Legal Definitions - bankruptcy-remote entity

A bankruptcy-remote entity is a type of business that is designed to minimize the risk of becoming bankrupt. It is usually created to perform limited functions, such as purchasing and holding financial assets that generate revenue. The entity's organizational charter requires at least one independent director to be appointed, and a unanimous vote by the entity's directors before a bankruptcy petition may be filed. This type of entity has only one or a few primary creditors to reduce the likelihood of an involuntary bankruptcy.

For example, a company may create a bankruptcy-remote entity to purchase and hold accounts receivable. This entity would have only one or a few primary creditors, reducing the risk of bankruptcy. The organizational charter would require a unanimous vote by the entity's directors before a bankruptcy petition may be filed, further reducing the risk of bankruptcy.

Another example is a special-purpose entity established to develop, own, and operate a power plant. The lender would look primarily to the money generated by the power plant as security for the loan. The lender would be paid solely or primarily from the money generated by the contracts for the facility's output, such as the electricity sold by the power plant. The special-purpose entity would be a bankruptcy-remote entity, reducing the risk of bankruptcy.