Substantive Consolidation

Bankruptcy is probably one of the messiest circumstances businesses, corporate owners and even a single individual may suffer. So if you’d ask what is Substantive Consolidation in the business context, creditors may likely to face an unrecognized risk from substantive consolidation, especially to those that extend credits to a corporation or other entity that is part of a much larger group.

Substantive Consolidation

Common Circumstances for Substantive Consolidation

There are instances where the bankruptcy court decides to fuse two or more debtors’ cases into one benefiting both the debtors as well as the debtors’ creditors. Since substantive consolidation is recognized as a power given to bankruptcy court through the bankruptcy code, the court has the ability to consolidate two or more assets into one. However, such agenda needs wise balancing of interests since there are no explicit remarks stated under the code for creditors.

In most cases, substantive consolidation comes into picture when a debtor wishes to combine similar enterprise bankruptcies into a single case. The trustees, in this case, may be able to sell their larger assets to a single buyer in order to expand the advantages to most parties. In general, under this code, debtors’ are likely to have the most advantage since one plan may cover multiple entities.

However, although understanding what is Substantive Consolidation would give one the idea that it is for the benefit of the debtor, other cases would assume the otherwise. Substantive consolidation may also be used to prevent debtors from evading their creditors through creation of multiple businesses that operate as one in reality. In this instance, balancing of interests by the Supreme Court should be upheld to be able to offer a fairer relief from the bankruptcy case.

Application of Substantive Consolidation

Substantive consolidation is open to all sorts of businesses especially creditors. Any creditor that lends money to an affiliated member of a group should highly consider the code’s potential effects at the event of a bankruptcy of a borrower or any member of the group for this matter.

Try to consider, for example, a borrower that has significant liabilities on its operations. A lender may be willing to propose a lone to the borrower if given that the affiliate of the borrower in an unrelated business with significant assets is not exposed to the contingent liabilities. If subsequently the borrower files for a bankruptcy, the guarantee of the affiliate should, ideally, protect the lender.

The Substantive Consolidation under Bankruptcy Code

Although it hasn’t been explicitly expressed the authority of the code to authorize substantive consolidation, the authority of a bankruptcy court may order for such as stated under Section 105 A of the code. The court will just have to examine the relationship between two entities to determine the instrumentality and domination of the parties or its inequitable to creditors.

In order to understand what is Substantive Consolidation in simpler sense, one must take note of its important and prevailing aspects under the recognized bankruptcy code.

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