US substantive consolidation
Produced in partnership with Julie Lanz of Skadden Arps Slate Meagher & Flom LLP
US substantive consolidation

The following Restructuring & Insolvency guidance note Produced in partnership with Julie Lanz of Skadden Arps Slate Meagher & Flom LLP provides comprehensive and up to date legal information covering:

  • US substantive consolidation
  • Definition and purpose
  • Authority
  • Tests for substantive consolidation
  • ‘Deemed’ substantive consolidation
  • Partial substantive consolidation
  • Substantive consolidation of a debtor with a non-debtor

Definition and purpose

Substantive consolidation is an equitable remedy which may be exercised by a bankruptcy court to combine the assets and liabilities of affiliated entities. The substantive consolidation of affiliated debtors is an accepted, if relatively rare, judicial remedy. The aim of substantive consolidation is to address the harms caused by debtors disregarding their separateness and/or otherwise entangling their affairs. The remedy combines the assets and liabilities of different entities and satisfying the liabilities out of the common pool that results, in order to ensure that all creditors are equitably treated. It is comparable to the non-bankruptcy doctrines of piercing the corporate veil and the alter ego rule. See: re New Century TRS Holdings Inc. 407 B.R. 576, 591, (D. CT. Del 2009) (not reported by LexisNexis®).

Substantive consolidation is an extraordinary remedy because it affects the substantive rights of creditors and equity holders. Substantive consolidation eliminates intercompany claims and alters creditor recoveries because each entity is likely to have a different asset-to-liability ratio. For example, if subsidiary A has assets of US$ 100m and liabilities of US$ 200m (50% recovery to creditors); subsidiary B has assets of US$ 80m and liabilities of US$ 300m (27% recovery to creditors); and subsidiary C has assets of US$ 50m and liabilities of US$ 200m (25% recovery to creditors). After substantive consolidation, all creditors would receive approximately 33% recovery on