The interpretation of the bankruptcy code has taken a major focus largely due to the varied orientation of cases being brought forward. You should now understand that you can be liable to bankruptcy if and when a business associate or a business you have invested in files for bankruptcy. The proper term for this process is substantive consolidation which works on the principle of bringing together debtors who are party to a business deal or transaction. This aspect of the law is exercised on the precedence that prejudice to the creditors without
consolidation should be considered above prejudice to the enterprises being consolidated.
The threat you face with this point of action is that non-debtors can effectively be consolidated with the debtors as long as the financial affairs of both entities are intertwined. With this in mind, you have to ensure that you or your business is marked as a separate entity when performing a business deal. In other words, it should be registered as a limited liability company.
Substantive Consolidation In A Business Deal
Substantive consolidation is a process of combining entities that have vested interests in a business or a transaction so that they are liable for the affairs of the deal collectively as opposed to single economic units. It is a path of the bankruptcy law that was incorporated to protect you as a creditor, from suffering losses due to entities using impunity to transfer finances to different enterprises which may be party to the benefit of the business deal.
How Does This Section Of The Bankruptcy Code Work?
Substantive consolidation was clearly defined in (In re Bonham) Alexander v Compton 229 F.3d 750 (9th Cir. 2000) whereby there are two instances when the code can be invoked. These instances were designed to cover the contractual settings that can exist in a business deal in order to cover the creditors.
- Creditors can deal with enterprises as separate entities and thereby apply for consolidation if one files for bankruptcy as opposed to the general idea that existed where creditors could deal with entities as a single economic entity
- Determination of whether the dealings of debtors are entangled and whether a process of consolidation will be of benefit to the corporation that is owed
With these stipulations, it is evident that you as an entity can be liable to bankruptcy. Liability can be proved if a creditor can prove that you are party to the business dealings, and that your affairs are entangled with that of the one applying for bankruptcy.
Equitable Powers Law
Within the equitable powers law under section 105 (a) of the bankruptcy law, substantive consolidation stems from instances that involve the piercing of the corporate veil. This is to say that factors that involve the affairs of corporate entities are governed by this particular law. In a rejoinder, the bankruptcy code clearly stipulates that there are no differences between entities in an organizational set up or entities as human beings. This is to say that you as an individual can be liable to bankruptcy if a determination is made as to your affairs being entangled with an enterprise that is bankrupt.
In the same wavelength, you can also be liable for bankruptcy if you are entangled in the dealings of estates of spouses. The substantive consolidation process covers the extending of the bankruptcy code to spouse estates.
Are You A Beneficiary?
The bankruptcy law has provided a provision whereby you as party to a business deal can be incorporated into bankruptcy when you are determined to be a beneficiary to a transaction. In light of this, you may find yourself or your business being dragged into a bankruptcy case. It may therefore, be beneficial if you get to have a determination as to the extent of liability as far as a business deal goes and thereby have a clear mandate of your capacity in a deal.