Argentina’s priority payment on its restructured sovereign debt



Argentina’s external debt instruments have been a source of litigation before domestic and international courts since the country defaulted in 2001-2002 on $100bn of sovereign bonds issued in accordance with a 1994 Fiscal Agency Agreement (FAA Bonds), and since it restructured more than 90 percent of them through its 2005 and 2010 bond exchanges. The first debt swap had enabled Argentina to restructure its external debt with 76.1 percent of its creditors and the second debt swap with approximately 93 percent of them, the remaining ones being ‘holdout creditors’.

The debt swaps had resulted in the issuance of new bonds (Exchange Bonds) worth 70 percent less than the original bonds’ face value, which entitled the exchange bondholders to a single instalment of interest on their bonds. NML Capital Ltd and 18 other plaintiffs (holdout creditors) sued Argentina before the US federal courts. They argued that Argentina’s payment of interest on exchange bonds without full payment of the interest and the principal on the FAA Bonds had breached the terms of the FAA. The latter agreement stipulated that Argentina had to pay back interest and the entire capital on FAA Bonds in the event of a default on the bonds. Moreover, the FAA called for equality of treatment between the proportion paid on FAA Bonds and that paid on any restructured bonds issued after the conclusion of the FAA (rateable payment clause). Finally, the FAA stated that any dispute over the FAA Bonds fell within the jurisdiction of New York courts and was subject to New York law.

In the case NML Capital Ltd et al. v. Argentina, the US District Court for the Southern District of New York (District Court) had partially granted the action brought by NML Capital Ltd and 18 other plaintiffs against Argentina. The District Court prohibited the latter from paying back the exchange bondholders without any corresponding payment made to the plaintiffs. The US Court of Appeals, Second Circuit (Court of Appeals) partially overruled and partially remanded the District Court’s injunctions in its October 2012 decision. On 21 November 2012, the District Court on remand delivered amended orders (Injunction Orders), which clarified the payment formula underpinning the challenged injunctions and the effects of these injunctions on third parties and intermediary banks.

Argentina claimed that the Injunction Orders, which prohibited it from paying back the exchange bondholders unless it made comparable payments to the plaintiffs, had caused injuries to its country, to the exchange bondholders, to participants in the exchange bond payment system and to the public interest. The Court of Appeals, in its decision of 23 August 2013, affirmed the District Court’s Injunction Orders and dismissed Argentina’s claims of abuse of discretion by the District Court. The decision of 23 August was the object of a petition for a writ of certiorari before the US Supreme Court. On 18 November 2013, the Court of Appeals refused to reconsider its earlier decision of 23 August, which had the effect of requiring Argentina to pay approximately $1.33bn to FAA bondholders pursuant to the FAA’s rateable payment clause. The US Supreme Court, in a decision of 16 June 2014, rejected the petition for a writ of certiorari, thereby precluding it from reviewing the lawfulness of the Court of Appeals’ decision of 23 August 2013 independently of the judgment on the merits. On 29 September 2014, US District Judge Thomas Griesa, in response to Argentina’s lack of compliance with the Court of Appeals’ decision of 23 August 2013, found Argentina to be in civil contempt of court, and reserved its penalty for a subsequent hearing. Following the Contempt Order, Argentina filed an application instituting contentious proceedings against the United States before the International Court of Justice (ICJ), alleging that the US federal decisions in the case NML Capital Ltd et al. v. Argentina had breached the international law principles of national sovereignty and of State immunity.

The focus in this article will be on the Court of Appeals’ decision of 23 August 2013, which precipitated scrutiny of the issue of sovereign debt restructuring by the UN institutions. The Court of Appeals recognised at the outset that the dispute between Argentina and the plaintiffs (i.e., original FAA bondholders) raised questions of contract law even though it responded to Argentina’s grounds of appeal in both legal and policy-oriented terms.

On the merits of the case, the Court of Appeals first assessed whether the injunction orders had unjustly injured Argentina per se. The Court of Appeals rejected Argentina’s claim that the injunction orders had violated the Foreign Sovereign Immunities Act (FSIA). The Court of Appeals ruled that the injunction orders were not in breach of the FSIA, as they did not amount to a seizing of, a forcible restraint on, or an act of legal ‘dominion’ over Argentina’s property. The injunction orders did not select the resources from which Argentina had to pay the FAA bondholders and thus did not qualify as ‘attachment’, ‘arrest’ or ‘execution’ on Argentina’s property in the United States.

