Currently before parliament, and expected to enter into force before the end of 2022, the Marshall Islands Netting Act is the positive response to the Republic’s interaction with ISDA on the enforceability of derivative transactions, close-out netting and related financial collateral arrangements. Alastair Macaulay, Marshall Islands counsel and consultant with the law firm Campbell Johnston Clark, explains.
Although a small country, the Republic of the Marshall Islands has a substantial corporate and maritime program; it is home to many private and NYSE listed corporations, LLCs and partnerships and runs one of the largest ship registers in the world.
The jurisdiction is important to financial institutions and others engaged in finance and investment, particularly in the maritime sector. All of these activities commonly use swaps and other derivatives to manage their exposure to adverse movements in interest rates, currency exchange and other financial instruments using the ISDA suite or other similar contracts.
The Marshall Islands Government is always keen to enhance the attraction of country as an offshore jurisdiction that passes the strict scrutiny of major investment banks worldwide. Sound corporate legislation, political stability, responsive government policy and substantial experience in administering corporate programs are the key criteria.
However, there is no Insolvency Law in the Marshall Islands and limited provisions elsewhere governing the dissolution of and appointment of a receiver to a Marshall Islands entity. Case law relating to close-out netting and financial collateral on insolvency remains largely undeveloped.
ISDA (the International Swaps & Derivatives Association) fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products, advancing practices related to trading, clearing, reporting and processing of transactions in order to enhance the safety, liquidity and transparency.
Hitherto, comfort on the treatment ISDA-style provisions on close-out netting and financial collateral has derived from the key principle of Marshall Islands law which is the recognition of the right of parties to negotiate and agree on the terms and conditions of their business relationship, including the choice of the law and forum by which dispute(s) may be resolved.
The Marshall Islands Netting Act, 2022 (Chapter 1 of a new Title 53 of the Marshall Islands Revised Code (MIRC)) is modelled on and follows in all material respects the ISDA Model Netting Act (MNA).
Principal features of the Netting Act
A qualified financial contract will not be voidable or unenforceable as a gamble, wager or lottery
A netting agreement will be enforceable against an insolvent party and any guarantor or other person providing security and may not be stayed, avoided or otherwise limited by virtue of its being subject to insolvency proceedings
After commencement of insolvency proceedings, the only obligation to pay, and the only right to receive payment, shall be a net amount as determined in accordance with the terms of the netting agreement
The provisions of a netting agreement that provide for the determination of a net balance will not be affected by any applicable insolvency laws limiting the exercise of rights to set off, offset or net out owed between an insolvent party and another party
Unless there is clear and convincing evidence to the contrary, no payment, transfer or substitution of security shall be avoided on the grounds of it constituting a preference or a transfer during a suspect period with actual intent to hinder, delay, or defraud any entity to which the insolvent party was indebted or became indebted
While the Netting Act generally adopts all the provisions of the MNA, interested parties should note that there are certain points which reflect the nature of the Marshall Islands corporate program:
The Act recognises that any Marshall Islands entity that engages in a derivatives transaction will be a non-resident domestic entity (i.e. it does not have any assets of carry on business physically within the Republic) and therefore an insolvent entity is likely to have assets and may be subject to insolvency proceedings outside the jurisdiction.
No international financial institutions have branches or are licensed to carry on business within the Republic, and the Bank of the Marshall Islands does not operate outside the Marshall Islands, and accordingly the multi-branch provisions of the MNA have not been adopted.
The Registrar of Corporations does not permit the formation of entities that intend to engage in forex trading, binary options trading, or related activities as their principal business, and therefore any counterparty entering into such arrangements with a Marshall Islands entity should be satisfied that any such transactions are ancillary to the entity’s primary business activity.
This article is intended as general guidance and should not be considered to be legal advice or relied on as such. parties should consult with their legal advisers and any other adviser they deem appropriate prior to making any decision in relation to any issue raised by or considered in this article. More generally, the author and Campbell Johnston Clark assume no responsibility for any use to which this article may be put.
Campbell Johnston Clark is an international law firm headquartered in London. CJC has acted as Marshall Islands counsel for (among others) banks and other financial institutions, shipowners, investors and managers on maritime and general corporate and commercial, litigation, insolvency and restructuring matters. CJC also frequently advises on corporate governance processes and the responsibilities/liabilities of directors/shareholders under Marshall Islands law.
For further information, please contact: