Type: Law Bulletins
Date: 06/05/2020

Key Concepts for When Your Customer or Supplier Files for Bankruptcy

As businesses continue to feel the impact of COVID-19, many vendors and service providers should be aware what actions they should take if their customer files for bankruptcy. Here are several key concepts to know if you are a vendor or supplier: 

  • Vendors and service providers have no obligation to extend credit to a company that has filed for bankruptcy. However, if you are in the middle of an unexpired supply contract that is critical to the debtor’s business, be careful and note the next point below.
  • You may not require payment of pre-bankruptcy accounts as a condition of providing post-bankruptcy services. This would be a violation of the “automatic stay.”
  • If you can be assured that the debtor company has Debtor-in-Possession (DIP) financing in place, this provides some assurance that you will be paid for post-petition deliveries. If the DIP lender is also the senior secured lender, it may be entitled to be paid in full before post-bankruptcy invoices are paid. If the case is not successful, there is no guarantee that post-petition vendors will be paid.
  • Even with a DIP loan in place, vendors may still require cash in advance or cash on delivery for goods or services.
  • While the automatic stay in bankruptcy prevents you from seeking to reclaim goods shipped to the debtor company immediately before its bankruptcy filing, you still may have special rights under Bankruptcy Code § 503(b)(9). That is, goods actually received by the debtor (as opposed to goods drop-shipped to the debtor’s own customer) received within a 20-day period preceding the bankruptcy filing are entitled to “administrative expense” status, which means those sums should be paid and be paid 100 cents on the dollar, unlike pre-petition claims that usually receive little or nothing.
  • If you are a sole source supplier or in an otherwise unique relationship with the debtor company, in certain jurisdictions you might be presented (usually pre-bankruptcy) with a critical vendor program. The upside is that critical vendors are generally paid a significant portion of their pre-bankruptcy balances. The downside is that they have to agree to continue to provide services according to specified terms. In some court-approved arrangements, critical vendors are actually required to disgorge payments received in respect of pre-bankruptcy debts if they do not provide goods and services post-petition according to the critical vendor terms.
  • As noted above, any payments received in the 90 days preceding the bankruptcy filing will be scrutinized and assumed to be preferential. If you received payments outside of the ordinary course of business that improved your position relative to the rest of the creditor body in that 90-day period, you may have to return all or a portion of the payments received in 90-day window.
  • If you are among the 20 or 30 largest unsecured creditors, you might be asked to serve as a representative on the unsecured creditors’ committee. While some find this to be a valuable learning experience, committee members are not compensated for their time, only for actual out-of-pocket (travel) expenses incurred in that role. You will be subject to strict confidentiality requirements and potential prohibitions on selling your claim. In our experience, the most worthwhile occasion to serve on a committee is where the debtor company is a critical partner in some area of your business, so you want to help that company to succeed in its re-organization or sale.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.

Additional Resources

In This Article

You May Also Like