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.
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1There 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 07 '21 at 17:45
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2This 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 08 '21 at 08:36
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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 08 '21 at 16:05
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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.
ohwilleke
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3"sufficient" implies minimum. Presumably you mean to say that the action should be pursued within a maximum number of years. – Acccumulation Jul 08 '21 at 04:15
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3Transferring the assets to a subsidiary would make that subsidiary a valuable asset itself. – MSalters Jul 08 '21 at 10:12
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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 08 '21 at 17:15
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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 08 '21 at 21:00
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@MSalters Unless the subsidiary is subsequently spun off to the shareholders of the parent company as an in kind dividend in the form of subsidiary shares. – ohwilleke Jul 08 '21 at 21:03
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@ohwilleke: If e.g. a company wants to split off a division which has its own building for which it has a mortgage, I would expect that it would be typical for the building and mortgage to both end up with the subsidiary. It would make sense for lender permission of some form to be required, but what form would such permission usually take? – supercat Jul 08 '21 at 21:27
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@supercat The lender would send a signed letter or signed permission form. The authorization to assign the loan would typically not release the original debtor from the lease, and would often require the debtor to affirm that the debt is in force and owing with a specified balance and that the debtor has no defenses to it, and would often require the subsidiary to guarantee the loan as well. – ohwilleke Jul 08 '21 at 21:28