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.
Transfers of property or the
incurrence of obligations is usually
continued on page 8
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