A bankruptcy remote entity is a special-purpose vehicle (“SPV”) that is formed to hold a defined group of assets and to protect them from being administered as property of a bankruptcy estate. The corporate documents of bankruptcy remote like memorandum association and article association may also attempt to create disablements to a bankruptcy filing. For example, they may impose limitations on the director’s ability to authorize a bankruptcy filing. These restrictions reduce (but do not eliminate) the risk that the SPV will file for bankruptcy, be forced into bankruptcy, or otherwise be adversely affected by a bankruptcy of its affiliates.
Normally, when a company which is part of a larger corporate group of businesses files for bankruptcy, creditors of the company in bankruptcy may attempt to seek debt satisfaction from other group companies. The concept of remote bankruptcy prevents such action from creditors of the company in bankruptcy against the related holding company, subsidiaries or affiliate enterprises. In the other words to achieve bankruptcy remote status, the borrower must be legally separate from all affiliated entities.
To attain a bankruptcy remote status, the borrower company must be legally separate from all affiliated entities and it should have its own corporate name, organizational documents, maintain all corporate formalities, maintain separate books and records, maintain separate accounts, and prepare separate financial statements. The SPV (bankruptcy remote) is also forbidden from incurring debt or other obligations, and limited in its purpose and the activities in which it may engage with its own separate staff. A bankruptcy remote company is often a single-purpose entity and usually the property owned and managed for securing a loan or debt obligation.
