Legal and Regulatory Landscape: What Courts Say About Independent Directors

Independent directors are widely used to help maintain bankruptcy remoteness, but is their power to block a bankruptcy filing truly enforceable? U.S. bankruptcy law is built on the principle that any eligible entity should have access to the protection of the courts when facing financial distress.

Let’s unpack the legal line between what contracts can dictate, and where public policy steps in.

The Legal Framework: Contracts vs. Bankruptcy Rights

Structured finance documents often include language stating that the consent of an independent director is required before an SPE can file for voluntary bankruptcy. These clauses are designed to:

• Prevent opportunistic filings by the parent company

• Protect lender collateral

• Preserve asset isolation for investors

But here’s the catch: federal bankruptcy law overrides contractual provisions that attempt to waive or eliminate the right to file bankruptcy. So, while independent director provisions are respected, they cannot make bankruptcy completely impossible.

What the Courts Have Said

Over the years, courts have largely upheld the legitimacy of independent director roles, provided:

• The director is truly independent

• The SPE is not being manipulated for improper purposes

• The governance structure doesn’t constitute a complete waiver of bankruptcy rights

General Growth Properties (2009)

The court emphasized that independent directors must exercise fiduciary duties to the SPE, not just the creditors.

Intervention Energy Holdings (2016)

Here, a "golden share" provision that gave one minority investor the unilateral right to block bankruptcy was struck down as contrary to public policy.

In Kingston Square Associates

The court upheld the use of an independent director, but carefully scrutinized whether they were truly independent or just a tool of the lender.

The Bottom Line

Independent directors can absolutely serve as a legal and practical deterrent to bankruptcy, but courts will not enforce arrangements that attempt to make bankruptcy protection entirely unreachable.

This reinforces the importance of:

• Using genuinely independent, qualified professionals

• Structuring governance that balances creditor protection with legal rights

• Maintaining clear documentation of fiduciary duty and intent

How SPE Specialists Supports Legal Integrity

At SPE Specialists, we go beyond just supplying qualified directors. We:

• Educate our directors on their fiduciary obligations

• Ensure they understand when and how to exercise independent judgment

• Help clients draft governance structures that are effective, but not overreaching

This legal nuance matters. Our goal is to help clients achieve robust bankruptcy remoteness without crossing legal or ethical lines that could undermine enforceability.

Up Next: Why Rating Agencies Care About Independent Directors. We’ll explore how independent directors directly impact credit ratings, and what rating agencies expect when evaluating bankruptcy remote structures.