11

Out of curiosity, is it theoretically possible for a parent company to create a spin off company that holds all of its debt and no assets? Then the subsidiary spin-off company will declare bankruptcy and the parent company remains with only assets.

3
  • 1
    There are rules regarding spinoffs, which I am unfamiliar; however, with regards to bankruptcy, bankruptcy courts can and do look back into past history, especially with an eye to how one got into debt, and either claw back funds or deny the bankruptcy protection.
    – sharur
    Jul 7 at 17:45
  • 2
    This idea comes up with some frequency. The advantages are very obvious, and it's clear how this would be rife for abuse. Why ever pay for any item purchased, if you could just spinoff the invoice into a company that doesn't have the asset? In short, there's not a human alive that wouldn't see this as a financial fraud.
    – Edwin Buck
    Jul 8 at 8:36
  • Look at the recent history of Sears (Sears Holding Company in particular) to see an example of how this would work in real life. Not word for word what you describe, but something that worked not-so-differently in practice.
    – Joe
    Jul 8 at 16:05
20

An arrangement like that (if successful) would be a fraudulent transfer in which creditors could gain access to the assets of the company's to which the assets were transferred, if pursued before the statute of limitations for doing so runs (typically four years from the date of transfer, or one year from discovery of the transfer, in the U.S.). In a bankruptcy, the bankruptcy trustee could exercise that right on behalf of all creditors.

Also, the debt can't be transferred without the creditor's consent. To do the transaction, the assets would have to be transferred to a subsidiary, not the liabilities.

9
  • 3
    "sufficient" implies minimum. Presumably you mean to say that the action should be pursued within a maximum number of years. Jul 8 at 4:15
  • 3
    Transferring the assets to a subsidiary would make that subsidiary a valuable asset itself.
    – MSalters
    Jul 8 at 10:12
  • "other company's assets" - do you mean parent company here? Jul 8 at 11:47
  • What would be the rules of transferring secured debts along with the assets that secure them? If e.g. a subsidiary receives a building along with a mortgage, would the parent company need to keep the debt on its books as a liability in case the subsidiary defaults, or would it typical for the parent company to seek permission from creditors to regard the subsidiary as the sole debtor (presumably in exchange for some consideration)?
    – supercat
    Jul 8 at 17:15
  • 1
    @supercat Most secured debts make transfer of the collateral an event of default that can't be done without lender permission. Also, even if it is transferred (perhaps in violation of loan covenants), the company signing the note remains obligated on the note and the asset remains subject to seizure for non-payment of the debt (subject to narrow exceptions that rarely apply in business transactions).
    – ohwilleke
    Jul 8 at 21:00

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.