Special Purpose Vehicles In Modern Accounting

1186 words - 5 pages

Many projects are structured by sponsors using a special purpose vehicle (SPV). The SPV will undertake and carry out the project on behalf of the sponsors. In a number of cases, the SPV will obtain limited recourse finance needed for the project. It is a popular belief that the use of such an SPV will effectively quarantine the liability exposure of the sponsors to the assets and undertaking of the SPV, including the project. The use of an SPV is said to create a closed circuit of risk1. Contrary to this view, where an SPV is a wholly-owned subsidiary of a sponsor, there nonetheless may be direct liability attaching to the sponsor as the SPV parent company, in the event of insolvency of the SPV. In layman's terms, a sponsor who utilises a wholly-owned SPV may not be able to simply walk away from the project debts and liabilities in the event of insolvency.There are various methods that creditors can employ in the case of default in order to recoup their debts from the sponsor, as opposed to simply seeking recovery from the SPV, the project's assets and cash flow. Creditors will, however, primarily have to look to the SPV and the project's success as the primary source for repayment.Limited liabilityThis concept lies at the heart of the incorporation of companies and the use of companies as the vehicles for the conduct of businesses and ventures. Generally, shareholders of a company will not be liable for the indebtedness of a company beyond the amount paid up on their shares. However, for companies which have wholly-owned subsidiaries (ie. parent or holding companies), the courts have occasionally allowed creditors of the subsidiary to have direct access to the parent or holding company's balance sheet. Any such liability will only arise upon the insolvency, or likely insolvency, of the subsidiary.Under-resourced subsidiariesA parent or holding company may find itself liable if it has allowed its subsidiary SPV to be under resourced when viewed against its contracted debts and liabilities.These subsidiaries may be regarded by law as a mere agent of the parent, as its parent, or as its partner in the venture. There are, however, various obviating factors. These include a separate and independent board; dedicated personnel separate from the parent; sources of credit other than the parent, and resources independent of the parent and not subject to its control.When considering such liability, there must be ongoing consideration by the company's directors as to whether the company is insolvent, or likely to become insolvent. A company will become insolvent at the time the debt or liability is incurred, or when the debt or liability pushes the company into insolvency. The test for determining whether a company is insolvent is an objective one. The court will ask whether a reasonable person at the time would suspect that the company was insolvent, requiring a positive feeling of apprehension, but without sufficient evidence (Justice Kitto in Queensland...

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