BANKRUPTCY REMOTE Meaning and
Definition
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Bankruptcy remote refers to a legal and financial concept that aims to safeguard the assets of a specific entity from being included in bankruptcy proceedings. This term is commonly used in the context of structured finance transactions, such as securitizations or special purpose entities (SPEs).
The concept of bankruptcy remote entails designing legal structures and agreements that minimize the risk of a bankruptcy court claiming the assets of a specific entity. This is typically achieved by placing the entity and its assets in a separate legal entity with limited or no liability to the parent company or other affiliated entities.
To be considered bankruptcy remote, certain key conditions must be satisfied. These may include the establishment of legally binding agreements, such as a true sale or a non-consolidation opinion, with third-party investors or lenders. Additionally, the separate entity must be structured in such a way that it operates independently and possesses its own assets and liabilities distinct from the parent company.
By creating a bankruptcy remote structure, lenders or investors can effectively reduce their exposure to potential bankruptcy risks, as the assets within the entity are protected and shielded from potential claims or liquidation in the event of a bankruptcy filing by the parent company. This is particularly important for the success of structured finance transactions, as it provides greater security and promotes confidence among investors.
Etymology of BANKRUPTCY REMOTE
The term "bankruptcy remote" is a combination of two words with separate origins: "bankruptcy" and "remote".
1. Bankruptcy: The word "bankruptcy" comes from the Italian term "banca rupta", which means "broken bench". This phrase originated during the medieval period when banking was conducted on benches in public marketplaces. If a banker was unable to repay debts, their bench would be physically broken to indicate their financial failure. Over time, the term evolved to refer to the legal status of individuals or businesses who are unable to repay their debts.
2. Remote: The word "remote" originates from the Latin word "remotus", which means "withdrawn" or "distant". It is derived from the verb "removere", which means "to move back" or "to remove".
