The Parliamentary Commission on the secret $2 billion debt said that the government guarantees were unconstitutional and that the loans should be seen purely as loans to three private companies.
Nevertheless, it advised that the guarantee should not be rejected, in part because any judgement would be in an English court, and in part because such a public hearing would put Frelimo officials at risk of local court judgements.
However, discussions in London suggest that Mozambique would receive a more friendly response in English courts than it expects, and could refuse to recognise the guarantee of the secret debt.
The Ematum loan was a public bond issue and has already been rescheduled. But Credit Suisse and the Russian state bank VTB made secret loans to MAM (Mozambique Asset Management) and Proindicus, which were then syndicated to other lenders (who have formed a creditors committee). These loans had the controversial guarantee and say that any dispute will be settled in an English court.
The first step would be for the Mozambican government to say it does not recognise the guarantees and to take the guarantees off its own books (which would probably reduce the total foreign debt enough to allow negotiation with the IMF).
The next step would be for Credit Suisse and/or VTB and/or the creditors committee to bring an action in an English court to enforce the guarantee. They would argue that:
The guarantee was signed by Finance Minister Manuel Chang and that a Finance Minister must have the right to sign contracts as an agent of the state.
The government has renegotiated the Ematum bonds as a government bond, and thus has accepted liability for a similar loan.
Mozambique would reply that:
The Finance Minister acted ultra vires, beyond his capacity, and that this is specified in the constitution. The Credit Suisse and VTB did, or should have done, due diligence studies which would have made clear that the Finance Minister could not agree such a guarantee. This was not an obscure law, but in the constitution, and thus any due diligence would have advised against making the loan.
The Credit Suisse, VTB, and the Finance Minister would have known from documents relating the projects to be funded by the loans that it would be impossible for the companies to repay the loans in the short specified time, and thus that the guarantee would be sure to be invoked. All parties knew that the guarantee was against the constitution and thus that any payment under the guarantee would be illegal in Mozambique.
This defence has two unusual aspects:
A government would be claiming that its own minister did not have the power to act. The minister admitted to the parliamentary commission that he kept the signatures secret and did not tell parliament or the council of ministers. It may be unprecedented in an English court for a foreign government to say that one of its own ministers did not have the right to act for it, but because it is in the Mozambican constitution and so obvious, an English court would give a hearing to such a claim.
The case would be brought by the creditors under English law and thus an English court would give preference to English law over that of a foreign country. And English courts have enforced a contract which required an action illegal under foreign law. But an English court would not enforce a contract which intended the performance of an illegal act. Thus Mozambique’s case would be that the Banks and the Finance Minister knew that the companies could not repay and the state would be forced to pay under the guarantee and thus it was intended, at the time of the signing, that an illegal act be carried out later. If proven, an English court would probably not enforce such a contract.
A final point is that both the banks and the government might prefer arbitration, which is probably permitted under the loan agreement, because a court action is public but arbitration is secret. The law is the same and the judgement would probably be the same. But in arbitration, the banks would not be required to make public their due diligence reports (or lack thereof), and the government would not be required to state publicly that it was claiming that its own minister acted unconstitutionally.
In such an unusual case, it is very hard to predict how an English court or arbitrator would rule. But Mozambique would find an English court more receptive to its case than it appears to think. Thus there is a strong argument for the government to say it does not accept the guarantee and wait for the creditors to take the case to court, and then to push for secret arbitration.