When Is It Too Late For Substantive Consolidation?

The substantive consolidation of two or more entities is an important tool available to a bankruptcy court overseeing the cases of related entities whose financial affairs are hopelessly entangled or whose separate corporate identities otherwise have been disregarded by those in control or the companies' creditors. In deciding whether to consolidate two or more estates, a court must conduct a factually intensive inquiry and carefully balance the competing concerns of all interested parties. Most courts acknowledge that the remedy should be invoked only under narrowly defined circumstances, given the significant potential for prejudice to creditors and other stakeholders in a bankruptcy case.