Talk:Bankruptcy remote

SPVs

Hi - for my sins I've spent the best part of 20 years doing legal work for SPVs. In the context of special purpose vehicles, bankruptcy remoteness means something subtly different to what is represented here: it means the vehicle, contractually, can't be made bankrupt at all - because all of the contractual claims against it are limited in recourse to the liquidated value of its assets. contracts purport to extinguish any debt that otherwise would be due once the assets of the company have been liquidated and distributed. This means that a creditor claim cannot exceed the balance-sheet value of the company's assets and the company cannot be balance-sheet insolvent: no creditor is ever in a position to petition a court for the winding up of the entity. This is important because the directors of SPVs are usually directors of many different entities, and they can't afford to be associated with the implied breach of directors' duties that wouod be represented by allowing a company to trade while insolvent (which may lead to their regulatory disqualification to act as directors of any company.) I think this article slightly misunderstand the concept in as much as it talks about isolation of claims between affiliated entities: that is a function of the corporate veil, and not what is usually meant (in the industry) by “bankruptcy remoteness”.

Happy to update the page if no-one objects. ElectricRay (talk) 15:36, 10 November 2016 (UTC)

usage slightly reversed

While the definition in the article is technically correct, the much more common usage of the term "bankruptcy remote" is concerned with whether a particular subsidiary or affiliate will be consolidated with the rest of the corporate group of which it is a part. Specifically, I would re-write the sentence

"A company within a corporate group is said to be bankruptcy remote when the solvency of that company does not affect any other company in the group, particularly any holding company or subsidiary company of the bankruptcy remote vehicle."

to read as follows:

"A company within a corporate group is said to be bankruptcy remote when the solvency of parents, affiliates or other third parties does not affect the solvency of the bankruptcy-remote company."

To be even more precise, "a company within a corporate group is said to be bankruptcy remote when, under applicable federal bankruptcy and state laws, the assets and liabilities of such company will not be consolidated into the bankruptcy estate of any other company in the corporate group were such other company to file for bankruptcy (or be forced into bankruptcy by its creditors)."

The most common area where this issue comes up is in project or asset-backed financings. In this type of transaction, a sponsor company will create a special purpose company (the "SPC") for purposes of the financing, contribute assets to it, and then use the SPC's assets as the basis for borrowing by the SPC. Say, for example, that there's a very large bank that holds a number of automobile loans (for example) in its portfolio, along with loans of all other types, and this bank also conducts a wide range of other lending, borrowing and similar financial activities. Say that this bank wanted to liquidate its portfolio of automobile loans in a way that would maximize its value. One way to do this would be for the bank to set up an SPC, have the SPC sell bonds to investors and use the proceeds of the sale of bonds to purchase the auto loans from the bank. The bank would have cash, the SPC would own the auto loans, and the repayments of the auto loans by people who financed their car purchases would be paid to the SPC which would then use those payments to pay principal and interest on the bonds it issued. In this type of financing, the investors who purchased the SPC's bonds evaluate the creditworthiness of the bonds based solely on the quality of the automobile loans held by the SPC, *not* the creditworthiness of the bank that originated the loans and set up the SPC, so to those investors it is important that the creditworthiness of the SPC be isolated from the creditworthiness of the bank. One important factor in establishing this isolation is bankruptcy remoteness--whether, if the bank itself goes bankrupt, the SPC will be permitted to continue operate outside of the bankruptcy process and not have its assets and liabilities consolidated as part of the bank's assets and liabilities. Therefore bankruptcy remoteness of the SPC means that the investors in its bonds do not have to analyze the bank's entire portfolio in order to evaluate the investment in the SPC's bonds. MaxPig 20:24, 16 April 2007 (UTC)MaxPig—The preceding unsigned comment was added by MaxPig (talk • contribs) 20:15, 16 April 2007 (UTC).

MaxPig is absolutely correct. The article as it stands is misleading. —Preceding unsigned comment added by 75.34.178.49 (talk) 04:54, 7 September 2009 (UTC)

I also think the following statement ... "Commercial mortgage loans often require that the properties financed be placed in special limited liability companies (LLCs) or corporations which are bankruptcy remote from the homeowner(s), to allow the lender to seize the property in the event of loan payment failures and not be stopped from property seizure by the home-owner's filing of bankruptcy." ... is extremely misleading. The purpose is not to isolate the investors from bankruptcy by borrowers, it is to isolate the investors from the creditworthiness of the bank that originated the loans. I also find it intriguing that the IP address of the entity that contributed this extremely misleading statement resolves back to Scor, a re-insurance company that insured alot of these loans via credit default swaps. Downright unethical in my opinion, trying to deliberately mislead anyone who was researching ways to defend themselves against foreclosure by feeding them false information. So I removed the offending content. — Preceding unsigned comment added by Jimmy517 (talk • contribs) 22:33, 13 November 2011 (UTC)