Page 156 - Bankruptcy Volume 1

Appendix E

Parent-Subsidiary Relationship Assessment

Use affirmative answers as evidence in favor of substantive consolidation to determine parent-subsidiary
relationships. Use negative answers as evidence against substantive consolidation. Because of the broad
nature of these questions, they often overlap with the other items described.

Yes No
1. The subsidiary has grossly inadequate capital and
receives the preponderance of its financing directly
from the parent.
2. The parent provides most of the subsidiary’s as-
sets.
3. The parent corporation owns all or a majority of
the subsidiary’s stock or otherwise caused its in-
corporation.
4. The parent finances the subsidiary or secures its
credit through a combined line of credit.
5. The parent pays the salaries, expenses, or losses of
the subsidiary.
6. The parent receives all bills for payment from
commingled cash.
7. The subsidiary has no business except with the
parent. (This issue provides compelling evidence to
support consolidation.)
8. In its communications, the parent refers to the sub-
sidiary as a department, division, or branch.
(Communications of this kind indicate that credi-
tors assumed they were working with the parent
alone, without regard to the subsidiaries.)
9. The parent receives all cash receipts, thereby
commingling income.
10. The parent provides customer guarantees.
11. The parent gratuitously transfers buildings or other
assets to the subsidiary, and the subsidiary’s lease
or purchase payments can cover only the existing
mortgage.
12. The parent and subsidiary make gratuitous inter-
company transfers without the benefit of signed
promissory notes or terms providing for the pay-
ment of interest.
13. The same legal counsel provides services to all of
the companies.
14. Departments of the different corporations, such as
accounting and payroll, manage the internal affairs
as if they made up a unified business enterprise.
15. The subsidiary or the parent utilizes the NOL of
the other without considering the benefit of a tax-
sharing agreement.

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