On 12 March 2012, Greece announced that it had completed the exchange of the EUR 177,252,131,542 outstanding principal amount of bonds issued by the State and governed by Greek law pursuant to its invitations of 24 February 2012. Given that 85.8% of holders of those Greek law bonds apparently tendered their bonds in the exchange, the remaining holders are purportedly dragged along by virtue of the collective action clauses (CACs) inserted into the Greek law bonds by the Greek Bondholder Act, an emergency piece of legislation passed by the Greek parliament on 23 February 2012. It remains to be seen whether the Greek Bondholder Act and the insertion of CACs into Greek law bonds pursuant thereto will be upheld on challenge. Potential challenges exist under Greek law, under US Securities law, and under international law, particularly under the terms of the Greek-German bilateral investment treaty.

But what of Greece's English law bonds? Those bonds contain a form of collective action clause which allow a 66% or 75% (depending on the series) majority to bind all holders in a given series. Greece had hoped that the exchange announced on 24 February 2012 would lead to majority participation in each series, so it could thereafter purport to drag along any hold-outs using the contractual CACs. That strategy has not thus far proved successful. Only 69% in aggregate of bonds governed by laws other than Greek law (i.e. English and other bonds) had been tendered in the exchange by the initial closing date of 8 March 2012, and Greece was therefore forced to extend the deadline to 23 March 2012. Greece hopes that the extra time will dislodge further hold-outs and allow Greece to get over the line for application of the CACs.

Holders of Greece's English law bonds therefore wish to know what will happen if either (i) there are sufficient hold-outs in a given series to block an exchange of that series; and (ii) there are not sufficient hold-outs so that an English-law series is purportedly exchanged.

As to (i), the simple answer is that the bonds therefore remain intact....for the time being.

Greece has already indicated, even if in fairly oblique terms, that it is prepared to negotiate with hold-outs after the main exchange has completed. The Invitation Memorandum for the exchange provides that the Republic reserves the right in its sole discretion to purchase, exchange, offer to purchase or to issue an invitation to submit offers to exchange or sell any bonds that are not exchanged or submitted pursuant to the Invitation. This is pretty much a reference to hold-outs who are not dragged along. If Greece tries but fails to get rid of hold-outs at that stage, then again, the bonds will remain intact...for the time being. Using its best powers of persuasion, Greece warns those hold-outs that bonds still outstanding at that stage will suffer from a significantly limited trading market, and there is no assurance that such securities will remain listed. As a result, Greece warns, the market price may be adversely affected, and they may not continue to be recognised as eligible collateral for Eurosystem monetary policy and intraday credit operations by the Eurosystem. Greece is threatening that if you hold out, you may end up with a worthless bond.

Some people have asked whether Greece might try to use Greek legislation, something akin to the Greek Bondholder Act, to mop up persistent hold-outs in English law series. Thus far, Greece has not suggested that it would do so. However, stranger things have happened.

Ireland has purported to use emergency Irish legislation to effectively devalue instruments governed by English law. There are outstanding challenges to the Irish legislation and it may be that an Irish or English court ultimately rules the legislation to be unlawful. In any event, Ireland's argument is that bank restructurings are governed by EU legislation governing credit institutions. There is no equivalent EU legislation for sovereigns.

Further, a recent decision of the English Commercial Court emphasises that a foreign restructuring/composition plan will not automatically discharge a debtor from liability under a contract governed by English law. In Global Distressed Alpha Fund I Limited Partnership v PT Bakrie Investindo, the Defendant (“Investindo”) issued $50m 9.625% guaranteed notes (the “Notes”) via a Dutch SPV in 1996 pursuant to a Fiscal Agency Agreement (the “FAA”). The Notes were due to mature in 1999 and repayment was guaranteed by Investindo under a Deed of Guarantee. Both the FAA and the Guarantee were subject to English law. Following the Asian financial crisis in 1997 there was an almost immediate default under the Notes. Then, in 2000-2001 Investindo underwent a restructuring, in which its debts were discharged as a matter of Indonesian law under a composition plan which was approved by the requisite proportion of creditors and the Indonesian court. Creditors were offered shares in related Bakrie entities. Investindo nevertheless continued to exist as a company, albeit a dormant one, so it claimed. The Claimant (“GDAF”) purchased $2m of Notes in late 2009 via Cleasrtream/Euroclear and sough to enforce the Guarantee. The claimed was issued just before the expiry of the limitation period.

The question for the English Court was: does the foreign restructuring discharge the company from its liability under the contract?

It was held that the answer is no; the restructuring in Indonesia did not automatically discharge Investindo from its obligations under the Guarantee. Consequently it was held liable to GDAF for $2m plus 5½ years of interest at 9.625%. The Judge held that he was bound by a decision of the English Court of Appeal from 1890, Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux. In that case a French company had agreed to purchase copper from the claimant. After making the contracts the French company had gone into liquidation and consequently did not accept or pay for the copper. The claimant claimed damages for the losses suffered on the resale of the copper. The defendant argued that the French insolvency discharged it from liability under the contracts and therefore operated as a total defence.

The Court of Appeal rejected this argument. The rationale for this decision was stated clearly, namely that French law was irrelevant because it was: “not a law of the country to which the contract belongs, or one by which the contracting parties can be taken to have agreed to be bound; it is the law of another country by which they have not agreed to be bound.”

In short, therefore, any attempts by Greece to use Greek legislation to amend the terms of English law would be very susceptible to challenge.

As to (ii), holders of English-law bonds who are dragged along by a majority in their series may seek to challenge the drag-along in the English Courts. As has been argued in Irish bank restructuring cases, minority holders who are dragged along could argue oppression of the minority, mis-use of the CACs, unlawful coercion by Greece as against holders, unlawful expropriation, breaches of Greek Constitutional law, European law (the ECHR) and/or international law.