A preferential transfer is an unfair transfer in which a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy. Transfer of the debtor’s assets to a third party, with the intent to prevent creditors from reaching the assets to satisfy their claims, is called a fraudulent conveyance.
Pursuant to the Bankruptcy Code, a debtor will not be discharged if s/he has transferred property of the debtor, within one year before the date of the filing of the bankruptcy petition. The bankruptcy code empowers a court to discharge a debtor unless the debtor, with intent to hinder, delay, or defraud a creditor has transferred, removed, destroyed, mutilated, or concealed property of the debtor, within one year before the date of the filing of the petition; or property of the estate, after the date of the filing of the petition. Preferential and fraudulent transfers can be set aside on the application of the liquidator or trustee in bankruptcy.
Normally, to set a transaction or payment aside as a preferential and fraudulent transfer, the liquidator will need to show that:
- the person or company was insolvent at the time the payment was made;
- the person or company then went into bankruptcy within a specified time thereafter;
- the payment had the effect of putting the creditor in a better position than other unsecured creditors; and
- the bankrupt intended to grant a preference.