Lessons for Death
8. Prepare for intense scrutiny of all of your previous actions.
You’ve filed for bankruptcy, which means a lot of people aren’t getting paid for the goods and services they legitimately sold to you. Additionally, a lot of people are going to lose their jobs. In some cases, customers aren’t going to get their products. All of this adds up to a lot of angry, frustrated, and depressed people. What does that mean? They’re going to go looking for answers. By law, they have the right to go through all of your business to figure out what went wrong and why they’re not getting paid.
The law has also put in place provisions to prevent owners and managers from either directly or indirectly benefiting themselves or others. In bankruptcy, a company that has filed is subject to “preference payment” analysis. Creditors are allowed to go into a company and examine all payments made over the previous year to determine if any of the payments were “preferential”—if they benefited one person over another. If they determine that there were preference payments, they can go to those parties and “claw” them back. Those parties will have to pay them to the estate and then the money will be redistributed to all unsecured creditors. If, in this process, they discover that owners and managers were aggressively dumping assets or paying themselves, family, or friends, the estate could go back further in time to examine preference payments.
Task: Ask your legal and financial advisors for a proper definition of “preference payments.” With your CFO, go back through 12 months of payments and try to identify what may be considered a preference. Create that list and then try to establish a defense to that claim. Prepare this with your lawyers and don’t discuss it openly. Once created, keep it with your lawyers. The day may never come when preferences are analyzed. Each bankruptcy and each UCC is different. However, being prepared in advance will help you and others from losing those fights down the road.