The US District Court in Delaware issued a decision late last
year in the Owens Corning bankruptcy case that has caused
many observers to wonder whether the bar for substantive
consolidation has been significantly lowered.
In the US, the equitable doctrine of substantive consolidation
allows a bankruptcy court to ignore the corporate separateness of
affiliated entities and combine them for purposes of making
distributions under a plan of reorganization. The creditors of the
entities that get lumped together essentially become the creditors
of the combined entity.
The doctrine is a long-standing one, but it has rarely been
applied because of the impact it can have on various creditor
constituencies. If the doctrine is applied, a lender who has
extended credit to one company within a corporate group can
suddenly find that the creditors of an affiliated group member have
claims against the assets of its borrower.
Usually, courts have substantively...