The Missing Element of a Single Limb Voting Procedure: Fair and Equitable Treatment Standard in Sovereign Debt Restructuring

Abstract

On 6 October 2014, the Executive Board of the International Monetary Fund (“IMF”) approved the staff paper on “Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring”. Among other things, the staff paper advocates in favor of a single Collective Action Clause (“CAC”) with a menu of voting procedures, including (1) a series-by-series voting procedure, (2) a two-limb aggregated voting procedure, and (3) a single-limb voting procedure with the possibility for “sub-aggregation”.

The single-limb voting procedure in option (3) will enable contract terms to be amended on the basis of a single vote across all affected instruments, thereby disallowing a creditor or a group of creditors to obtain a blocking position in a particular series. In the view of the author, the single-limb voting procedure resembles the cram-down procedure in the U.S. municipality bankruptcy law, with the exception of one missing element. Whereas the cram-down procedure contains a safeguard provision that ensures minimum protection for each impaired dissent creditor class through the prohibition of unfair discrimination and fair and equitable treatment principle, the single-limb voting procedure is silent about creditor protection in this context. In searching for a safeguard provision for the single-limb voting procedure, the author discovers the similarities between the safeguard provision for cram-down procedures and the fair and equitable treatment principle under investment treaties, and argues that investment arbitration could serve as an appropriate forum to develop a safeguard provision for the single-limb voting procedure.

Keywords: Sovereign debt, Collective Action Clause, IMF, Fair and Equitable Standard

JEL Classification: H63, F34, K33