USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
• substitute collateral; and • reject executory contracts.
However, an outright prohibition against the SPE itself voluntarily filing for bankruptcy is unen - forceable as being against public policy, and such risk must therefore be mitigated by more indirect means. Limiting the SPE’s unrelated activities and restricting the SPE from having employees and unrelated property reduces the risk of unrelated liabilities. Appointing an inde - pendent director whose fiduciary duty runs to the SPE and not to its shareholders, and employing an entity type that allows for such redirection of fiduciary duties, reduces the risk of a filing for the benefit of its shareholders. The independent director(s) also provide(s) important protection against dissolution of the SPE, in part by requiring such a director’s par - ticipation in a dissolution decision, and in part by providing that such independent director becomes a “springing member” or “springing partner” if the absence of a member or partner would cause dissolution. The number of inde - pendent directors should at least be equal to the minimum number of members or partners required to continue the SPE’s existence. Substantive consolidation is an equitable doc - trine that permits a bankruptcy court to disre - gard the separateness of an entity that is not itself in bankruptcy and that provides an alterna - tive pathway for an SPE to become entangled in its affiliate’s bankruptcy proceedings. Although the analysis differs somewhat between various US circuits, in general, a bankruptcy court may order substantive consolidation where the sepa - rateness of the entities has not been sufficiently respected or where the affairs of the debtor enti - ties are so entangled that unscrambling them will be prohibitive and will hurt all creditors.
Creditors may also be restricted from exercis - ing rights that are triggered by a debtor’s bank - ruptcy or financial condition (so-called ipso facto clauses). Unlike many other jurisdictions where bankruptcy effectively amounts to liquidation proceedings, bankruptcy proceedings in the USA also encompass a workout regime (Chap - ter 11 bankruptcy). Workouts are highly variable, and specific to facts and circumstances, which makes it difficult to predict the duration of the stay and the impact on a particular creditor. Consequently, a key aspect of securitisations is to isolate the issuer and its assets from such bankruptcy risks by: • transferring the securitised assets to the issuer in a perfected true sale; • reducing the risk of the issuer becoming subject to involuntary or voluntary bankruptcy proceedings; and • reducing the risk of the issuer becoming substantively consolidated with any affiliates, should they become subject to bankruptcy proceedings. As an alternative to a true sale structure, it is also possible to transfer exposure to the securitised assets using contracts that are protected against the most troublesome bankruptcy powers. 6.2 SPEs Establishing a bankruptcy-remote SPE is a key aspect of a typical securitisation transaction. The transaction documents typically include non-petition clauses that restrict involuntary bankruptcy filings against the SPE.
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