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 creditors 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.
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 h-omeowner(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.
External links
- American Bar Association: Special-Purpose Bankruptcy-Remote Entities