A "vulture" fund seeking more than $55m (£27.5bn) from Zambia had its wings clipped in the high court yesterday by the judge who limited its claim to $15.5m and cut its award of costs because of its "dishonesty".
The judge also refused an application to extend a freezing order on Zambian assets in Britain to include assets held abroad, again citing the company's dishonesty.
US company Donegal International had purchased some Zambian sovereign debt from Romania in 1999 for $3.2m. It then pursued Zambia for the face value of the debt but agreed with the impoverished African nation in 2003 to accept $16m.
Zambia paid $2.5m that year before ceasing payment. Under the terms of the deal, any default meant the full value of the debt plus back interest, a total of $44m, would be payable. Interest since then took the claim to $55m.
Mr Justice Andrew Smith ruled in February that the 2003 agreement was legal but that the ratcheting up of the amount payable in the case of default was penal and struck it out. Yesterday he confirmed that the award would total $15.5m, the original amount outstanding plus $2m of interest.
He repeatedly criticised Donegal owner Michael Sheehan, and other witnesses Philip O'Rourke and Fisho Mwale, a former Mayor of Lusaka, for dishonesty.
"I do regard the dishonesty with which I was confronted to be rather serious ... I cannot regard this as a few casual lies in the witness box," he said. Much of the Donegal witnesses' evidence was dishonest, the judge said.
As a result, he cut the award of costs to Donegal by a third, especially as Zambia had suffered extra costs of having to bring people from Zambia to rebut the Donegal witnesses's dishonest statements. Donegal's lawyers, Allen & Overy, were claiming £1.7m in costs so the judge's ruling will cost Donegal £600,000.
Mr Anthony Trace QC, for Donegal, admitted his clients had been "cavalier" but insisted they had won judgment on the 2003 Zambia deal and would have even if his clients had been "thoroughly dishonest". Allen & Overy refused further comment.
The judge did grant Donegal a 28-day freezing order on assets held by a Zambian company, Mofed Ltd, in Britain, worth about $10m, but refused to extend the order to Mofed assets held worldwide.
"I am not prepared, in all the circumstances, not least the conduct of Donegal in these proceedings, to extend the [freezing] relief on Mofed assets worldwide."
Donegal had also sought to lay claim on assets that Zambia may win in a separate trial in London against former president Frederick Chiluba and others for corruption. Judgment is due on May 4 so Mr Justice Smith deferred his decision.
Donegal hopes that if Zambia wins that case and gets more than $5m, it can claim the difference between the $10m of frozen Mofed assets and what it is owed.
Debt campaigners welcomed the judgments. "We are extremely happy that Zambia's tenacity in fighting this case has seen the claim reduced by $40 million," said Trisha Rogers, director of Jubilee Debt Campaign.
International development secretary Hilary Benn said: "This is the first defence in a case of this kind that has ever been even partially successful, and its impact will be felt across the world. Vulture funds cannot continue to expect to profit from the world's poorest countries. The UK will help heavily indebted poor countries limit the impact of vulture funds."
Zambia was represented by William Blair QC, the prime minister's brother.
Backstory
Vulture funds prey on hapless countries who lack funds for basic health care or education, let alone paying millions of dollars to overseas investors. Often operating through shell companies in the Caribbean, they buy debt obligations in secondary markets at a fraction of their face value in the hope of enforcing them through the courts at full value. Commercial banks often sell the debt cheaply because of the low probability of it being repaid.
