December 03, 2014 Articles

"Bankruptcy Remote" Does Not Mean "Bankruptcy Proof"

Entities are generally made bankruptcy remote for the benefit of one or more key classes of creditors or equity holders.

By Jeremy R. Fischer

To file a voluntary petition for relief under the Bankruptcy Code, an entity’s directors must approve a resolution authorizing such action, subject to the requirements of the entity’s organizational documents. A copy of such authorization is generally filed along with the voluntary petition. 

In bankruptcy parlance, “bankruptcy remote” is a term used to describe provisions of an entity’s organizational documents that make it difficult (or impossible) for the entity to voluntarily seek bankruptcy relief. Entities are generally made bankruptcy remote for the benefit of one or more key classes of creditors or equity holders, and two typical provisions in the organizational documents act in concert to achieve this result—one that requires the appointment of at least one “independent” director loyal to the class that wishes to avoid bankruptcy and one that requires unanimous approval of the entity’s directors to authorize a filing.

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