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Simple English definitions for legal terms
insider preference
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A quick definition of insider preference:
Insider preference: When someone favors or gives priority to a person or thing that they are close to or have a special relationship with. In bankruptcy, it refers to a transfer of property by a debtor to someone they have a close relationship with within a certain time frame before filing for bankruptcy. This type of transfer can be challenged and reversed by the bankruptcy court. In business, it can also refer to a preferred shareholder's right to receive a specified distribution before common shareholders receive anything when a corporation is liquidated.
A more thorough explanation:
Definition: Insider preference refers to the act of favoring one person or thing over another, especially when it comes to priority of payment given to one or more creditors by a debtor. It can also refer to a transfer of property by a bankruptcy debtor to an insider more than 90 days before but within one year after the filing of the bankruptcy petition.
Examples:
- A company filing for bankruptcy may prefer to pay off certain creditors who are insiders, such as family members or business partners, before paying off other creditors.
- A debtor may transfer property to an insider, such as a family member or business partner, in an attempt to protect it from being seized by creditors during bankruptcy proceedings.
- A preferred shareholder may have insider preference when it comes to receiving a specified distribution before common shareholders receive anything during a corporation's liquidation.
These examples illustrate how insider preference can give certain individuals or entities an advantage over others, often to the detriment of those who are not insiders. It can also be used to manipulate the bankruptcy process or unfairly distribute assets during liquidation.