GMRA A-Z: Act of Insolvency

The concept of an “Act of Insolvency” is relevant for the purposes of the Events of Default under the Global Master Repurchase Agreement.  More specifically, an Event of Default arises under Paragraph 10(a)(vi) of the 2011 GMRA if an “Act of Insolvency” occurs with respect to either the Seller or the Buyer.  In addition, if the parties have agreed that “Automatic Early Termination” should apply under the GMRA, all outstanding transactions will automatically terminate at the time immediately preceding the occurrence of an “Act of Insolvency” with respect to the Defaulting Party.

The definition of “Act of Insolvency” is deliberately drafted very widely so as to capture as many types of insolvency-related events in different jurisdictions as possible.

Since the Lehman crisis, there has been a move to standardise the “Act of Insolvency” definition across various master agreements (ISDA, GMRA, GMSLA etc.) so as to improve a party’s ability to implement an ‘across the board’ close-out on insolvency of its counterparty.  This effort to standardise explains some of the differences which are apparent between, on the one hand, the 2011 GMRA and, on the other hand, earlier versions of the GMRA.  Most of these changes are designed to align the definition of “Act of Insolvency” under the GMRA with the ISDA Master Agreement definition of “Bankruptcy”.

Looking across different versions of the GMRA, the definition of “Act of Insolvency” is the same between the 1995 GMRA and the 2000 GMRA.  However, the definition of “Act of Insolvency” in the 2011 GMRA shows the following changes:

1. A new event which constitutes an “Act of Insolvency” is included within the definition.  This relates to the enforcement of a security over all or substantially all of a party’s assets (provided that the relevant process isn’t dismissed within 15 days).
2. The event which refers to ‘an inability to pay debts’ has been expanded slightly.
3. The event which refers to the ‘commencement of winding up petitions’ has been expanded.  Under the 2011 GMRA it is also triggered if a “Competent Authority” brings any proceedings.  This seems likely to have been included to address regulatory procedures such as bank resolution.  In addition, the previous grace period of 30 days which a party facing a petition benefitted from before the “Act of Insolvency” actually crystallised has been reduced to 15 days.
4. There is a slight extension of the ‘appointment of a receiver, administrator etc’ clause to include references to “conservator” and “custodian”.

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