Bonds Issued to a Subsidiary
nish
that C issues some unsecured debt and S issues its own unsecured debt.
Later C declares chapter 11. S remains a healthy business. In such cases
would the debt issued to the subsidiary S be any safer than the debt issued
directly to C? If C decides to wind up S in order to satisfy creditor
claims against C, would S's own obligations be satisified in full first
before any monies are available from S to satisfy creditors of C?
nish
Barry Gold
Let me start out by warning you:
This is for discussion purposes only, and is not legal advice. I'm
not a lawyer. If you want legal advice, hire a lawyer.
IIUC, there is no difference between a "subsidiary corporation" and a
corporation that is entirely owned by one (natural) person. Let's say
you form a corporation to run a business(*), and the corporation borrows
money. Later on, you have some ginormous medical expenses and file
for BK. The assets of the corporation are _not_ part of your assets,
and they cannot be used to satisfy your personal debts. As long as
the corporation remains a healthy business, it can continue to pay its
own debts.
Instead, the _ownership_ of the corporation becomes part of your BK
estate. Your creditors would then own the corporation. In a typical
BK, with multiple creditors and your assets worth only a fraction of
your debts, what would probably happen is the BK trustee would sell
the business on the open market and distribute the proceeds to the
creditors.
I assume the same thing would happen with a subsidiary. C's assets
(including the ownership of S) are sold, and the money distributed
among the creditors. Alternatively, the (unsecured) creditors could
agree to distribute the _shares_ of S in proportion to the amounts
they are owned.
The one problem that I forsee is _running_ S. When a corporation is
owned by an individual, that individual's personal management is often
a large part of the reason for the business's success. So taking away
the ownership and assigning management to somebody else would likely
result in the business failing -- or at least becoming less sucessful.
Or they could keep him on as CEO and/or COO and pay him a salary, but
then you have the question: would he put as much effort and creativity
into running the business for others, as he did when he expected to
reap the profits for himself (by eventually selling the shares).
But with a subsidiary corporation, it is likely that S _already_ has a
separate executive structure, and that those executives will continue
to exert the same effective management for the new owner that they did
for the previous owner.
So as long as the new owner leaves the management structure in place
and doesn't try the "New broom sweeps clean" approach, S should
continue to be a profitable business and hence well worth buying.
(*) There are lots of reasons to do this. The check cashing business
that my father ran was a corporation, because the state corporations
code considered that a sort of bank, and banks are required to be
incorporated in CA. Or you may want to take out loans for the
business -- then if the business goes belly up you don't have to pay
the loans. [But that makes it harder to get the loans, because banks
and other lenders know they have no recourse against your personal
assets.]
--
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