Bits and Pieces

Wednesday, December 21, 2011

Bankruptcy and the Preference Period

A friend of mine is going through a rough time right now.  A few years ago he had an idea, and after a looooot of legwork, grovelling, begging and cajoling he'd raised enough venture capital to start a business. 

Unfortunately my friend isn't all that savvy.  He's a great ideas man, but when it comes to the nuts and bolts of the day to day running of a business... well, he leaves something to be desired.  What he'd done is this: he'd promised the VC guys a return on their investment by x months after the payments were made.  What he hadn't accounted for, thanks for some more than optimistic number crunching on his part, was that the capital wouldn't be available when the payment date came.  The money was there, sure, but it was tied up in stock, rent and wages.

Anyway, things got a little ugly.  My friend hadn't covered his ass legally, so the VC guys were tough to deal with.  They eventually accepted a repayment on their investment in installments, but this only made the matter worse.  With the lifeblood of the business heading out to the investors my friend had no chance.  A couple of months ago he filed for bankruptcy.

Now, I always assumed that this was as simple as saying, in fancy legal terms, 'sorry guys, I'm out of money.  We're all screwed, but you ain't getting a penny'.  It now turns out that it's much, much more complicated than that.  There are all sorts of terms like preference period and preferential transfer being thrown around: terms that basically mean that my friend has to repay certain debts come hell or high water, despite filing for bankruptcy.

Well, it's all too complicated for me, but it makes me glad that I live in a country that lacks such a complex legal system as that of the US.  Out here on the Mongolian steppe we just break your legs if you don't pay a debt!
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