Insolvency Principles and the Odious Debt Doctrine: The Missing Link in the Debate

By Dickerson, A. Mechele | Law and Contemporary Problems, Summer 2007 | Go to article overview

Insolvency Principles and the Odious Debt Doctrine: The Missing Link in the Debate


Dickerson, A. Mechele, Law and Contemporary Problems


I

INTRODUCTION

Politicians in this country, as well as many members of the international human-rights community, view it as fundamentally unfair that the Iraqi people may be saddled with the debts Saddam Hussein's brutal regime incurred. Further, some in the human-rights community generally argue that rich (creditor) countries have a moral duty or obligation to protect citizens of poor (debtor) countries and that richer nations should forgive the debts of poorer nations to help reduce existing inequalities between developed and developing countries. Until recently, arguments that successor governments should not be forced to repay the debts of former leaders or regimes relied almost exclusively on philosophical or humanitarian grounds. This article joins the attempt by scholars in the insolvency community to shift the discussion from the human rights, to the insolvency, arena.

The article does not attempt to outline a framework that should be used to determine whether a debt should be declared odious nor does it propose any specific entity that should have the authority to determine the odiousness of a debt. Instead, the article evaluates the doctrine of odious debts using the insolvency framework found in the United States Bankruptcy Code. Part II of the article provides a brief overview of sovereign lending and notes that entities that lend to, or invest in, sovereigns understand ex ante that many of the typical creditor remedies available upon default (such as repossession of collateral and replacement of managers) simply are not available in the context of sovereign lending. Since sovereigns are atypical debtors, their debt restructurings do not resemble the typical insolvency proceeding or out-of-court workout that involve business debtors.

Part III of the article then briefly describes the odious debt doctrine, discusses instances when it has been invoked to allow a sovereign to repudiate its debts, and briefly discusses the Iraqi debt situation. In considering what obligations a sovereign should have to repay a former regime's debts, the article emphasizes that even sovereigns who refuse to repay their debts cannot be liquidated and political leaders who refuse to repay the sovereign's debts cannot be replaced by lenders (at least not without military assistance). Thus, like consumers and businesses that reorganize in bankruptcy, financially troubled sovereigns will continue to exist notwithstanding their financial crises.

The article concludes by discussing instances where businesses are allowed to repudiate promises made to groups typically favored in our society (employees), are allowed to discharge debts owed to favored (often governmental) creditors, or, are allowed to subordinate certain creditor claims. Since debt restructuring is designed to rehabilitate people and businesses and to allow them to perform their core functions, courts allow debtors to break these promises if forcing debt repayment will prevent a business from rehabilitating itself in bankruptcy. The article argues that sovereign-debt restructurings should focus on the need both to rehabilitate the sovereign's finances and to allow the new leaders to perform the sovereign's principal "business" functions. Since the "business" of a sovereign is principally to provide for the needs of its citizens and to maintain the country's physical infrastructure, and a democratically elected government will be ineffective if it lacks the respect of its citizens or is unable to provide essential health and human welfare services for those citizens, it would be justifiable to forgive odious debts if forcing the sovereign to repay those debts would prevent the sovereign from restructuring itself politically and financially.

Finally, the article notes that an additional benefit to periodical invocation of the odious debt doctrine is that it reminds lenders that the doctrine may at some point gain acceptance in the international financial community. …

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