Voidable preference: Difference between revisions

Depending on where you are from, the [[insolvency]] laws of your land may set aside any such preference, at the petition of your administrator, if it supposes that in creating, it you acted with base motives: preferring one of your buddies, over your legion of other creditors, when the writing was already on the wall.

Most sophisticated jurisdictions have some kind of “anti-deprivation” principle in their insolvency regime which stops a struggling company from preferring some of its creditors over others. There is usually an exception for desperate rearguard actions taken in good faith with a genuine aspiration to stave off calamity, notwithstanding that they might have inadvertently caused it.

In the UK, it is section 239 of the [[Insolvency Act 1986]], and it goes something like this:

This gives an insolvency administrator a wide discretion, and should give those extending credit to struggling companies pause for thought.  

But it is a well understood part of the corporate credit landscape. Except when it comes to ''[[special purpose vehicle]]<nowiki/>s''.

===[[Limited recourse]] and voidable preferences===

Now elsewhere, in the wonderful world of structured finance, is a sort of anti-preference gambit: the [[Secured, limited recourse obligation|secured limited recourse]] [[espievie]].  

Why mention this in an article about [[voidable preference]]s? Well, as long as you are doing secured, single-issuance deals where every [[creditor]] is represented by the [[security trustee]] and has a place reserved at ''La Restaurant Cascade de Sécurité'', no reason at all.  

But [[limited recourse]] has slipped its moorings and drifted into the shipping lanes and intercontinental canals<ref>I am going to resist the temptation to make an Ever Given Suez Canal gag here. Mainly because I can’t think of one.</ref> through which ordinary, unsecured asset management vehicles make their stately passage. [[Hedge fund]]s. [[UCITS]]. [[SICAV]]s. An [[investment fund]] [[espievie]] doesn’t usually grant security interests over its assets at all, and it has a much more dispersed, antagonistic bunch of creditors, who are assuredly not on the same page as each other, and, usually, equity holders too.  

There’s a ''weak'' justification to have [[limited recourse]] here: — to preserve the livelihoods of [[espievie]] directors who might otherwise be barred from holding directorships if companies they manage go ''[[βυζιά πάνω]]'' — but this is a weak reason, and removing it might incentivise the fund’s director to, you know, ''do their jobs'' and properly supervise the company’s [[agent]]s to make sure they are conducting themselves with probity.  

All this might seem a rather arid, even petulant objection, but [[repackaging]] vehicles are a rather special case, and it doesn’t really do to confuse them with regular fund vehicles, which are a lot more like normal companies.

By resisting [[limited recourse]] [[creditor]]s, who might otherwise be at each others’ throats, are protected from each other should the company go into receivership. Insolvency rules, such as those against [[voidable preference]]s a company grants to its favourite creditors just before it goes ''[[seins en l’air]]'', ensure fair treatment for everyone.  

Could such a preference happen with a harmless, peace-loving [[espievie]]? Well, imagine a fund that has put on aggressively levered positions with several brokers, without telling any of them that it has doubled down on the trade elsewhere. And imagine that trade suddenly goes, ''[[tango uniform]]'', prompting a margin call bonanza and sending the cream of each broker’s [[legal eagle]]ry scurrying for their [[close-out]] manuals. But — oh! — too late. They all try to sell the same stocks at once, into a market which suddenly has zero appetite for that stock, except not “suddenly”, really, since the only person who ever ''had'' the appetite for the stock is the one whose udders are currently pointing skyward, and they are pointing that way precisely ''because'' of his ravenous appetite for a crappy stock. Stock falls through the floor, and that of several apartments below.  

If it then transpires that our now ''[[titten hoch]]'' [[espievie]] got together with one of its brokers last week, to close out its positions while all the other brokers were being good eggs and holding off in the vain hope of an orderly unwind, then what? Well, suddenly those voidable preference rules start to look quite appealing to disappointed brokers.

Which means that a “[[limited recourse]]” contractual provision, by which those [[broker|brokers]] kindly agreed ''not'' to put the [[espievie]] into [[bankruptcy]] should it go ''[[tette in alto]]'', for the sake of its poor little directors, looks like quite the unfortunate legal term.

*[[bankruptcy]]