The 800-Pound Gorilla. Limits to Group Structures and Asset Partitioning in Insolvency, Preadviezen / Reports 2018
The website of the Netherlands Association for Comparative and International Insolvency Law (NACIIL) has published in open access the reports (“preadviezen”) on Limits to Group Structures and Asset Partitioning in Insolvency.
This book contains reports prepared by prof. R. Squire (US), prof. J. Vananroye, A. van Hoe and dr. G. Lindemans (Belgium), prof. F.M.J. Verstijlen and A. Karapetian (Netherlands) and A.L. Jonkers (Netherlands). From the introduction to reports by the NACIIL board:
“In insolvency procedures, administrators have to accept the estate as they find it. Furthermore, administrators are commonly appointed in the proceeding as to a specific legal entity and have to respect the separate legal personality. By means of limited liability and separate legal personality, groups can incorporate in ways where liabilities and assets are allocated in different legal entities. This creates room for opportunism, especially in relation to creditors.
The 2018 NACIIL annual reports focus on the theme ‘Limits to Group Structures and Asset Partitioning in Insolvency’. This theme encompasses two related topics at the intersection of corporate law and insolvency law: (1) the artificial subdivision of enterprises over different legal entities (asset partitioning) and (2) selective perforation by means of guarantees. Continue reading “Limits to Group Structures and Asset Partitioning in Insolvency”
Asset partitioning refers to limited liability (or: owner shielding) and entity shielding. In both cases a pool of assets is allocated to a pool of liabilities.
The economic justifications of limited liability and entity shielding typically refer – sometimes implicitly – to the situation of many shareholders in a business. Hansmann and Squire refer to this type of asset partitioning as external asset partitioning (“External and Internal Asset Partitioning: Corporations and Their Subsidiaries, The Oxford Handbook of Corporate Law and Governance (Forthcoming)”; Yale Law & Economics Research Paper No. 535, 2.). Asset partitioning is also used within a business to make separate pools of assets and liabilities; this is internal asset partitioning (ibid.). A typical example is a corporate group, where the business as an economic unity is internally, through affiliates, divided in separate pools of assets. We also consider a company owned (or primarily owned) by a single shareholder as internal asset partitioning, even if that shareholder is a physical person. The economic unity between the single shareholder and the business of her company is similar to, if not stronger than, that between the separate entities of a corporate group.
Asset partitioning builds walls between pools of assets and liabilities. Sometimes the insiders themselves disregard the asset partitioning which they have set up themselves. This is referred to as selective de-partitioning. A crude example is the single shareholder or the parent company extracting assets from its company or subsidiary or shifting liabilities towards it. A more sophisticated example is a guarantee of one entity of a group towards another entity of the group. Often legal rules provide the creditors of the shareholders of a company with remedies against selective de-partitioning. In such a case the law reinforces the walls of asset partitioning.
We will use Belgian law as an example of how an entity-focussed tax law can favour asset partitioning and discourage selective de-partitioning. Continue reading “The underestimated role of tax law in promoting asset partitioning ánd discouraging selective de-partitioning”
Allowing creditors of one member of a corporate group to pierce horizontally to reach the assets of other members
Belgian private law is traditionally very distrustful of asset partitioning in the shape of both owner shielding and entity shielding. It has inherited from the 19th century French doctrine (Aubry & Rau) the idea that: (i) only persons have an estate; and (ii) every person has only one estate. An ‘estate’ (‘vermogen’ / ‘patrimoine’) is a pool of assets which serves as collateral for a pool of liabilities. Accordingly, the traditional théorie du patrimoine entails that a person cannot have separate pools of assets which serve as collateral for separate pools of liabilities. This theory betrays a strong distrust of asset partitioning, both internal and external.
In the beginning of the 19th century the rule ‘one person, one and only one estate’ was generally understood as referring to natural persons. The incorporation of legal persons, particularly of legal persons with owner shielding (limited liability), was exceptional and restricted. It was limited to certain types of activities and subject to governmental authorization. As a result, the 19th century doctrine of ‘one person, one and only one estate’, while at face value barely modified, presently has completely different practical consequences. Presently a natural person can easily incorporate, control and benefit from, one or more legal persons.
This raises the important question: Why is the traditional animus against asset partitioning not an issue, or less so, in case the technique of the corporate form with legal personality is used to bring about such asset partitioning? Continue reading “‘Enterprise liability’ for entities of a group?”