Guarantors

Guarantors should be especially careful of the manner in which the corporation pays debts that have been guaranteed by principals who control where the money goes. Payments of guaranteed debts with corporate funds from an insolvent corporation can be voided. If the guarantor is an insider (generally, an officer, director, or person in control) the waiting period is one year before bankruptcy can be filed.

This is but one example of how one payment method results in liability while the other payment method results in exculpation, even though the same value may have been transferred in both instances. In order to protect against such a "preference action" the guarantor should make provisions in his contract well in advance.

Equally true is that principals and guarantors should be vigilant in the manner in which they receive funds from the potentially insolvent corporation to pay themselves back for loans made to the corporation.

Actions of the principals prior to a voluntary or involuntary bankruptcy proceeding are important for other reasons also. Acts that they do can effect whether the officers can remain in control of the corporation after the commencement of a Chapter 11 or whether they have conflicts of interest that will follow them or whether their history leaves them vulnerable to an action to place others in charge, such as a Trustee, which results in the end of the bankruptcy reorganization process.

For the principal/guarantor, the goal is often either effective Chapter 11 reorganization or payments against guaranteed obligations - payments, that is, that are stay where they are intended to stay.

In practically all instances, the liabilty of a guarantor will not be affected by the filing of a bankruptcy by the entity for which the debt has been guaranteed. The individual guarantor may have to file his own bankruptcy. If so, he should plan as far in advance as possible in order to avoid losses as much as possible.