There is a significant difference between procedural consolidation and substantive consolidation of bankruptcy proceedings. In procedural consolidation, the court directs that bankruptcy proceedings against two or more related persons be consolidated in a single proceeding. This is merely an administrative convenience that reduces the time and expense involved in maintaining separate proceedings. Procedural consolidation does not alter the substantive right of claimants against their respective debtors.
Substantive consolidation involves a pooling of assets and a pooling of claims. All of the assets of the various debtors are liquidated. The funds generated from the disposition of these assets are then used to satisfy the claims of all the creditors. Substantive consolidation can significantly affect the substantive position of the creditors. Suppose that A has assets worth $100,000 and $200,000 in debts, while B has assets worth $200,000 and $800,000 in debts. In the absence of substantive consolidation, the creditors of A will receive 50 cents on the dollar and the creditors of B will receive 25 cents on the dollar by way of dividend. With substantive consolidation, all creditors will receive 30 cents on the dollar.
The BIA contains several statutory provisions governing procedural consolidation of bankruptcy proceedings. Where more than one application for a bankruptcy order is against the same debtor or against joint debtors, a court may consolidate the proceedings.32A court is also permitted to consolidate bankruptcy proceedings against members of
a partnership where a bankruptcy order is obtained against one of the members.33The court’s power to make consolidation orders is not limited to these specific situations. A bankruptcy court has the inherent jurisdiction to control its own processes, and this permits it to make such orders in appropriate cases.34
The BIA provides for substantive consolidation in respect of the summary administration of the estates of individuals who, because of their relationship, could reasonably be dealt with as one estate.35A joint assignment may be made where the debts of the individuals making the joint assignment are substantially the same and the trustee is of the opinion that it is in the best interest of the debtors and creditors. While the court’s power to make substantive consolidation orders extends to other situations as well, it will not exercise that power if substantial...