Critical Vendors: Managing a Customer in Bankruptcy
A recent study published by the Harvard Business School found that bankruptcy filings with greater than $50 million in assets have increased by nearly 200 percent year-over-year from January through August. The COVID-19 pandemic has been detrimental to significant portions of the economy causing large-scale reorganizations in Chapter 11, and liquidating Chapter 7 bankruptcies. However, changes to bankruptcy law may benefit international ocean freight carriers and specific vendors which service the bankruptcy estate.
Generally, the filing of a bankruptcy petition creates a wall between what happened before the filing (“pre-petition”) and what happens afterwards (“post-petition”). Creditors may not proceed in any way, shape or form against a debtor who has filed a petition without the permission of the bankruptcy court. Further, the bankruptcy code requires equal treatment of all creditors of like kind and the estate has the right to “claw back” payments made to creditors within ninety days of the filing (“a preference”).
The “critical vendor” concept in a bankruptcy case asserts that, under Chapter 11, the debtor may not be able to continue without certain vendors or, from a freight perspective, without certain logistical partners. To retain critical shipping and logistical services, the normal rules regarding non-payment of pre-petition invoices are suspended to ensure continued service post-petition under favorable terms that existed pre-petition. A creditor may be designated a critical vendor via a “first-day motion”, at the inception of the Chapter 11, with an Order soon following. It is imperative that a creditor be represented by experienced legal counsel to ensure that there is no violation of the bankruptcy code or a detriment to the creditor’s rights.
Once designated a critical vendor, it is important for a creditor to monitor its post-petition transactions and payments closely. There is a risk that the Chapter 11 debtor either fails to make regular payment or converts the case to a liquidation under Chapter 7. Heightened account scrutiny may avoid either needing to proceed by way of bankruptcy suit to recover post-petition balances due, or, being left with unpaid post-Chapter 11 debt upon a conversion to a Chapter 7 liquidation. Chapter 11 post-petition debt is lower in the hierarchy than Chapter 7 administration debt and can adversely affect the creditor’s ultimate recovery.
With the surge of bankruptcy and reorganization filings, Metro Group Maritime can guide you in any U.S. bankruptcy court. We monitor and review bankruptcy filings to find out whether there are orders allowing our clients to be paid for pre-petition services under certain circumstances. Additionally, we can file proofs of claim, monitor the progress of the case, and provide representation as to post-petition claims, motions to reduce claims, and preference claims. We have creditor-debtor counsel throughout the country who are experienced in these matters and our depth of knowledge includes the less common state court composition agreements, receiverships, and assignments for the benefit of creditors.