hammer.jpgA “vulture fund” won a  court case against  Zambia on Thursday. The British High Court ruled that Donegal International, based in the British Virgin Islands, had the right to receive some payments for Zambian sovereign debt that it bought at a heavy discount. The debt, originally owed by Zambia to Romania, was bought by Donegal in 1999 for less than $4m. It emerged that Donegal  was seeking $55m in payment for the full value of the debt, higher than the $42m earlier thought, after a “settlement   agreement” in 2003 between Donegal and Zambia. Zambia had claimed in court that the debt was invalid as there was evidence  that Donegal’s local agent had bribed civil servants to pass the debt to Donegal rather than allowing Zambia to pay it off  at a heavily discounted rate to Romania. Zambia ceased making payments under the settlement agreement in 2004.

Issuing judgment, Mr Justice Andrew Smith rejected the contention of bribery. The judgment of how much should be paid
to Donegal was postponed but Mr Justice Smith said that the full claim was unlikely to be justified.

The high court ruled that a claim against Zambia by the US company Donegal International, owned by US citizen Michael Sheehan, for debts incurred by the impoverished southern African nation more than a decade ago, was lawful.

Zambia was represented by the prime minister’s brother, William Blair QC.

Donegal is claiming about $55m, a sum representing a 1,400 per cent return on its initial investment,  from Zambia but it is thought this will be reduced to around $20m when the parties meet in court again next month and the judge, Justice Andrew Smith, decides how much interest Zambia has to pay.

He ordered that Zambian assets in the UK be frozen in the meantime.

Oxfam and the Jubilee Debt Campaign said that Donegal – a vulture fund registered in the British Virgin Islands – should not accept any of the money because Zambia, one of the poorest countries in the world, has qualified for debt relief and desperately needs the money.

“It is clear that while the actions of Donegal International were not strictly illegal, they were immoral,” said Adrian Lovett, director of campaigns and communications at Oxfam. “Donegal should not take the money.”

Trisha Rogers, director of Jubilee Debt Campaign, said: “There is a clear need for a fair, comprehensive and binding framework for dealing with poor country debt which will ensure that commercial creditors will never again have the chance to profit in this way. ”

Donegal bought the Zambian debt, with a face value of around $30m, from Romania in 1999, for less than $4m. Zambia had run up the debt, mainly for agricultural machinery, during the Cold War.

Zambia approved the Donegal purchase at the time and later agreed to pay Donegal $15m for it.

The judge had little choice but to say the contract was binding, although he is thought unlikely to allow Donegal’s claim that interest and costs have inflated the amount to $55m.

The amount claimed by Donegal is more than the total debt relief Zambia is due to receive as agreed at the G8 meeting in Gleneagles in 2005.

Gordon Brown has condemned vulture funds and a Treasury spokesman said: “By depleting the resources of developing countries’ governments, these companies reduce the funds available for schooling and hospital treatment. This behaviour is socially irresponsible.”

Oxfam and Jubilee urged the chancellor to use his influence as chair of the International Monetary Fund’s key decision-making committee to make sure that new regulations are devised that prevent private companies from bypassing international debt rules and pursuing debts from very poor countries.

The judge did not let Donegal off lightly. “I have been driven to conclude that they were at times being deliberately evasive and even dishonest,” he said.

Mr Sheehan was “not merely careless but cavalier in presenting his evidence”.

He pointed out that delays had been caused to the trial because “put at its kindest, some of Donegal’s witnesses were less than candid”.

BBC’s Newsnight broadcast a report on Wednesday night purporting to show an email from Mr Sheehan offering $2m to the then president Frederick Chiluba’s favourite charity when Donegal bought the debt.

Mr Blair called it a “bribe” but Mr Sheehan told Newsnight it was a “charitable initiative”.

The US Justice Department later asked the BBC to hand over the documents to assess whether Mr Sheehan, a resident of Washington DC, had committed a crime under the US Foreign Corrupt Practices Act.

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