One of the aims of the Ghanaian insolvency regime is to maximise returns of the entire creditor class as opposed to benefitting specific creditors. To achieve this, the Act deploys a number of tools. These include the imposition of a moratorium on the commencement and continuation of court proceedings – including enforcement measures against the insolvent company. The aim is to prevent run-ins, enable the insolvency practitioner swell-up available assets and distribute them to the creditor pool. Further, the insolvency law prohibits actions or arrangements that benefit one creditor over other creditors. While the Corporate Insolvency and Restructuring Act, 2020,is generally consistent with this objective, an exception is created in the case of netting agreements. This Q&A looks into the rules governing netting agreements and how they impact the insolvency process.
a) What is a netting agreement?
A netting agreement permits two parties to a qualified financial contract to, on the occurrence of an insolvency, consolidate the respective claims they have against one another; and then cross out these mutual obligations with one another in one fell swoop. These obligations may be present or future (a) payment obligations, (b) delivery obligations or (c) entitlements. This also includes a collateral agreement entered under a qualified financial agreement before 30th April 2020.
b) Are the provisions on netting applicable to all types of contracts?
No. The netting provisions under the Corporate Insolvency and Restructuring Act are only applicable to “qualified financial contracts”. Examples of these qualified financial contracts include: (a) a currency, cross-currency or interest rate swap; (b) a basis swap; (c) a spot, future, forward or other foreign exchange transaction; (d) a commodity swap; (e) a forward rate agreement; (f) a currency or interest rate future; (g) a currency or interest rate option; (h) an equity derivative such as an equity or equity index swap, equity forward, equity option or equity index option; (i) a derivative relating to bonds or other debt securities or to a bond or debt security index such as a total return swap, forward option or index option; (j) a credit derivative such as a credit default swap, credit default basket swap, total return swap or credit default option; (k) an inflation or any other economic statistics derivative; (l) a spot, future, forward or any other securities or commodities transaction; (m) a securities contract including a margin loan and an agreement to buy, sell, borrow or lend securities; (n) a commodities contract including an agreement to buy, sell, borrow or lend commodities; (o) a collateral arrangement.
c) What rationale is behind the recognition of netting agreements under the Corporate Insolvency and Restructuring Act, 2020?
Netting agreements permit parties, typically entities in the financial industry, to to allocate risks among themselves. In the case of the Corporate Insolvency and Restructuring Act, 2020, the specific risk being contemplated is risk of insolvency. Financial institutions, including Banks and Specialised Deposit-Taking Institutions, have significant exposure toward each other. In the netting provision’s absence, one entity’s insolvency risks impacting other financial entities negatively.
Ordinarily, if A owes B GH¢150 and B owes A GH¢100 , A would be entitled to pay B GH¢150. B would also be entitled to pay A GH¢100. Should A become insolvent, B’s GH¢150 will be treated in accordance with the insolvency ranking provisions. This is means that there is even the risk that B will not get the entire GH¢150 owed it by A. The same situation applies in the context of B’s indebtedness to A.
Under a netting arrangement, A and B simply “net-off” or deduct their mutual obligations to each other. This means that B’s exposure to A would be GH¢50 instead of GH¢150.
d) To what extent is a netting agreement enforceable in the event of an insolvency?
The Corporate Insolvency and Restructuring Act’s provisions on netting recognises the parties’ contractual intent and disables application of the standard insolvency rules – especially the pari passu rule which requires that all creditors be treated equally. This means that an insolvency practitioner cannot insist on having the subject matter of the netting agreement ( as contained in a qualified financial contract) being part of the asset pool. This further means that a moratorium arising as a result of a liquidation does not affect the parties’ right to net-off their mutual obligations.
In essence, netting agreements do not count as creditor claims, and also do not affect the ranking of claims or distribution of dividends to creditors during insolvency.
e) Aside from the Insolvency legislation, what other legislation provides for netting arrangements?
The Corporate Insolvency and Restructuring Act, 2020 (Act 1015) recognises that other specialised legislation may provide for their own insolvency arrangement. For instance, the Banks and Specialised Deposit Taking Institutions Act, 2016, (Act 930) recognises the netting of obligations between Banks and Specialised Deposit Taking Institutions and their counterparties .
The Authors
Audrey and Clara are lawyers from AudreyGrey, a boutique corporate law firm specialising in Corporate Law, taxation and insolvency. Both are corporate attorneys who specialise in Insolvency and bankruptcy. Audrey is also a licenced insolvency practitioner and has done extensive work on insolvency law in Ghana.
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