Meaning
Statutory provision in federal insolvency law that empowers a trustee or debtor-in-possession to avoid and recover preferential transfers made to creditors shortly before the bankruptcy petition is filed. Under US Bankruptcy Code Section 547, transfers made within the ninety-day pre-petition period can be clawed back to prevent the unequal treatment of creditors. This provision is designed to promote an orderly and fair liquidation process.
Asset Recovery
Trustees file avoidance complaints against creditors who received payments while the debtor was insolvent. The action requires proving that the transfer was made for an antecedent debt and allowed the creditor to receive more than they would have in a liquidation. Recovered funds are returned to the general bankruptcy estate to be shared among all unsecured creditors.
Creditor Equality
Equal distribution of assets is the fundamental policy of federal insolvency proceedings. By clawing back preferential transfers, US Bankruptcy Code Section 547 discourages creditors from racing to dismember the debtor during its financial distress. This deterrent protects the viability of the enterprise and encourages out-of-court restructuring efforts, which often yields a better outcome for all stakeholders involved in the process.
Transaction Defense
Defendants can defeat avoidance claims by proving that the transfer occurred in the ordinary course of business or represented a contemporaneous exchange for new value. This defense protects standard commercial transactions from disruption.
