Organizations that engage in business-to-business operations may have customers or clients with major outstanding debts. In many cases, collecting debt from a business can be easier than engaging in collection efforts against individual debtors.
However, the complex structure and resources of business organizations can also facilitate inappropriate debt avoidance strategies by companies that owe another business money. Businesses that have fallen behind on their financial obligations may decide to file for bankruptcy to restructure the company’s debts, delay aggressive collection activities or discharge financial obligations while preparing for organizational dissolution.
Creditors may end up scrambling for payment in those scenarios and may need to look into unusual strategies to collect what they are due. In some cases, an organization may have provided a golden parachute for an executive or owner shortly before announcing a bankruptcy. Could that generosity constitute a fraudulent transfer that a creditor can challenge in court?
Fraudulent transfers involve avoiding responsibility
A golden parachute is a large severance package typically promised to an executive at the time of their onboarding. Provided that they remain with the company for a set amount of time or hit certain productivity goals regarding their job performance or the company’s operations, they can receive large bonuses when they exit the organization in the future.
In theory, a golden parachute is simply the fulfillment of the company’s contractual obligations to its workers. In practice, a golden parachute can represent a fraudulent and inappropriate attempt to extract wealth from a company that does not intend to fulfill its financial obligations to others. Fraudulent transfers can play a role in business collection efforts.
Business creditors can sometimes raise questions about the appropriateness of providing a large executive bonus when the company is on the cusp of insolvency. In some cases, the courts may hold the organization accountable for inappropriate transfers conducted immediately prior to bankruptcy proceedings. Creditors may be able to secure partial repayment by highlighting questionable transactions and asking the courts to intervene.
Companies attempting to collect on a debt that could be subject to discharge or restructuring efforts when a debtor organization files for bankruptcy may need help exploring different collection options. Litigation is sometimes the best solution for businesses denied appropriate repayment for valid debts.