Bankruptcy remote

Bankruptcy remote

A company within a corporate group is said to be bankruptcy remote when the insolvency of that company does not affect any other company in the group, particularly any holding company or subsidiary company of the bankruptcy remote vehicle. If the company goes into bankruptcy, no other company in the same group would be affected.

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 LLC's or corporations which are bankruptcy remote from their owners, to allow the lender to seize the property in the event of loan payment failures and not be stopped by the owner's filling bankruptcy.

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