Consolidation of the SPV

As is well-known, the essential premise of securitisation is the transfer of assets by the originator which will be isolated, such that the originator, a credit or liquidator of the originator cannot interfere with the same in the event of any bankruptcy, potential bankruptcy or distress proceedings against the originator.

Consolidation may make isolation meaningless. Consolidation is the power of a Court, in particular, a bankruptcy court, to consolidatte the SPV with the originator. In other words, the Court treats the SPV as a subset of the originator, or as an extended arm of the originator, and consolidates the SPV with the originator, such that the assets transferred by the originator to the SPV are treated as a part of the assets of the originator. Thus, the very purpose of isolation or true sale may be frustrated.

Such an action of the Court is referred to as substantive consolidation, lifting or pierceing of corporate veil, etc.

Here are the important questions regarding consolidation:

If the SPV is a separate company, how could the Court treat the SPV as a part of the Originator?

No doubt, the SPV is a separate incorporated body. There is a veil of legal entity or separation that separates the originator from the SPV. However, the Court may pierce the corporate veil and consolidate the two.

Do Courts in all jurisdictions have the power to consolidate?

The power to order a consolidation may either be specifically granted by bankruptcy statutes, or it is an inherent power of the Court. In most jurisdictions, since Courts are clothed with inherent powers to deal with situations where the Court feels it should disregard colourable arrangement of affairs by parties, the power to order a consolidation should be regarded as inherent power and is applicable in all jurisdictions.

However, the intensity of the probe that the Court may make into community of the originator with the SPV, or the tendency of the Court to actuall order a consolidation, really depends on the practice of the Court in the jurisdiction concerned.

US Courts are known to have a history of consolidation rulings. UK Courts, on the other hand, have been less keen to do so, except on suggestions of outright fraud, shams, fraudulent transfer of assets, etc.

What are the grounds on which a Court can order consolidation?

The fundamental basis of consolidation ruling is that SPV that is constituted as a separate legal entity is, in fact or substance, nothing but an extended arm of the originator. In other words, there is no separateness between the originator and the SPV and the investors who bought the securities of the SPV have actually relied upon the assets or credit of the originator.

Thus, the basis of consolidation is that the SPV is substantially the same as the originator.

Have there been instances of consolidation in securitisation industry?

There have been two prominent US : Buckhead America Corporation (1993) and Kingston Square Associates (1997). The first case is more or less based on mutual consent of all concerned parties but the latter case is very significant. In this, the originator succeeded in bringing back the assets of the originator by convincing the Court to consolidate. The Court relied upon such things as common sounding name of the SPV as that of the originator, common directors, common office, etc. There are a number of links below discussing this ruling in detail and securitisation professionals are advised to study this ruling in detail.

How about the UK practice?

As said before, UK Courts are less likely to order consolidation on the grounds on which US court did so in the Kingston Square case. UK Courts are still driven by the age-old ruling in Salomon v. Salomon and Co. In the context of securitisation, there has been a significant ruling in Re Polly Peck International Plc [1996] 1 BCLC 428. In this case, the SPV was a Cayman Island subsidiary of the originator. There were common directors too. The SPV was thinly capitalised. The Court refused to treat the SPV as a mere facade. The judge held that it is "legal substance" rather than economic substance that should guide the Court.

What should be done to avoid consolidation?

There cannot be a complete list, but among factors that one would like to observe while structuring the SPV are:

  • name of the SPV
  • office address of the SPV
  • ownership capital and the percentage held by the originator- preferably, the originator should not hold a substantial equity stake
  • number of independent directors, and a provision in constitutional documents obliging the directors to take independent decisions, etc. Proper legal counsel should be obtained to structure the SPV.


  • Substance DOES Count: The Efficacy of Independent Directors In Bankruptcy Remote Structures – article by Michael F. Wurst discusses how independent board of directors is necessary to prevent consolidation of the SPV upon bankruptcy of the originator. Click here 
  • Asset securitization: How remote is bankruptcy remote? This is a very elaborate article by Michael J. Cohn – click here
  • The Pitfalls of Bankruptcy Remote Clauses by Maureen Harrison – click here
  • Bankruptcy Court Allows Circumvention of "Bankruptcy Remote" Clause and Rejects a Secured Creditor's Attempt to Enforce "Anti-Bankruptcy" Provision by Irving Walker – click here
  • Issues in Securitized Mortgage Lending by Gregory P. Pressman – click here
  • Bankruptcy-proofing" your commercial transaction: reality or myth? By Gregory A. Tselikis, Esquire – Click here 
  • New decision may threaten "bankruptcy remote" provisions by Marvin Krasny – click here
  • UK ruling in Polly Peck and related cases have been discussed at length in To Pierce or Not to Pierce the Corporate Veil: Why Substantive Consolidation is Not an Issue under English Law by Simon Bowmer in Journal of International Banking Law August, 2000