Preference Payment / Clawback
Preference Payment / Clawback a legal mechanism in bankruptcy where a trustee can recover payments made to creditors before a company's bankruptcy filing.
This mechanism aims to ensure fair distribution of assets among all creditors during bankruptcy proceedings.
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How Preference Payment / Clawback Works
Preference payments occur when a struggling business makes payments to specific creditors within a defined period before filing bankruptcy. The bankruptcy code allows trustees to 'claw back' these payments to create a more equitable distribution of remaining assets.
The legal framework targets transactions that might unfairly prioritize certain creditors over others in the immediate pre-bankruptcy period. This prevents strategic manipulation of payment schedules designed to protect select creditors.
Businesses can defend against preference claims through specific legal defenses, including demonstrating contemporaneous exchange, ordinary course of business, or providing new value after the payment.
Key Points
- •90-day lookback period for ordinary creditors
- •Payments can be recovered if they provide preferential treatment
- •Multiple legal defenses exist to challenge clawback attempts
- •Potential significant financial impact for businesses
- •Requires careful documentation and payment tracking
Frequently Asked Questions
Related M&A Concepts
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