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Voidable preference: Difference between revisions
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{{a|glossary|}}What happens if you create a [[security interest]] over existing [[indebtedness]], and then go bust within a period specified by statute ( usually 6 months of thereabouts). The law will set aside such a [[security interest]], supposing that in creating it a debtor was acting with base motives: preferring one of his buddies, to whom he owed money, over his legion other creditors, when the writing on the wall or his solvency made itself suddenly all too painfully clear. | {{a|glossary|}}What happens if you create a [[security interest]] over existing [[indebtedness]], and then go bust within a period specified by statute ( usually 6 months of thereabouts). The law will set aside such a [[security interest]], supposing that in creating it a debtor was acting with base motives: preferring one of his buddies, to whom he owed money, over his legion other creditors, when the writing on the wall or his solvency made itself suddenly all too painfully clear. | ||
Most jurisdictions have some kind of “anti-deprivation” principle in their insolvency regime which stops a struggling company preferring some of its creditors over other ones. | Most jurisdictions have some kind of “anti-deprivation” principle in their insolvency regime which stops a struggling company from preferring some of its creditors over other ones. | ||
In the UK, it is section 239 of the [[Insolvency Act 1986]], and it goes something like this: | In the UK, it is section 239 of the [[Insolvency Act 1986]], and it goes something like this: | ||
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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 is wide and loose, and gives an insolvency administrator power to stop companies preferring, you know, the director’s brother in law’s firm which supplies the copier paper. It gives those extending credit to struggling companies pause for thought, at any rate. | This is wide and loose, and gives an insolvency administrator power to stop companies preferring, you know, the director’s brother in law’s firm which supplies the copier paper. It gives those extending credit to struggling companies pause for thought, at any rate. But it goes wider than just setting aside security interests. If you have five trade creditors and you pay off one of them a week before you go insolvent, expect the administrator to have a good hard look at that payment. | ||
===[[Limited recourse]]=== | |||
Now elsewhere in the wonderful world of structured finance is the secured limited recourse [[espievie]]. | |||
{{Repackaging limited recourse capsule}} | |||
Why mention this in an article about voidable preferences? 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 the ''Restaurant Cascade de Sécurité'', no reason at all. But latterly limited recourse has slipped its moorings and drifted into the shipping lanes through which the asset management tankers thunder. An investment fund espievie doesn’t usually grant security and has a much more dispersed, antagonistic bunch of creditors and, usually, equity holders too. There’s a weak reason for requiring limited recourse — to preserve the livelihoods of espievie directors who might otherwise be barred from helming companies due to their reckless trading — but this is a weak reason, and removing it might incentivise the director to actually, you know, supervise the company’s agents to make sure they are conducting themselves with probity. Which is actually what they are paid to do. | |||
And there’s a rather pressing reason to resist limited recourse: creditors, who might otherwise be at each others’ throats, get certain protections from each other should a company go into receivership. Such as protection against [[voidable preference]]s granted to other creditors just before it went ''[[seins en l’air]]''. | |||
How might this happen? Well, imagine a fund that has put on aggressively levered positions with several brokers, without mentioning to any of them that it has doubled down on the trade elsewhere. And imagine that trade suddenly goes, ''[[tango uniform]]'', sending the fund auguring into the side of a hill, and sending dozens of broker legal eagles scurrying for their [[close-out]] manuals. But — oh! — too late. There’s no market for a stock that heavily overshot — that’s what caused the margin call int he first place — Then it transpires the fund had worked with one of the prime brokers to | |||
{{Sa}} | {{Sa}} | ||
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*[[Carve-in]] | *[[Carve-in]] | ||
*[[Slavenburg]] | *[[Slavenburg]] | ||
{{Ref}} | |||