Bankruptcy remote
Encyclopedia
Bankruptcy remote is a term that describes the relative position of one company as it relates to bankruptcy
vis-a-vis others within a corporate group
, whereby the insolvency
of the bankruptcy remote entity has as little economic impact as possible on other entities within the group. A bankruptcy remote entity is often a single-purpose entity.
In practice, due to the concept of limited liability
, most companies in developed legal systems will be de facto bankruptcy remote from other members of the group (except in limited circumstances where creditor
s are permitted to pierce the corporate veil
). However, in financial structuring, references to bankruptcy remoteness usually imply additional steps being taken to protect group members from attendant liability, such as by using an orphan structure
to remove the legal ownership of the bankruptcy remote vehicle from the group, whilst retaining the economic benefits of it. Such structures are used where the vehicle's activities may give liability to the group as a whole, for example, under certain environmental protection
legislation, or in relation to tax
liabilities in certain countries.
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
vis-a-vis others within a corporate group
Corporate group
A corporate group is a collection of parent and subsidiary corporations that function as a single economic entity through a common source of control. The concept of a group is frequently used in tax law, accounting and company law to attribute the rights and duties of one member of the group to...
, whereby the insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
of the bankruptcy remote entity has as little economic impact as possible on other entities within the group. A bankruptcy remote entity is often a single-purpose entity.
In practice, due to the concept of limited liability
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
, most companies in developed legal systems will be de facto bankruptcy remote from other members of the group (except in limited circumstances where creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s are permitted to pierce the corporate veil
Piercing the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it...
). However, in financial structuring, references to bankruptcy remoteness usually imply additional steps being taken to protect group members from attendant liability, such as by using an orphan structure
Orphan structure
An orphan structure is a financing term referring to a company whose shares are held by a trustee on a charitable purpose trust. The company is said to be an "orphan" as it is not beneficially owned by anyone....
to remove the legal ownership of the bankruptcy remote vehicle from the group, whilst retaining the economic benefits of it. Such structures are used where the vehicle's activities may give liability to the group as a whole, for example, under certain environmental protection
Environmental protection
Environmental protection is a practice of protecting the environment, on individual, organizational or governmental level, for the benefit of the natural environment and humans. Due to the pressures of population and our technology the biophysical environment is being degraded, sometimes permanently...
legislation, or in relation to tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
liabilities in certain countries.
External links
- http://www.abanet.org/rppt/meetings_cle/spring2004/rp/Mindingpandq/moskowitz1.pdfAmerican Bar AssociationAmerican Bar AssociationThe American Bar Association , founded August 21, 1878, is a voluntary bar association of lawyers and law students, which is not specific to any jurisdiction in the United States. The ABA's most important stated activities are the setting of academic standards for law schools, and the formulation...
: Special-Purpose Bankruptcy-Remote Entities]