Clawback Risk

Avoidance Period

Statutory lookback periods define the temporal boundary of the risk. For routine transactions, this period is typically ninety days, but it extends to one year for insiders such as directors or parent companies. If the transfer occurred during this period while the debtor was insolvent, clawback risk materializes as a demand for return of the funds.

The trustee needs to prove insolvency at the time of the transfer, which is often presumed for the ninety days preceding the petition.

Defensive Safeharbor

Defending against a clawback claim requires proving that the transfer occurred in the ordinary course of business. Creditors can also escape liability by showing they provided new value to the debtor after receiving the payment. These statutory defenses protect legitimate commercial transactions and maintain liquidity in the market.

Without these protections, trade creditors might refuse to do business with distressed suppliers.

Corporate Exit

Restructuring agreements and merger contracts must allocate this potential liability between the buyer and the seller. When a division is carved out and sold, clawback risk can threaten the transaction if the seller enters bankruptcy soon after the deal closes. Parties mitigate this by requiring solvency certificates and using transaction structures that ensure fair value was paid.

This allocation of risk is finalized before the transaction completes.