Substantive consolidation combines the assets and liabilities of closely related debtors into a single entity during bankruptcy proceedings. It can speed up the process but carries risks for creditors. Creditors may miss out on payments, and judges must consider whether to pool assets and liabilities. Interested parties may comment on the proceedings, and high-profile cases can be covered in the media.
Substantive consolidation is a proceeding in which a bankruptcy court orders that the liabilities and assets of closely related debtors are brought together and treated as a single entity. This is done when the debtors have an intricate legal relationship and are both going through bankruptcy court. It can speed up the process of settling accounts with creditors, but it can also carry some risk for creditors and sometimes people can argue against it.
In a classic example of substantial consolidation, two or more subsidiaries of a parent company could go bankrupt. Their finances can be closely intertwined, as seen in cases where one company supplies another or when the same staff oversee both companies and fail to keep them clearly separate. Sometimes, creditors themselves tend to blur the lines between the companies they do business with, and this can make it difficult to determine which company owes which money to whom.
When reviewing cases, a bankruptcy court judge may determine that substantial consolidation is the best option. The liabilities of both companies are cataloged and combined, as are any available assets. Creditors are compensated according to the type of debt in question. It may not always be possible to pay off debt in full, as seen when companies do not have enough assets to cover their debt. Higher-ranking creditors will be repaid first, followed by smaller obligations.
There is potential with substantial consolidation that some creditors may miss out on. The merged assets must pay the liabilities for both companies. Creditors who may have gotten a larger percentage of their money have to share with more creditors and may not receive full payment as a result. Judges must consider this issue when deciding whether to pool the assets and liabilities of two companies. Also under consideration is whether companies are filing for bankruptcy protection to reorganize or are actually winding up.
If substantial consolidation is possible in a case, individuals may be offered the opportunity to comment, allowing them to discuss their concerns with the judge. People watching the proceedings tend to take note of moves like consolidation, as they can provide important insight into how and when the case will be resolved. If the company is high-profile, it can be discussed in the mainstream media, as well as covered in the financial news and scrutinized by interested analysts.
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