Published by Thomson Reuters in the Norton Journal of Bankruptcy Law & Practice (volume 23, issue 1, February 2014).
Substantive consolidation is the merging of the assets and liabilities of two or more related debtors into a single pool to pay creditors. Cases decided under the Bankruptcy Code and its predecessor, the Bankruptcy Act, have established that a bankruptcy court has the power, in the exercise of its equitable jurisdiction, to disregard the separate existence of corporate entities and to effect a substantive consolidation in appropriate cases. Thus, the doctrine of substantive consolidation enables a bankruptcy court to pierce corporate veils in order to reach assets for the satisfaction of debts of a related corporation
Substantive consolidation is a judicially created doctrine arising from the general equitable powers granted to bankruptcy courts now embodied in section 105(a) of the Bankruptcy Code. Where substantive consolidation is ordered, the intercompany claims of the consolidated companies are eliminated, the assets of all debtors are treated as common assets, and claims of outside creditors against any of the debtors are treated as claims against a common fund.
“Appellate courts have ratified substantive consolidation orders when, for example, the debtors have abused corporate formalities, where creditors have treated the separate entities as a single unit and the business affairs of the consolidated entities were hopelessly entangled.”
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