State succession and allocation of debts: The case of Yugoslavia

The induction of establishment of multiple new states was a direct result of the end of World
War II, which consequently, gave rise to numerous questions pertaining to legal obligations
concerning state succession. The scant laws "governing" the allocation of debts and assets
prior to the disintegration of Yugoslavia were developed from state practice and emerging
customary international law based on examples of decolonization. 1 An attempt was made to
codify these broad principles in the 1983 Vienna Convention on Succession of States in
Respect of State Property, Archives and Debts. There aren't many established international
law principles that administer state succession and the ones that exist must largely be applied
case by case. However, the 1983 Vienna Convention was never ratified, thus it is not binding,
nonetheless, through the recent cases it is evidently seen that the Convention is being adopted
in state practice.

The taxonomy of debt is public and private. An area of specific incertitude is public debt, and
it has been queried whether there is a rule of succession in such instances. Public debts can be
broken down into: national debts (governed by the principle of pacta sunt servanda), being
debts owned by the state as a whole; local debts, which are debts contracted by a sub-
governmental territorial unit or other type of local authority; and localised debts, being debts
incurred by the central government for the purpose of local projects or areas. 2 Much will
depend on the peculiars but, principles of equity would advocate some form of allocation of
the national debt in cases where the succeeding state represents a significant part of the
preceding state.

The parties involved should settle such matters by agreement, as this is the primary norm
governing the distribution of assets and liabilities in situations that involve succession.3 The
Convention and scant precedents only come into picture with the absence of an agreement.
The Vienna Convention specifies that successor states, in some form, are obligated to accept
a fair portion of the predecessor state's national and territorial debt, but this obligation is
conditional upon the successor states' consent. The successor states may dictate the
specifics to divide the debt with the final consent of the creditor states.4
1
Ana Stanic, “Financial Aspects of State Succession: The case of Yugoslavia”, EJIL (2001).
2
P. Williams, J. Harris, “State Succession to Debts and Assets: The Modern Law and Policy”, Volume 42,
Number 2, Summer 2001.
3
92 ILR, p. 205.
4
MALCOM N. SHAW, INTERNATIONAL LAW, p. 617-18 (3d ed. 1991)

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EVOLUTION OF MODERN POLICY AND LAW THROUGH THE DISSOLUTION OF YUGOSLAVIA

The most recent state practice concerning Yugoslavia's dissolution confirmed, altered, and
denied various parts of customary law, which largely contributed to the advancement of
international law, consequently establishing a precedent. The key claims resulting from the
negotiations during dissolution are covered in the sections that follow.

1. DISTINCTION BETWEEN TERRITORIAL AND NATIONAL DEBTS

Despite the Vienna Convention contending the contrary, recent state practise supports the
old state practise of distinguishing between national and territorial debts.

Yugoslavia's case provided substantial evidence in favour of the differentiation between

national and territorial debts and assets. The successor states were declared to be
accountable for territorial debts and entitled to territorial assets by the creditor and
successor states. As it appears to be functional in awarding significant portions of the
debts and assets of predecessor states, particularly in circumstances of non-consensual
break-up, the reconfirmed distinction is a valuable development for future state break-
ups.5

Yugoslavia also contributed to the expansion of the notion of territorial debt to include all
forms of identifiable debt. Traditional territorial debt, defined as loans made by the state's
national government for projects in a particular region, and debt traceable to a certain
bank or financial institution situated on the territory of a certain successor state were
considered to be identifiable debt.

2. PRINCIPLE OF PACTA SUNT SERVANDA

In the case of the former Yugoslavia, the successor states never agreed to a debt partition
of the preceding state. In order to implement the principle of pacta sunt servanda, the
creditor states divided up the debt and notified the successor states that in order to
participate in the international financial community, they would have to assume the
portion of the debt apportioned to their state. Reliance upon this principle dictates that
continuing states are responsible for the debt of the predecessor state. The principle's
incorporation in recent state practise encourages creditor states and institutions to lend.
However, it is implausible and unfair to suggest that a small successor state legitimately

5
Supra note, 1

2
 consented to pay off the total amount of debt loaned to the preceding state while the
successor state was a constituent unit, making the use of such a principle to support joint
and several liability dubious.6

3. DETERMINATION OF AN EQUITABLE ALLOCATION OF DEBTS

The Vienna Convention calls for an equitable distribution of debt among the interested
parties, but it offers no mechanism for doing so. Consequently, the definition of
an "equitable proportion" of debts and assets is being expanded upon by recent state
practice. With regard to Yugoslavia, the creditor states used a broader concept of
territorial debt to determine obligation and distribute the majority of the debt among the
successor states. The creditor states determined the proportionate share of each successor
state's territorial debt in order to distribute the remaining national debt, and they
subsequently held each successor state responsible for that share of the debt. As a result,
the creditor states believed it was fair to hold the successor states accountable for national
debts in the same proportion as they were responsible for territorial debts.7

Additionally, cautious optimism should be expressed on the allocation of national debt

based on the share of territorial debt. In non-consensual breakups, this form of allocation
offers a practical instrument for allocating national debt; nevertheless, there isn't always a
logical connection between each successor state's actual benefit from national debts and
its proportionate part of territorial liabilities.

4. REQUIREMENT OF CONSENSUAL ALLOCATION AND UTILIZATION OF A JOINT COMMISSION

Both previous state practise and the Vienna Convention of 1983 stipulate that successor
states shall decide on a mutually agreeable premise how to equitably distribute debts and
assets. The use of commissions to carry out the actual allocation of debts and assets is
encouraged by past and recent standard practice. The EC Arbitration Commission
handled the dissolution of Yugoslavia, confirming the aforementioned approach.8

Even though the succession negotiations have not yet resulted in an agreement, several
conclusions may be considered, that will aid in shaping international law's approach of

6
Supra note, 2.
7
Guido Acquaviva, “The dissolution of Yugoslavia and the fate of it’s financial obligations”, Denver Journal of
International Law and Policy, Volume 30, Number 2, Spring.
8
Supra note, 2.

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 the allocation of debts. Most importantly, the case of Yugoslavia seems to be consistent
with other recent scenarios of state succession, furthering the idea that the Vienna
Convention's provisions reflect and possibly even codify state practice. Second, this case
seems to strengthen the pacta sunt servanda principle , which upholds the principle of
equity as the foundation for allocating assets and debts, as well as the notion of universal
succession to debt as a rule of international law. Finally, it reflects clearly on the growing
significance of the role that international organisations play in establishing international
law.