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{{a|glossary|
{{a|glossary|
[[File:Void.jpg|450px|thumb|center|[https://www.artlimited.net/35486/art/image-far-from-void/en/642461 ''Far from Void''], Michael Dunaj]]
{{image|Void|jpg|[https://www.artlimited.net/35486/art/image-far-from-void/en/642461 ''Far from Void''], Michael Dunaj}}
}}{{d|Voidable preference|/ˈvɔɪdəbl ˈprɛfərəns/|n|}}
}}{{d|Voidable preference|/ˈvɔɪdəbl ˈprɛfərəns/|n|}}


What happens if you suddenly, apropos nothing, create a [[security interest]] in favour of your buddy, or generally prefer one creditor to others and then go ''[[tetas arriba]]'' within a short period.
What happens if you suddenly, ''a propos'' nothing, create a [[security interest]] in favour of your buddy, or generally prefer one creditor to others and then go ''[[tetas arriba]]'' within a short period.


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.
Depending on where you are, local [[insolvency]] laws may let an insolvency administrator set aside such a “preference”, if it supposes that, in creating it, you acted with base motives — i.e., you preferred your buddies over your legion of other creditors — when you both knew [[Tits up|things were turning to]] [[crème anglaise]].


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.
Most sophisticated jurisdictions have some kind of “anti-deprivation” principle in their insolvency regime which stops a company from preferring some of its creditors over others at its time of [[Tits up|tango uniform]].  


In the UK, it is section 239 of the [[Insolvency Act 1986]], and it goes something like this:
There is often an exception for desperate rear-guard actions taken in good faith with a genuine aspiration to stave off calamity, notwithstanding that they might have inadvertently caused it. This is the joy of cross-border finance: the rules will be utterly different in each jurisdiction where your counterparty is resident or holds assets. ''So you will need lots of legal advice.''
 
=== United Kingdom ===
In the UK, when we last looked<ref>Usual [[Ultimate disclaimer|disclaimer]] applies.</ref> it was section 239 of the [[Insolvency Act 1986]], and it goes something like this:


{{quote|''For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—'' <br>
{{quote|''For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—'' <br>
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:''(b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.''<br>}}
:''(b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.''<br>}}


This gives an insolvency administrator a wide discretion, and should give those extending credit to struggling companies pause for thought.  
This gives an insolvency administrator a wide discretion, and should give those extending credit to struggling companies pause for thought. But, in any case, it is a well understood part of the corporate credit landscape. Except when it comes to ''[[special purpose vehicle]]<nowiki/>s''.  


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


===[[Limited recourse]] and voidable preferences===
===[[Limited recourse]], voidable preferences and ... [[Archegos]]===
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]].  
Now, in the wonderful world of structured finance, there is a sort of anti-preference gambit: the [[Secured, limited recourse obligation|secured, limited recourse]] [[espievie|SPV]].  


{{quote|{{Repackaging limited recourse capsule}}}}
{{quote|{{Repackaging limited recourse capsule}}}}


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.  
=== Repackaging SPVs: an honourable exception ===
[[Repackaging vehicle|Repackaging SPV]]<nowiki/>s are designed to have a strictly limited, identifiable set of creditors all of whom agree that the vehicle should never to go [[Seins en l’air|''seins en l’air'']], and contractually agree not to put it into [[bankruptcy]], so questions of voidable preference do not arise.
 
So: as long as you are doing secured, [[Limited recourse|ring-fenced]] deals where every [[creditor]] is represented by the same [[security trustee]] and has its place pre-booked at ''[[La Restaurant Cascade de Sécurité]]'', no reason at all.
 
Why mention this in an article about [[voidable preference]]s? Well, because [[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. And they will soon grow old, and out of date, as we who are left grow old and out of date.</ref> through which ordinary, unsecured [[Asset manager|asset management]] vehicles make their stately passage. [[Hedge fund]]s. [[UCITS]]. [[SICAV]]s. 
 
=== [[Investment fund]] vehicles should ''not'' be limited recourse ===
Many other types of [[investment fund]] are also incorporated as [[Orphan ownership|orphan SPVs]]. But these “normal” investment funds don’t usually grant security interests over their assets, and they have a much more dispersed, antagonistic bunch of creditors and equity holders — who are assuredly ''not'' on the same page as each other.
 
They are no different from ordinary [[Limited liability company|LLC]]<nowiki/>s — they ''are'' ordinary [[Limited liability company|LLC]]<nowiki/>s — only with an odd ownership structure.
 
