‘Policy in Command’: When Government Policy May Shape Creditor Recoveries

Creditors are accustomed to various forms of subordination, whether arising from contract, capital structure, statute, or equity. However, they may be less familiar with a dynamic in which governments effectively prioritize policy objectives over creditor interests, even without any formal change in the legal ranking of claims.

In this ‘policy in command’ dynamic, governments may influence the practical allocation of value in distress situations by directing financial resources toward the achievement of broader policy objectives rather than toward creditor recoveries. Thus, even though formal creditor priorities remain unchanged, value may be diverted away from debt service and instead directed toward other governmental priorities. As a result, creditor recoveries may be affected in practice even though the legal ranking of claims remains intact.

This dynamic has become increasingly prominent in recent years as governments have responded to challenges involving economic, political, or social stability, as well as foreign policy and national security, by pursuing overriding policy objectives that, in some cases, have influenced the practical allocation of value among stakeholders. Two recent examples, one from the US and the other from China, illustrate how government policy objectives can shape creditor recoveries even without altering formal creditor priorities. 

In the case of the US, the Trump administration issued an executive order whereby the government asserted control over Venezuela’s oil revenues and asserted that this was necessary to further the foreign policy and national security interests of the US.  In the case of China, the government at both the national and local level sought to address widespread discontent among Chinese homebuyers who were left in the lurch by the collapse of China’s major property developers and claimed that this was necessary to preserve social stability in China.

The US government acted in the wake of the capture of Venezuela’s former president, Nicolas Maduro, by US military forces.  The basic idea behind the Trump administration’s executive order was to shield Venezuela’s oil revenues from creditor enforcement actions, place the oil revenues in US government-controlled custodial accounts, and empower the US government to decide how those oil revenues should ultimately be allocated.

Yet, as oil revenues are the lifeblood of the Venezuelan economy, creditors of the Republic of Venezuela and its state-owned oil company, PDVSA, would naturally look to those revenues as a principal source of repayment of their outstanding debt.  However, with the Trump administration’s assertion of control over those oil revenues, creditors may ultimately find that their interests and their potential recoveries become secondary to the US government’s pursuit of its policy objectives vis-à-vis Venezuela. 

In China, the government was faced with a situation in which millions of Chinese homebuyers put down substantial deposits on apartment projects that, as a result of the property developer crisis, were not completed, leaving the homebuyers without access to the apartments.  Even worse, the homebuyers remain obligated on mortgage payments to the banks that had loaned them money. As a result, homebuyers staged protests across China and threatened to initiate mortgage boycotts. The Chinese government perceived these developments as a threat to the country’s social stability, long a top priority of the Chinese government.

The Chinese government initiated a policy designed to ensure the delivery of homes to the Chinese homebuyers notwithstanding the financial difficulties of the property developers. One tool that Chinese authorities employed was tightened supervision of escrow accounts that held the homebuyers’ deposits. The developers were restricted in how they could use the funds in the escrow accounts: those funds were to be used primarily for the completion of housing projects and not for other purposes such as debt service.

In practice, this meant that the available liquidity in the escrow accounts was being used to advance the government policy of guaranteed delivery of homes but that it would not be available for debt service payments. The offshore bondholders of the property developers, who were already in a structurally subordinated position relative to onshore creditors, were therefore relegated to an even more disadvantageous position as a result of the Chinese government’s pursuit of this policy. 

In short, if the ‘policy in command’ dynamic could manifest itself in the US and China, with their vastly different political and economic situations, it could also potentially arise in a range of other systems around the world when governments are facing certain threats to stability or emergencies, perceived or real. Thus, when creditors are deciding whether to extend credit to a particular borrower, traditional credit analysis may therefore no longer be sufficient by itself. Creditors may also need to consider whether government policy objectives could influence the practical allocation of value and, in turn, creditor recoveries.

The author’s article (available here) appeared originally in International Insolvency & Restructuring Report 2026/27 published by Capital Markets Intelligence and is reprinted here with permission.  

Steven T. Kargman, a leading expert on international restructurings, is the Founder and President of KARGMAN ASSOCIATES, New York City.