What if a customer is considering bankruptcy?
It is not uncommon to receive calls from clients after learning of their customers negotiating with lenders and other creditors about balance sheet and liquidity issues, including planning for potential bankruptcy filings. Clients typically ask questions about collecting past due amounts or customers filing for bankruptcy protection. However, often unstated in these preliminary conversations, clients really want to know how they can protect themselves without losing the customer, particularly where that customer represents a significant portion of revenues. In a nutshell, one size rarely fits all situations, and oftentimes we find ourselves progressing through a decision-tree type of analysis.
In normal times, companies will deploy credit managers to manage receivables and collections. However, when a major customer falters, the sales organization and senior managers may have to engage in the process, entangling the selling and revenue sides of a business with the financial, treasury, and legal aspects. Harmonizing competing goals of these functions within an enterprise can be challenging when dealing with a troubled customer.
In general, as legal advisors, we take the time to understand the client’s business and its relationship with a customer, along with the client’s short-term and long-term goals. Thereafter, we analyze any contracts between the parties and the leverage points with the customer, both contractual and non-contractual. For obvious reasons, a client that serves as a sole or critical supplier to a customer may have the ability to extract concessions before or after the filing of a bankruptcy case, particularly where parts or supplies involve regulatory approvals. Intertwined as part of this strategic process, we may recommend seeking guarantees or other security from a customer or a customer-affiliated party.
A client may also invoke certain contractual or non-contractual remedies, such as offset or force majeure clauses, and seek redress under the Uniform Commercial Code and the Bankruptcy Code, such as through adequate assurance, administrative, or reclamation claims. Part of the process may include an active dialogue not only with the customer, but also with its lenders and other creditors, which may require confidentiality agreements. As a last resort, it may be necessary to initiate litigation to enforce consignment, licensing, or tooling rights or to pursue other claims or actions against customers. Throughout the process, and in negotiating interim or final compromises, we have to consider potential clawback risk if a customer with whom we settle later files for bankruptcy and tries to bring preference or fraudulent conveyance actions to recover payments or otherwise unwind a transaction.
Rarely does a client want to harm a customer in any dispute, even when litigation ensues. Ultimately, we endeavor as legal advisors to create win-win scenarios where we maximize the recoveries for clients while helping facilitate a future revenue stream from revived customers. In certain situations, we have even helped clients finance customer operations and provide other “outside the box” solutions.
Ultimately, any engagement involving a troubled customer requires close coordination between principals and lawyers to align business objectives with legal strategy. Because of the sensitivity of customer relationships, restructuring lawyers have to take into account multiple layers of legal and non-legal considerations in providing advice. Albeit challenging, obtaining a result that protects the client and preserves the customer relationship, while helping the customer‘s turnaround, can be satisfying both professionally and personally.
