Non-petition covenant: Overview, definition, and example
What is non-petition covenant?
A non-petition covenant is a clause commonly used in structured finance, securitizations, and bankruptcy-remote transactions. It prevents a party—typically a creditor, investor, or contract counterparty—from initiating or joining an involuntary bankruptcy or insolvency proceeding against a specific entity, often a special purpose vehicle (SPV). The restriction usually applies for a certain period of time after the transaction has ended.
Why is non-petition covenant important?
This clause helps preserve the bankruptcy-remote status of entities like SPVs by protecting them from premature or opportunistic insolvency filings. It's a key tool in maintaining the integrity of structured finance deals, ensuring that cash flows remain uninterrupted and that investor protections remain intact. Without this covenant, counterparties might trigger bankruptcy proceedings that could destabilize the structure or harm other stakeholders.
Understanding non-petition covenant through an example
An SPV is created to hold receivables in a securitization transaction. The contract with the noteholders includes a non-petition covenant stating that no noteholder may file or support an involuntary bankruptcy petition against the SPV for one year after the notes are repaid. This gives the SPV time to wind down in an orderly fashion and protects the structure from legal disruptions during that period.
Example of a non-petition covenant clause
Here’s how a non-petition covenant clause may appear in a contract:
"Each party hereby agrees that it shall not institute or join in any proceeding seeking the bankruptcy, reorganization, arrangement, insolvency, liquidation, or other relief with respect to the Issuer under any bankruptcy or insolvency law for a period of one year and one day following the date on which all obligations under the transaction documents have been paid in full."
Conclusion
The non-petition covenant plays a crucial role in protecting structured finance vehicles from destabilizing bankruptcy filings. It supports deal stability, preserves investor confidence, and helps maintain the legal and financial separation needed for these entities to function effectively. If your transaction involves an SPV or a securitized asset structure, this clause is an essential safeguard.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.