In the event of a company filing for bankruptcy, creditors often face the risk of preference exposure, where the company may seek to reclaim funds paid to the creditor prior to the bankruptcy filing. However, the Bankruptcy Code offers affirmative defenses that can help creditors reduce their preference exposure or liability. One such defense is the new value defense, also known as the subsequent new value defense. This defense, outlined in 11 U.S.C. § 547(c)(4), is designed to encourage creditors to continue their engagement with financially distressed companies.
The new value defense requires the creditor to demonstrate that they provided new value to the debtor after the alleged preferential payment, that this new value was not secured by an unavoidable security interest, and that the new value remains unpaid at the time of the bankruptcy filing. For instance, if a company pays a creditor $20,000 and then receives goods worth $10,000 from the creditor before filing for bankruptcy, the creditor could reduce their preference exposure by the value of the goods provided.
However, the application of the new value defense is not always straightforward. Courts may differ on its application, and other factors may affect its availability. For example, some jurisdictions allow a creditor to offset new value against only the immediately preceding preferential payment, while others allow offsetting against all prior preference payments. Determining when new value was provided can also be challenging, and courts have varying views on the impact of post-petition events on the new value defense.
Despite its complexities, the new value defense can be a valuable tool for creditors to reduce or eliminate their preference liability, and it is advisable for creditors to seek competent legal counsel to navigate these complexities. Read the full article here.