Meaning
Transfer of assets made with the intent to hinder creditors. A claim of fraudulent conveyance arises when a company moves property or cash to a third party to place it out of the reach of those to whom it owes money. This doctrine allows a court to void the transfer and return the assets to the original owner for distribution.
It is a central tool in bankruptcy proceedings.
Actual Intent
Proving that a transfer was designed to hide assets involves looking for specific indicators of fraud. These include transfers to insiders, the retention of control over the property, the secrecy of the transaction itself and the timing of the transfer relative to a lawsuit. If a founder receives a large payout just before the company files for protection, a trustee might argue this constitutes a fraudulent conveyance.
The focus is on the state of mind of the debtor.
Constructive Fraud
Liability can also exist without proof of bad intent if the company received less than reasonably equivalent value for the asset. If the transfer occurred while the company was in a fragile financial state, the court may rule it a fraudulent conveyance regardless of the motive. This objective test looks at the balance sheet and the price paid at the time of the deal.
It prevents the depletion of an estate to the detriment of creditors. This creates a protection for those who are owed money.
Statutory Lookback
Laws typically provide a window of several years during which a transaction can be scrutinized and reversed. This period ensures that a founder cannot simply wait a few months after a questionable transfer to avoid consequences. The reach of the law is long.
