Bringing Rule of Law and Fairness to the Dysfunctional World of Sovereign Debt: A Role for Canada?
Restructuring sovereign debt has long proved challenging: There is no formal regime for sovereign insolvencies similar to those that that govern domestic bankruptcy and insolvency and attempts to create one by international treaty have been met with political resistance. Currently, sovereign debt restructuring is governed by the debt contracts themselves along with the background law in the jurisdiction in which the debt is issued. Sovereign immunity also protects most state assets from seizure. These ad hoc restructuring processes are plagued by unpredictability, however, and there are incentives for individual creditors to "hold out," demanding full repayment of their claims and thereby undermining a necessary restructuring. Judicial decisions in recent years regarding debt governed by New York law have only strengthened the hand of these holdout creditors. While modifications to standard terms in sovereign debt contracts can go some way towards improving the current situation, this paper proposes that a superior option is the adoption of a Model Law on sovereign debt restructuring by at least one appropriate jurisdiction. Under the Model Law approach, sovereigns could issue debt in a jurisdiction that has enacted a law providing for a fair, orderly, and predictable restructuring in the event that a sovereign's debt becomes unsustainable. Due to its well-developed financial markets and reputation for the rule of law, this paper argues that Ontario, supported by Canada, would be an appropriate jurisdiction to enact such a law. This article further argues that a collaborative legislative approach between Ontario and federal Parliament would best ensure the constitutional validity, and therefore stability, of this novel and innovative proposed regime.