There’s a ''weak'' justification to have [[limited recourse]] here: to preserve the livelihoods of the passive [[Special purpose vehicle|SPV]] directors who might otherwise be barred from holding directorships if the vehicles they nominally manage go ''[[βυζιά πάνω]]''. They have delegated away most of their executive function to the investment manager: they just sit in the Cayman Islands snorkelling, cheating on each others’ spouses and holding the odd board meeting but otherwise having nothing to do with the day-to-day management of the fund. 
 
But this ''is'' a weak reason. Removing it might incentivise the fund directors to, you know, ''do their jobs'' and properly supervise the company’s [[agent]]s to make sure they are conducting themselves with probity and competence, so that the fund ''doesn’t'' go bankrupt.
 
=== [[Archegos|Voldemorchegos]] ===
Now, all this might seem an arid — even petulant — objection, but the [[repackaging]] vehicles whence the [[limited recourse]] idea came are a special case, and it doesn’t really do to confuse them with regular fund vehicles.
 
Normal funds ''can'' go bust — our [[roll of honour]] refers<ref>[[Roll of honour|Hall-of-famers]] include [[Archegos]], [[Amaranth Advisors LLC|Amaranth]], [[Long-Term Capital Management|LTCM]] and SPV daddy-oh Andrew Fastow of [[Enron Corporation]].</ref> —  and when they do, insolvency rules such as those against [[voidable preference]]s ensure fair treatment for everyone.
 
Now. Could such a voidable preference happen with a harmless, peace-loving [[Investment fund|fund management vehicle]]? 
 
''Yes''. 
 
Imagine a fund that has put on aggressively levered positions in the same stocks with several [[Broker|brokers]], without telling any of them that it has doubled down elsewhere. And imagine those trades suddenly turn to [[Tits up|vanillesoße]] ''together,'' 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! The [[Prime broker|brokers]] 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 [[Tits up|udders are currently pointing skyward]], and they are pointing that way precisely ''because'' of the fund manager’s ravenous appetite for a crappy stock). 
 
In that very instant the stocks — and the margin position of every one of the brokers — falls through the floor, and that of several apartments in storeys immediately below.  


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.  
Anyway, said fund is now a smoking hole in the ground, and five of its prime brokers are staring uncomprehendingly at billion dollar holes in their balance sheets.


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.  
But the sixth one — who was buddies with the PM at the investment manager — seems somehow to be okay.  


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.
If — this is purely hypothetical, but let’s just imagine for a minute — it then transpires that our now ''[[titten hoch]]'' [[espievie|investment fund]] got together with its favourite broker last week and quietly closed out the positions it held with ''that'' broker, while all the other brokers were being good eggs and holding off in the vain hope of an orderly unwind, then what?


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.
Well, suddenly those voidable preference rules start to look quite appealing to the disappointed brokers. Why should the favourite broker get preferential treatment? This is not so much a claim versus the [[كاسترد]] fund itself — it’s currently [[Tits up|on the dessert menu]] — but against that pally [[broker]] who got out at par a couple of days before the fund started swimming with the fishes


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.  
The brokers consult with their legal eagles, who stumble across a “[[limited recourse]]” provision, by which those [[broker|brokers]] kindly agreed ''not'' to put the [[espievie|fund]] into [[bankruptcy]] should it go ''[[tette in alto]]'', for the sake of its poor little directors.  


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.
But if you can’t bankrupt the fund, it can’t have ''made'' a voidable preference, because voidable preferences only ''exist'' in situations of insolvency. The fund is cleaned out, ''but it isn’t insolvent''. The brokers’ [[debt]]<nowiki/>s are extinguished. They have no further claim. They have no way of alleging that there has been a voidable preference, because they can’t put the fund into bankruptcy to establish one.


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.
Suddenly this little concession to preserve the livelihoods of SPV directors looks like quite the unfortunate legal term. Could our jokey broker have got away with it?


At the moment limited recourse is almost ''de rigueur''. It remains to be seen whether it stays that way, or whether some kind of evolution of the clause to allow voidable preference claims to be made even without an actual insolvency.
In the investment world at the moment, limited recourse is almost ''de rigueur''. It remains to be seen whether it stays that way, or whether some kind of evolution of the clause to allow voidable preference claims to be made even without an actual insolvency.


{{Sa}}
{{Sa}}
*[[bankruptcy]]
*[[bankruptcy|Bankruptcy]]
*[[Carve-in]]
*[[Carve-in]]
*[[Slavenburg]]
*[[Slavenburg]]
{{Ref}}
{{Ref}}
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