Final answer:
Creditors can potentially challenge fund purchases made by an investor who was legally insolvent during certain periods before the investor declared bankruptcy. These periods vary but typically range from 90 days to one year for general creditors and can be up to two years for insiders.
Step-by-step explanation:
The question deals with the issue of creditors challenging fund purchases made by an investor who is legally insolvent at the time of the purchase, in the context of bankruptcy proceedings. In bankruptcy law, such transactions can be scrutinized under 'fraudulent conveyance' or 'voidable preferences' rules, depending on the jurisdiction. These rules typically allow a trustee or creditors to challenge transfers of assets—including the purchase of segregated funds—that occurred within a certain period before the bankruptcy filing if the debtor was insolvent at the time.
While the specific look-back period can vary by jurisdiction, typical durations range from 90 days to one year for ordinary creditors and up to two years for insiders. For a legally insolvent investor's segregated fund purchase to be challenged, a creditor would need to prove that the purchase represented an unfair transfer of assets that should have been available to satisfy all creditors.
Understanding the potential look-back period is essential for investors and creditors, particularly when considering the acquisition of bonds or making investments. Even though bond issuers may declare bankruptcy only in rare cases, it’s important for stakeholders to be aware of their rights and obligations when a bankruptcy does occur.