In this prior post, a discussion was provided in connection with requiring a company to prepay for its goods or services in order to limit potential preferential exposure. If a company heading into bankruptcy cannot prepay for its goods or services, however, another measure which can be taken by vendors to minimize their preferential exposure is to require that payment be made “substantially contemporaneous” with the goods or services provided to the company.
Under Section 547(c)(1) of the Bankruptcy Code, a debtor or trustee may not avoid and recover transfers that are (a) intended by the debtor and defendant to be a contemporaneous exchange for new value given to the debtor, and (b) are in fact a substantially contemporaneous exchange. What this means is that even if a payment made by a debtor during the 90 day Preference Period is not a prepayment, a creditor can defend itself from liability for such transfer if the parties intended for the debtor’s payment, and the goods or services provided, to be contemporaneous exchanges, and the exchanges were in fact made close to the same time.
Therefore, if your company is providing goods or services to a company in financial distress, it is prudent to require the company to prepay for its goods or services, or at a minimum, to require that payment be made as close as possible to the time that goods or services are provided.
Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP. Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.