Journal of Corporate Renewal

April 2017

Any transaction that occurred during the
applicable look-back period is potentially
voidable if it can be shown that the debtor was
insolvent when the transaction took place.

not the debtor. Excessive salaries, bonuses, and perks well in excess of market value that were paid to officers or relatives of debtors have been recovered. Mortgages that far exceeded a property’s market value have been voided, and payments on those mortgages recovered.

Fraudulent conveyance is statutorily based in the U.S. Bankruptcy Code and in state law under the Uniform Fraudulent Transfer Act (recently refined by the Uniform Voidable Transactions Act). The law varies from one jurisdiction to another.

The elements of a fraudulent conveyance are the transfer of an interest in property or the incurrence of an obligation for which the debtor received less than reasonable equivalent value in exchange. Further, the debtor was insolvent at the time of the transfer or incurrence, or was rendered insolvent as a result of the transaction, was left with unreasonably small capital, or incurred debts beyond its ability to pay.

The concept of unreasonably small capital tests whether a company is likely to become insolvent at some future time based on likely business conditions. The key issue is: will or did the business have sufficient cash flow to execute its business plan?

Arguments regarding unreasonably small capital usually center on the reasonableness of management’s plans and projections, and is therefore significantly more qualitative than the other solvency tests.

For purposes of measuring solvency,
the date of the transaction being
voided is the relevant date. The
Bankruptcy Code assumes that,
for general creditors, debtors were
insolvent for 90 days prior to the
filing of the case. The code also
provides for a one-year look-back
period for insiders. For fraudulent
conveyances, the look-back period
varies from two to six years,
depending on the jurisdiction. Any
transaction that occurred during
the applicable look-back period
is potentially voidable if it can be
shown that the debtor was insolvent
when the transaction took place.