Ordinary Course of Business Law and Legal Definition
Ordinary course of business is a phrase used to determine the routinr record keeping and other procedures applied to the mainenance of something. The usual transactions, customs and practices of a business, often used to judge the validity of certain transactions. To protect those transactions which replace value to the bankruptcy estate previously transferred, the Bankruptcy Code carves out seven exceptions or defenses to the trustee’s recovery powers. The ordinary course of business defense is commonly argued as an exception by vendors.
That defense protects payments, in all or part, received by an unsecured creditor within 90 days of the bankruptcy from recovery where the creditor establishes certain elements detailed below. The policy supporting the ordinary course of business defense is two-fold:
- protect customary transactions, and
- encourage creditors to continue to extend credit to financially troubled debtors, possibly helping the debtor avoid bankruptcy.
To establish the ordinary course of business defense, the vendor must not only establish the payments received from the customer during the preference were ordinary with payments prior to the preference period, the vendor may be required to show that the customer’s practices are similar, though not necessarily identical, to others in the industry.