Home Philatelic investment Substantive Opinions on Consolidation and Non-Consolidation – Insolvency/Bankruptcy/Restructuring

Substantive Opinions on Consolidation and Non-Consolidation – Insolvency/Bankruptcy/Restructuring


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In this article, the authors review the elements to be included in a non-consolidation opinion issued to the lender in the context of a structured finance transaction by the board of the special purpose entity.

Substantial consolidation is an equitable remedy under which a bankruptcy court disregards the separate legal existence of a debtor and pools the debtor’s assets and liabilities with one or more of its affiliates, in order to make distributions to creditors as part of a plan of reorganization or liquidation.

The Bankruptcy Code does not contain specific authorization for substantial consolidation. Instead, a bankruptcy court’s power to substantially consolidate affiliated entities derives from its general equitable powers.

When affiliated entities are substantially consolidated, intercompany claims between those entities are eliminated, the assets of the consolidated entities are pooled, and the claims of creditors on each entity are treated as against the common pool of assets. Substantial consolidation generally benefits creditors of one entity at the expense of creditors of another entity because each of the consolidated entities has a different debt ratio.

Lenders in structured finance transactions often require their borrowers to be special purpose entities (“SPEs”) in order to insulate the assets being financed and the cash flows from those assets from external factors, such as the performance other assets or financial condition. condition of SPE members. Substantial consolidation of an SPE with one or more of its affiliates goes against isolating the assets of the SPE, bringing them together in a common distribution pool.


To provide reassurance about the lender’s interest in the assets being financed and the cash flows from those assets, the lender in a structured finance transaction often requires that a notice of non-consolidation be issued by the structure’s board. welcome at closing.

A notice of non-consolidation states that if one or more parent entities of the SPE file for bankruptcy, the bankruptcy court would respect the separate legal existence of the SPE and not order the substantial consolidation of the assets and liabilities of the SPE with those of one or more of its parent entities, guarantors or affiliated managers (such as an affiliated property manager).

The opinion confirms that the SPE structure required by the lender will be respected in the event of bankruptcy and that the assets of the SPE will remain isolated and will not be grouped in a common distribution pool with those of the subsidiaries of the SPE.

Since the Bankruptcy Code does not contain prescribed standards for substantial consolidation, the standards for review were developed through the courts. Bankruptcy courts have developed multiple, complicated, and sometimes conflicting criteria for determining whether a SPE should be substantially consolidated with one or more of its parent entities. However, four important categories of factors emerged:

  1. Record keeping: the SPE must have separately identifiable assets and liabilities, as well as separate accounting records and financial statements.

  2. Operational issues: the SPE should be sufficiently capitalized and economically independent of its shareholders.

  3. Intercompany transactions: the SPE’s transactions with Affiliates must be at arm’s length and commercially reasonable terms, and guarantees of the SPE’s obligations by Affiliates and other credit support by Affiliates must be limited.

  4. Advantages and disadvantages: whether the benefits of the consolidation of assets outweigh the harm caused to creditors by the consolidation of assets.

Essentially, the courts seek to determine whether the assets and liabilities of the SPE can be separated from those of its affiliates and whether the SPE can operate as a stand-alone entity.

The courts are also considering whether the pooling of estates would cause injustice to creditors who relied on the separate credit and existence of the host structure.

Substantial consolidation can occur when the assets and liabilities of an SPE are “hopelessly intertwined” with those of its affiliates or when an SPE has to rely on its affiliates to conduct its business.


Affiliates of the SPE that are included in the non-consolidation notice are referred to as non-consolidation notice “matches”.

  • The basic rule, and requirement in rated transactions, is to match the SPE with any equity owner (or group of affiliated equity owners) that owns 49% or more of the equity interests in the SPE, plus any Guarantor and any Affiliated Manager (collectively, the “Related Entities”).

  • The non-consolidation notice will have the SPE on one “side” of the notice and the related entities on the other. Other SPEs to be transacted, such as operating lessees or general partners of a limited partnership SPE, should be included on the SPE side of the non-consolidation notice, matched with related entities. No notice of non-consolidation is required between the SPEs involved in the transaction.

  • In real estate transactions involving both a mortgage loan and a mezzanine loan, the mezzanine borrower is not a required SVC for the purposes of the mortgage loan, as it has a separate debt which must be isolated from the debt of the mortgage borrower. Instead, the mezzanine borrower, as the owner of the mortgage borrower’s equity, should be included as a related entity in the mortgage non-consolidation notice.

Originally posted by Pratt’s Journal of Bankruptcy LawVolume 18, Number 1, January 2022.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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