRB’s argument that the litigation should proceed without further delay, as the restructuring does not affect its claim for $ 250 million in principal and interest.
Sri Lanka’s legal team counters that a stay is still necessary to ensure the restructuring process reaches its conclusion without disruption. They warn that premature legal action could undermine the broader restructuring effort, potentially deterring other creditors or creating legal uncertainty. The Government argues that any delays in resolving HRB’s claims will not harm the bank, as accrued interest will compensate for the wait.
Domestically, the successful completion of the restructuring is vital for Sri Lanka’s economic recovery. The process aims to stabilise public finances, create fiscal space for development, and fulfil commitments to both domestic and international stakeholders. However, the Government’s management of the crisis has faced criticism. Allegations of inefficiency and corruption in state institutions have raised concerns about the administration’s ability to deliver on its promises and implement necessary reforms.
Analysts opined the Court’s decision on the requested stay will have significant implications for Sri Lanka and the global financial community. A ruling in Sri Lanka’s favour would allow the Government to complete the restructuring process and set a precedent for handling similar cases. Conversely, a denial could accelerate HRB’s litigation, potentially complicating the recovery process.
The proposed update on 6 January 2025, is expected to confirm the restructuring’s completion. This milestone would mark a turning point for Sri Lanka, providing the foundation for economic stability and growth. The outcome of this case will likely influence how courts and policymakers address future sovereign debt disputes, balancing the interests of individual creditors with the broader goals of economic recovery, analyst added.
