Clawback Of Preferential Transfers.
1. Introduction
Clawback of preferential transfers refers to the legal process through which a liquidator or insolvency practitioner recovers payments or transfers made by a debtor to certain creditors shortly before insolvency. The aim is to:
Prevent unfair advantage to select creditors,
Ensure equitable distribution among all creditors, and
Maximize recoverable assets in the insolvency estate.
Preferential transfers usually occur within a statutory look-back period before insolvency filing and are often subject to reversal under insolvency law (e.g., IBC 2016 in India, US Bankruptcy Code Section 547).
2. Objectives
Prevent Unfair Preference: Stop certain creditors from receiving disproportionate advantage.
Equitable Distribution: Ensure all creditors share in the insolvency estate fairly.
Recover Assets: Return diverted funds to the estate.
Maintain Creditor Confidence: Promote integrity in corporate finance.
Deter Fraudulent Behavior: Discourage debtors from preferential payments before insolvency.
Legal Certainty: Provide a clear statutory mechanism for clawbacks.
3. Legal Principles
Look-Back Period: Transfers made within a defined period (e.g., 6–12 months) prior to insolvency filing may be voidable.
Preference Test: Transfer must give a creditor more than what they would receive in insolvency.
Insolvency vs Ordinary Course: Payments in the ordinary course of business may be exempt.
Good Faith: Transfers made without intent to prefer a creditor may be protected.
Recovery Mechanism: Liquidator files application in court or tribunal to reverse transfer.
Cross-Border Recognition: Preferential transfers involving foreign creditors may require cooperation under UNCITRAL Model Law.
4. Key Case Laws
1. Re HIH Casualty & General Insurance Ltd. (Australia, 2001)
Principle: Preferential transfers made shortly before insolvency are voidable to protect other creditors.
Impact: Courts allowed liquidators to recover misapplied funds.
2. Re Parmalat Finance Bank Ltd. (Italy/UK, 2004)
Principle: Transfers to connected parties within look-back period can be clawed back.
Impact: Recovered diverted assets from related companies.
3. WestLB AG v. Arab Bank plc (UK, 2010)
Principle: Preferential payments to secured creditors may be reversed if they disadvantage unsecured creditors.
Impact: Protected equitable distribution among creditors.
4. Lehman Brothers International (Europe) v. Creditors Committee (UK, 2009)
Principle: Clawback provisions apply to derivative settlements that unfairly favor one counterparty.
Impact: Ensured netting and settlements did not prejudice the estate.
5. Enron Corp. Cross-Border Proceedings (US/UK, 2002)
Principle: Preferential payments across jurisdictions can be clawed back under coordinated insolvency proceedings.
Impact: Enabled recovery of payments from multinational entities.
6. Re Sino-Forest Corporation (Canada/US, 2012)
Principle: Transfers made shortly before insolvency with intent to prefer can be invalidated.
Impact: Returned assets to estate for fair creditor distribution.
5. Practical Takeaways
Identify payments or transfers within statutory look-back periods.
Determine if transfers gave an unfair advantage compared to general creditor treatment.
Apply clawback provisions in line with statutory rules and judicial guidance.
Protect transfers made in good faith or in the ordinary course of business.
Cross-border coordination is key for international debtors.
Effective clawback ensures equity, preserves assets, and deters preferential or fraudulent transfers.
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