Avoidance Actions, Overadvances, and What Happens When Time Runs Out

When a company starts to wobble—liquidity dries up, performance stalls, and secured lenders start asking tough questions—the path forward often includes tough conversations, creative structuring, and, sometimes, legal maneuvering. One of the most complex tools in the bankruptcy toolbox is the avoidance action: a legal mechanism used to unwind certain pre-bankruptcy transactions that unfairly advantaged one creditor over others. However, before we even reach court, the situation with a secured lender often signals how the story will unfold.

One common warning sign is the request for an overadvance. This is when a lender agrees to let the borrower draw more money than the collateral would typically support. It’s not charity—lenders do this because it can improve their own chances of recovery. They’re betting that a bit more liquidity can get the company to a sale, a refinancing, or another outcome that maximizes the lender’s repayment. But make no mistake: overadvances usually signal that the borrower has run out of options. It’s the starting trigger signaling the last lap.

This is also where strategy becomes critical. The repayment of an overadvance may later be scrutinized as a potential preference or fraudulent transfer in a bankruptcy proceeding—especially if the terms are one-sided or if other creditors are harmed by the deal. That’s where avoidance actions come in: courts can unwind transactions made shortly before bankruptcy if they’re deemed unfair, overly preferential, or detrimental to the broader creditor pool.

Whether you’re a lender navigating the risks of a distressed borrower or a company desperate to bridge the gap to survival, the need for expert guidance is clear. At Gavin/Solmonese, we’re often brought in to play the role of Chief Restructuring Officer, working to negotiate and structure solutions like overadvances in a way that protects stakeholders and maximizes value—before a judge or trustee gets involved.

Avoidance actions are a powerful remedy. But the best outcomes are usually the ones that never need to go to court. When time is short and liquidity is tighter, having the right advisors at the table can make all the difference.