Insolvency

Insolvency

The insolvency of a contracting party will usually trigger certain rights of the other party under the parties’ contract, including the right to terminate the contract.

Accordingly, it is important for the parties to agree to a suitable definition of insolvency, such as the one in the following exemplar:

Exemplar C40-1

An “Insolvency Event” occurs when a Party: (i) files for bankruptcy; (ii) becomes or is declared insolvent, or is the subject of any bona fide proceedings related to its liquidation, administration, provisional liquidation, insolvency or the appointment of a receiver or similar officer for it; (iii) passes a resolution for its voluntary dissolution or liquidation; (iv) has a receiver or manager appointed over all, or substantially all, of its assets; (v) makes an assignment for the benefit of all, or substantially all, of its creditors; (vi) enters into an agreement or arrangement for the composition, extension, or readjustment of all, or substantially all, of its obligations or any class of such obligations; (vii) becomes incapable of paying its undisputed debts when due; or (viii) experiences an event analogous to any of the foregoing in any jurisdiction in which any of its assets are situated.

In the following exemplars, to avoid hair-trigger application of termination and other rights upon an insolvency event, the parties agree that certain adverse legal proceedings shall not constitute insolvency if they are discharged, stayed, or dismissed with a certain period of time:

Exemplar C40-2

For purposes of this agreement, a party will be deemed insolvent upon the occurrence of any of the following events: (i) institution by a party of insolvency, receivership or bankruptcy proceedings, (ii) the appointment of a receiver for a party which is not discharged within sixty (60) days; (iii) the filing by creditors of a party of a petition in bankruptcy against Depositor which is not stayed or dismissed within sixty (60) days, (iv) a party makes an assignment for the benefit of a creditor, (v) a party ceases to do business in the normal course.

Exemplar C40-3

An ”Insolvency Event” means any of the following events: (a) Vendor admits its inability to pay its debts generally as they become due or otherwise acknowledges its insolvency; (b) Vendor ceases or threatens to cease to carry on business in the ordinary course; (c) Vendor institutes any proceeding, takes any corporate action, or executes any agreement to authorize its participation in or the commencement of any proceeding seeking: (i) to adjudicate it a bankrupt or insolvent; (ii) liquidation, dissolution, winding-up, reorganization, arrangement, protection, relief or composition of it or any of its property or debts or making a proposal with respect to it under any law relating to bankruptcy, insolvency, reorganization or compromise of debts or other similar laws; or (iii) appointment of a receiver, trustee, agent, custodian or other similar official for it or for any substantial part of its properties and assets; (d) creditor or any other person privately commences any proceeding against or affecting Vendor (except during any period up to a maximum of ninety (90) days during which such proceeding is being contested in good faith by appropriate proceedings by Vendor) seeking: (i) to adjudicate it a bankrupt or insolvent; (ii) liquidation, dissolution, winding-up, reorganization, arrangement, protection, relief or composition of it or any of its property or debts or making a proposal with respect to it under any law relating to bankruptcy, insolvency, reorganization or compromise of debts or other similar laws; or (iii) appointment of a receiver, trustee, agent, custodian or other similar official for it or for any substantial part of its properties and assets; or (e) any other act of bankruptcy, as contemplated in Title 11 of the United States Code.

Exemplar C40-4

The Client shall be deemed insolvent if: (i) the Client commences a voluntary case under Chapter 11 of the United States Code or the corresponding provisions of any successor laws or laws of a non-U.S. jurisdiction; (ii) anyone commences an involuntary case against the Client under Title 11 of the United States Code or the corresponding provisions of any successor laws or laws of a non-U.S. jurisdiction and (a) either the case is not dismissed by midnight at the end of the 60th day after commencement or (b) the court before which the case is pending issues an order for relief or similar order approving the case; (iii) a court of competent jurisdiction appoints, or the Client makes an assignment of all or substantially all of its assets to, a custodian (as that term is defined in Title 11 of the United States Code or the corresponding provisions or any successor laws or laws of a non-U.S. jurisdiction) for the Client or all or substantially all of its assets; or (iv) the Client fails generally to pay its debts as they become due (unless those debts are subject to a good-faith dispute as to liability or amount) or acknowledges in writing that it is unable to do so.