Must a Subsidiary File for Bankruptcy
If Its Parent Company Does So?
By Michael C. Dennis, MBA, CBF
The answer to this question is important if you are selling to
subsidiary - particularly if the subsidiary's business seems to
be thriving, but the parent company is in financial trouble.
Answer to this question is the subsidiary will Not Necessarily
file for bankruptcy protect. However, creditors should remember:
The stock of a subsidiary is an asset of the parent company.
In many cases, when a parent company files for bankruptcy protection
its subsidiaries also file for bankruptcy protection.
Is it possible [but uncommon] for a subsidiary to be unaffected
by the bankruptcy filing of its parent company?
A parent company cannot automatically place its subsidiaries
The subsidiary must meet the bankruptcy requirements --- meaning
either [a] the subsidiary's liabilities exceed its assets, or
[b] the subsidiary is not paying its debts as they come due.
In this scenario, other serious issues to consider include:
Are the assets of the subsidiary pledged to the parent company's
bank as collateral for debts of the parent company?
Are there any loan covenants involving loans to the subsidiary
that relate to the financial health of the parent company?
Will other creditors continue to support the subsidiary by
providing open account terms while the parent is in bankruptcy
Even if the subsidiary does not file bankruptcy, would the
cash demands of the bankrupt parent company damage the subsidiary's
liquidity to the point that selling to it on open account terms
after the parent company's bankruptcy would be unwise?
Might talented employees leave the subsidiary over concerns
about the viability of their employer?
Reprinted with permission from the Covering
Credit Newsletter 9/25/02 Edition © 2001All Rights