Meaning
Legal defenses protected under bankruptcy codes allow suppliers to keep payments received from a customer shortly before that customer filed for bankruptcy. Utilizing a preference shield prevents a bankruptcy trustee from clawing back cash that a manufacturer received for delivering parts during the normal course of business. This protection ensures that the manufacturer does not suffer sudden cash drains that would impair its own ongoing factory operations or halt the acquisition of raw materials for future production lines.
Clawback Defense
Trustees often attempt to claw back payments made by a debtor within ninety days of a bankruptcy filing. Having a valid preference shield ensures the supplier can retain these funds, protecting the revenue generated by previous product runs. This defense prevents the sudden loss of working capital that has already been reinvested in materials.
Ordinary Course
Proving that the transactions occurred under normal industry terms is the most common way to establish this protection. When a manufacturer continues to ship parts and receive payments on standard schedules, the preference shield is solidified. This consistency demonstrates that the supplier was not receiving preferential treatment over other creditors.
Transaction Verification
Documenting all delivery dates and payment receipts provides the evidence needed to defeat clawback attempts. This operational diligence protects the cash flow generated by high-volume lines.
