Bankruptcy filing
A made a loan to B. Because of A”s position as a senior creditor, if B defaults on the loan, A has the right to direct B to sell certain assets to repay the loan to A. In its initial assessment of control, A concluded that this right was a protective right, because it concluded that defaulting on the loan would be an exceptional circumstance. Consequently, this right did not give A power over B, and therefore, A did not control B. A concluded that the voting rights, which are held by the equity investors, give the equity investors power over B.
B later defaults on the loan and files for bankruptcy, giving A the right to direct B to sell certain assets to repay the loan to A. Upon B filing for bankruptcy, A would need to evaluate whether having this right, which was previously protective, gives A power. This would be the case if A”s right to direct B to sell its assets is the activity that most significantly affects A”s returns. A may delegate this right to another party, such as a trustee or an administrator, who might be acting as A”s agent.
Before concluding which investors, if any, control B once it files for bankruptcy, consideration would also be given to what rights the equity investors have, if any, to direct the relevant activities of B, and also to whether A and the equity investors have exposure to variable returns from B.