27 September 2010 | By James Swift
In investment circles they are known as distressed debt funds or specialist situation funds - to everyone else they are vulture funds.
Such vehicles buy up sovereign debt at bargain rates and then sue the debtor for the full amount plus interest charges and legal fees.
In 2007, in one of the most high-profile vulture fund cases, British Virgin Islands fund Donegal International attempted to sue the Zambian government for around $55m (£35m) for a $15m debt it had bought from the Romanian government for around $3.3m. The High Court awarded Donegal $15.5m.
At least 54 companies are known to have brought these kinds of actions, suing the world’s 12 poorest nations for a total of more than £1.2bn.
There are arguments made in favour of vulture funds: that the funds are a necessary part of the financial ecosystem, and that repeatedly forgiving debt only serves to prop up incompetent or corrupt governments.
But even if you ignore the rights and wrongs, gaping inequalities exist when debtor countries try to defend themselves.
Indebted countries cannot afford to hire the same quality of lawyers as the vulture funds can and cases rarely take place on the debtor country’s home turf - the loan agreements are usually governed by UK or US law and actions brought in London or New York. There are even instances of the debtor country going to court without having seen the transfer agreement between the original creditor and the vulture fund.
But one organisation is trying to redress this imbalance. The African Legal Support Facility (ALSF) is seeking to arm poor countries facing vulture funds with the expert lawyers needed to fight them. The Tunis-based organisation was created under an initiative of the African Development Bank and African finance ministers in 2009, becoming operational in March 2010.
“It’s not a question of being for or against vulture funds,” says ALSF legal counsel Coumba Doucoure Ngalani. “It’s about sending out the message that African states have access to good lawyers too.”
The ALSF is funded by contributions from the African Development Bank, its member countries and non-members too. In total it has 45 members, made up of 42 countries and three organisations.
As well as helping regional member countries (RMCs) address litigation brought by vulture funds, the facility has two other mandates: to help RMCs access technical legal advice when negotiating complex commercial transactions, especially those relating to natural resources, and to help build legal knowledge and capacity in Africa by organising seminars and workshops with legal experts.
Since it started working on cases in March the ASFL has had 15 requests. One is a project helping Djibouti - a small country on the horn of Africa, bordering Eritrea, Ethiopia and Somalia - renegotiate port concessions by procuring international law firms to advise the government so as to stop it getting a raw deal.
Another project is helping the Somalia-based Pan-African Lawyers’ Union organise seminars across the continent to get international lawyers to share their knowledge on complex commercial agreements.
ASLF has a small technical staff and Ngalani is one of only three lawyers, the other two being Portuguese- and New York- qualified, respectively. Ngalani says the ASLF needs more personnel, but adds that finding lawyers with the appropriate international profile can be hard.
Before joining the organisation Ngalani spent four years in the capital markets department of Allen & Overy, which represented Donegal in its claim against Zambia, billing £1.7m.
“Working in an international organisation is a different world from private practice. You need to analyse every aspect of a situation and take into account a variety of interests before making any decision,” explains Ngalani. “And now I’m working with governments I can really see the difference - you can’t deal with governments the way you do with private practice clients.”
Ngalani says the response from law firms has been extremely positive, with lawyers clamouring to get involved. And with top firms on board, there is every chance that the organisation can turn the tables on vulture funds, even if it is just once or twice.
“If we can at least win one or two cases,” stresses Ngalani, “that would be a great victory and show that having good lawyers and instructing good international law firms can help.”