The risks facing a lending bank if the borrower becomes insolvent are often twofold. Not only are outstanding repayments in jeopardy, but, in the case of debtor`s insolvency, there is also a risk of voidable preference (Insolvenzanfechtung), where the insolvency administrator may challenge repayments already received and loan collateral granted before the insolvency filing.

A recent decision of the Delaware bankruptcy court serves as a reminder of a key risk for lenders who finance leveraged transactions—namely, that a bankruptcy court may “collapse” the components of a leveraged transaction in order to avoid the lender’s liens and the debtor’s loan obligations as fraudulent transfers.