Meaning
Provisions within the United States Bankruptcy Code establish the elements required to avoid and recover preferential transfers made to creditors. A trustee relies on Section 547b to systematically demonstrate that a transaction was made for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent. This regulation ensures the equitable distribution of the assets of the debtor.
Statutory Element
Five distinct conditions must be met to successfully avoid a transaction under this provision. The transfer must benefit a creditor, resolve a pre-existing debt, occur while the debtor is insolvent, fall within the relevant lookback period, and enable the creditor to receive more than they would under a liquidation. Failing to prove even one of these elements defeats the avoidance action.
Insolvency Presumption
The law assumes the debtor was insolvent during the ninety days preceding the bankruptcy petition. This presumption shifts the burden of proof to the creditor, who must present evidence of solvency to escape the clawback action. It simplifies the task of the trustee during the initial phases of asset recovery.
Creditor Defense
Affected creditors can defeat the action by demonstrating that the transfer occurred in the ordinary course of business. Alternatively, providing new value to the debtor after receiving the payment can protect the transaction from being avoided. These exceptions prevent the law from disrupting standard commercial relationships and punishing cooperative suppliers.
By establishing these safe harbors, the statute maintains a balance between recovering unfairly distributed assets and protecting ongoing trade relationships that might help a struggling firm survive.
