Clause primer
Limited recourse and non-petition clause
Claims against a special purpose entity are limited to its specified assets as applied under the payment waterfall, and each party agrees not to start insolvency proceedings against it.
Legal information, not legal advice. What a clause does depends on its exact words, the rest of the agreement and the governing law.
Also called: limited recourse, non-petition covenant, bankruptcy remoteness provisions, no recourse clause. Where you find it: SPV and securitization documents, receivables purchase and servicing agreements, collateral trust and account bank agreements, and supply chain finance programs that use a purchasing vehicle.
SAMPLE CLAUSE (INVENTED FOR THIS PRIMER)
Each party agrees that the obligations of the Issuer under this Agreement are payable solely from the Collateral, as applied under the Priority of Payments. If the Collateral is exhausted, any remaining claim against the Issuer is extinguished and no party may take further action to recover it. No party shall, until one year and one day after all Notes have been paid in full, institute or join any person in instituting any bankruptcy, insolvency, reorganization or similar proceeding against the Issuer. Nothing in this Section limits any claim against any person other than the Issuer.
How it works
Recourse limited to collateral
The SPV's obligations are payable only from defined assets and only in the order the waterfall sets. A party lower in the waterfall bears the risk that the assets run out before it is paid.
Extinguishment
Once the collateral is exhausted, any remaining claim is extinguished. Some forms instead only bar enforcement, which can matter in an insolvency.
Non-petition period
Parties agree not to start or join insolvency proceedings until a set period after the debt is repaid. The "one year and one day" period is a common choice tied to preference look-back concerns; check the period your deal uses.
Claims against others preserved
The limit protects only the SPV. Claims against a servicer, originator or guarantor in its own capacity remain available.
Why it is there
Securitization relies on the SPV being isolated from the credit of its sponsor and protected against being pushed into insolvency by any one creditor. Rating agencies and investors want certainty that only the waterfall determines who is paid and that no service provider can disrupt it. Every counterparty, including trustees, account banks, servicers and hedge providers, is therefore asked to sign these provisions.
How it works with other clauses
- The payment waterfall (priority of payments) defines what each party actually receives, so the limited recourse clause must be read with it.
- Separateness covenants and independent director provisions in the SPV's organizational documents support the same bankruptcy remoteness goal.
- Indemnities given by the SPV are only as good as the collateral and the party's place in the waterfall.
- True sale and non-consolidation opinions often assume these clauses are in place.
Negotiating it
Who it protects: The SPV and its senior investors
If it protects you
- Require every counterparty to the SPV to sign both limited recourse and non-petition language.
- Keep the express statement that unpaid claims are extinguished after the collateral is applied.
- Make the non-petition covenant survive termination of the agreement.
If it runs against you
- Standard ask: a senior place in the waterfall for your fees and indemnities; fallback is a capped senior amount with the balance subordinated.
- Confirm that claims against the sponsor, servicer or originator in their own capacity are preserved.
- Ask for a right to join or file claims in proceedings started by others, so you are not shut out.
Escalate before accepting: A limited recourse clause that also protects the sponsor or servicer from claims for their own breaches, since that removes your only practical remedy.
What AI explanations get wrong
- Treating the clause as a general limitation of liability. Check that it covers only the SPV and is tied to the waterfall.
- Stating that the non-petition covenant is always enforceable. Check governing law; some courts may limit enforcement of an agreement not to file.
- Missing the difference between extinguishment and a bar on enforcement. Check the exact operative words.
- Ignoring where the reader sits in the waterfall. Check the priority of payments before assessing the risk.
Where the law varies
Enforceability of non-petition covenants and of extinguishment language depends on governing law and on the insolvency law of the SPV's jurisdiction, and courts may view a waiver of bankruptcy rights differently when given by a creditor rather than the debtor itself.
Sources
TOOLS
Need a primer like this for a clause in front of you? The Clause Primer Kit, included in All-access, produces one in this format inside the AI tool you already use, with checks built in. For reviewing whole agreements, see the Agent Kit 1: Contract Review and Negotiation.