Clawback, related-party transactions or avoidance actions are available under the Federal Debt Collection & Bankruptcy Act with which certain transactions that were concluded pre-bankruptcy can be challenged and set aside by the court. As a result, the considerations or assets received by the creditor from the debtor in the challenged transaction are to be returned to the bankruptcy estate and the creditor is left with such claim in the bankruptcy it had prior to the receipt of the considerations or assets.
Three different types of transactions can be challenged:
- gifts and equivalent transactions made in the year prior to the bankruptcy being declared;
- transactions concluded in an over-indebted situation such as the provision of security for an unsecured debt without prior respective obligations, the satisfaction of a money claim other than by usual methods of payment, and the payment of claims that are not yet due, all made in the year prior to the bankruptcy being declared. The transaction will not be set aside if the beneficiary can demonstrate that it neither knew nor ought to have known that the debtor was over-indebted; and
- transactions concluded that are knowingly disadvantageous to creditors in general, or for the benefit of individual creditors (fraudulent conveyance), which were made in the five years prior to the bankruptcy being declared.