Second, the Court of Appeals found ill-grounded Argentina’s claim that the injunction orders had caused injuries to Exchange Bondholders by inflicting on them “unreasonable hardship or loss” in their capacity as third parties. The Court of Appeals pointed out that Argentina had expressly refused to provide any formal assurance to Exchange Bondholders, prior to their accepting the exchange offers, that the dispute over the FAA Bonds would not impact upon the payments required by the Exchange Bonds. In any event, even if Argentina did default on the Exchange Bonds, the Exchange Bondholders would still be in a position to launch judicial proceedings against Argentina.

Third, the Court of Appeals dismissed Argentina’s and the amici curiae’s contention that the injunction orders, by targeting participants in the international financial system through which Argentina makes payments to Exchange Bondholders, had been founded on a lack of personal jurisdiction, had breached the principle of comity and had infringed upon non-parties’ due process rights. The Court of Appeals ruled that any District Court’s injunction automatically binds “persons who are in active concert or participation” with the direct parties to the decision by virtue of Rule 65(d) of the Federal Rules of Civil Procedure. It found that the District Court had not lacked personal jurisdiction since it had merely warned payment system participants that their liability could be engaged should they provide any assistance to Argentina in disobeying the injunction orders. When addressing the relevance of comity to the case at hand, the Court of Appeals clarified that the injunction orders had not imposed a prohibition on any foreign entity aside from Argentina: the reference to specific foreign payment participants was only meant to acknowledge the applicability of Rule 65(d). As regards the question of whether the due process rights of non-parties had been denied, the Court of Appeals held that, if persons actively assisted Argentina in breaching the District Court’s Injunction Orders pursuant to Rule 65(d), they would be given notice and be granted the right to be heard in subsequent proceedings.

Fourth, the Court of Appeals dismissed Argentina’s claim that the injunction orders would have an adverse impact on the capital markets and on the global economy. The Court of Appeals ruled that Argentina’s claim was premised on speculative and exaggerated consequences. In particular, the Court of Appeals took the view that the injunction orders would not dissuade other bondholders from entering into future sovereign debt restructurings (contrary to Argentina’s claim) since more recent bond arrangements tend to stipulate ‘collective action clauses’ which enable a qualified majority of bondholders to extend the effects of a restructuring plan to holdout creditors.

The Court of Appeals also held that the injunction orders would not deter bond issuers from the New York financial market. Whereas New York law does not preclude borrowers and lenders from freely negotiating financial transactions, borrowers shall be held liable for any breach of the terms of transactions they have agreed upon. Requiring any debtor to pay back the bonds it has issued is essential to preserving New York as one of the leading financial platforms worldwide.

The above litigation raises the questions of how to impose a foreign debt restructuring scheme accepted by a majority of bondholders on a minority of recalcitrant bondholders in the absence of inclusion of a collective action clause in the bond exchange offers and of how to protect the integrity of a foreign debt restructuring scheme from actions for full recovery of their receivables launched by holdout bondholders. As the UN Secretary-General (UNSG) pointed out in his Report of 22 July 2014 (UNSG’s Report), whereas more recent bond agreements have stipulated collective action clauses, an important number of older bonds that have not yet expired do not include such clauses.

The UNSG rightly signalled that the US federal decisions in NML Capital Ltd et al. v. Argentina may discourage bondholders not bound by a collective action clause from entering into a foreign debt restructuring scheme given the absence of guarantee that they will not be superseded by holdout creditors who will have maintained their original title to the full amount of their bonds. It must also be agreed with the UNSG’s Report that what is currently missing in the international financial sector is an “international debt workout” that would obviate the absence of “clear sovereign insolvency procedures”. As a follow up to the UNSG’s Report, the UN General Assembly (UNGA), in its Resolution of 17 September 2014, called for the adoption by the end of 2014 of a “multilateral legal framework for sovereign debt restructuring processes” designed to enhance the international financial system’s efficiency, predictability and stability.


Nora Wouters is a partner and Dr Nicolas Croquet is an associate at McKenna Long & Aldridge LLP. Ms Wouters can be contacted on +32 2 278 1215 or by Dr Croquet can be contacted on +32 2 278 1292 or by email:

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Nora Wouters and Dr Nicolas Croquet

McKenna Long & Aldridge LLP

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