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Recovering Transfers That Create Insolvency

BY David Gottlieb
September 25, 2012

Over the past few years, several companies have run out of money and been forced to declare bankruptcy within months of completing transactions that depleted their equity value and rendered them insolvent. Sometimes the value was dissipated through an equity distribution and other times through non-ordinary course expenses.

There are successful approaches to recovering funds for creditors in such cases. Creditors, however, are not the only parties with a stake in understanding how such transactions can be unwound. The recipients of the funds generated by such loans could be required to return the proceeds, leaving the recipients in significantly worse condition than they were before they received the funds.

By understanding the test for determining whether such a transaction can be unwound, lenders, recipients, and creditors all benefit. Lenders can recognize the inherent risk in such transactions in advance and make adjustments to protect themselves. Recipients can learn to forecast scenarios in which the funds would be expunged and thus make informed decisions about accepting such loan proceeds. Creditors can potentially unwind the questioned transactions and recover value.

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