When trustee enforcement meets sovereign reality: lessons from the SriLankan Airlines default

Introduction

The SriLankan Airlines bond default and subsequent court proceedings offer a compelling case study in what happens when traditional bond trustee mechanics intersect with sovereign guarantees, political sensitivity and court‑led restraint. They also expose the legal complexities that arise when English law debt securities must be enforced through the courts of the issuer’s home jurisdiction.

While the dispute ultimately concluded with a successful restructuring, the journey highlights a number of important trustee‑specific risk lessons – particularly for those acting (or considering acting) in delegate or successor trustee roles for state-backed entities and issuers. In this case, the trustee role was delegated to Law Debenture by the bank trustee.

Background: a default with sovereign overtones

SriLankan Airlines defaulted on its US$175m 7% bonds, missing multiple coupon payments from late 2022 and failing to repay principal at maturity in June 2024. The bonds were expressly guaranteed by the government of Sri Lanka. By mid-2025, outstanding principal and interest totalled approximately US$209m. An ad hoc group of bondholders was formed who, along with their counsel, opened communications with the delegate trustee and their legal advisors.

Trustee enforcement and court proceedings

Following prolonged non‑payment, a stalemate in negotiations and the absence of any binding restructuring proposal, the delegate trustee-acting on instructions from the requisite majority of bondholders-issued a statutory demand under s 272(a) of Sri Lanka’s Companies Act, asserting that the airline was unable to pay its debts and warning that winding‑up proceedings would follow if payment was not made within 21 days.

In response to the statutory demand, SriLankan Airlines made an application to the court in Colombo seeking, among other things, an injunction preventing any steps from being taken to wind up the airline, as well as damages against the delegate trustee.

The application raised a number of issues of wider implication for the trustee, the delegate trustee and the bondholders more generally which meant that it was important to oppose the application.

In its application, SriLankan Airlines’ legal arguments focused on three principal themes:

1. Lack of standing.
2. Sovereign guarantee and restructuring context.
3. Essential service considerations.

The arguments put forward regarding lack of standing included seeking the court’s confirmation that the trustee and delegate trustee were not “creditors” under Sri Lankan corporate law and, therefore, had no rights to petition to wind up the airline.

In addition, SriLankan Airlines sought a permanent injunction preventing the trustee or delegate trustee from doing anything which might result in the airline being wound up. They also sought damages of approximately US$2.5m.

If successful on these points, the airline could have limited the trustees’ powers to take future enforcement action on behalf of the bondholders. There might also have been implications for other trustees on different securities seeking to enforce in Sri Lanka.

Resolution of the dispute

In March 2026, SriLankan Airlines and the government of Sri Lanka successfully completed a formal US$175m government-guaranteed bond restructuring. Key features included:

• More than 99% bondholder participation.
• An estimated16% haircut on total claims.
• The exchange of old bonds for new Sri Lankan government bonds due in 2028 (4% coupon), plus a cash component.
• Full alignment with Sri Lanka’s IMF‑backed sovereign debt restructuring.

This settlement effectively ended the litigation risk, removed the threat of winding up, and resolved one of the last major externally‑guaranteed debt overhangs facing the Sri Lankan state.

Resolution: enforcement still played its part

Despite extended injunctions, trustee enforcement action was far from futile. It preserved bondholders’ rights, avoided inertia and helped maintain the negotiating position of the bondholders. It was clear from the reaction of SriLankan Airlines that both they and the government were concerned at the thought of winding-up proceedings, which helped to apply the pressure required to reach a settlement.

Key trustee risk takeaways

• Sovereign guarantees do not eliminate issuer‑level enforcement risk:
• A sovereign guarantee changes the credit narrative, but not the procedural reality at issuer level.
• Trustees may still need to pursue enforcement against the operating entity first.
• Courts may treat enforcement differently where public interest or national infrastructure is involved. For example, in this case many of the arguments raised by the airline revolved around the potential impact of any winding up on the Sri Lankan economy. The airline even added the Sri Lankan attorney general as a party to the court proceedings to support these arguments.
• Standing challenges in local courts are a real and recurring issue:
• Even though all transaction documents contain jurisdiction clauses, it is impossible to rule out parties getting dragged into proceedings in local courts.
• Local courts may scrutinise whether a trustee (or delegate) has standing to bring proceedings. Such decisions could potentially have wider implications – beyond the local proceedings – and go to the role of the trustee or delegate more generally.
• Local courts could be influenced by non-legal considerations which can make it more difficult to take enforcement action.
• Documentation, delegation mechanics and evidence of authority become critical.
• Delegate trustees carry execution and visibility risk, but principals are not insulated and retain fiduciary responsibility, creating dual-layer accountability.
• Enforcement pressure matters even where courts stay remedies, and issuers and sovereign stakeholders are more likely to engage where enforcement is demonstrably real.
• Delegate vs successor trustee decisions should be treated as reputational risk choices. Accepting a delegate role in a high-profile enforcement scenario carries significant visibility.
• Stakeholder complexity is a core execution risk:
• This transaction involved multiple stakeholder groups: bondholders, sovereign representatives, issuer management, legal advisors and trustee parties.
• Misalignment or delay across any group can impact outcomes.

A Law Debenture perspective

Law Debenture has extensive experience acting as an independent trustee in complex cross‑border, restructuring and sovereign‑linked transactions. The unique challenges presented by the legal proceedings in the Colombo courts necessitated close collaboration between London and Hong Kong colleagues to overcome a myriad of procedural and timing issues.

Stakeholder management was a key theme, Law Debenture were in communication with upwards of seven transaction parties which presented a level of complexity that required organisation, impartiality and a strong awareness of execution risk.

This article was first published in the October issue of Butterworths Journal of International Banking and Financial Law. Read the original or download a PDF version here by creating an account: https://www.jibfl.co.uk/articles/when-trustee-enforcement-meets-sovereign-reality-lessons-from-the-srilankan-airlines-default