How to protect payments when doing business with companies in financial trouble
COURTESY / Preti Flaherty
Bodie B. Colwell is an attorney with Preti Flaherty’s creditors’ rights and bankruptcy practice group.
Bankruptcy attorneys are anticipating that bankruptcy filings by businesses will increase in the coming months. You may unexpectedly find your company is a party-in-interest or creditor in a bankruptcy case.
When contract counterparties or vendors are in financial distress and may file for bankruptcy, steps need to be taken to ensure that your company’s interests are protected in the bankruptcy case.
First, if you are concerned that a contract counterparty (or an adverse party in litigation) is likely to seek bankruptcy protection, or your client receives notice that they are a creditor in a pending bankruptcy case, you should immediately contact your attorney.
Second, if your company does business with another company that files bankruptcy, there is the possibility that payments made to you before the filing for bankruptcy would be vulnerable to recovery by the trustee in the bankruptcy case or the debtor. In particular, a trustee, or a debtor in a Chapter 11 case, may recover payments made to creditors in the 90 days prior to filing bankruptcy.
Do not let this potential “claw-back” make you nervous about accepting payment. Generally, it is better to collect on outstanding invoices and address the attempt to recover the payment later.
If a vendor or contract counterparty is having financial issues, is insolvent, or is considering filing bankruptcy, there are steps that can be taken to preserve the defenses available to your company (as a creditor) under the Bankruptcy Code:
To the greatest extent possible, make sure invoices are paid on time and consistent with past practice between you and the distressed company.
- Send invoices on a regular schedule, such as monthly or quarterly. Do not deviate, if possible.
- Do not take any extraordinary collection efforts without first discussing the risks of those efforts with your attorney.
- Keep a detailed record of the payment relationship including any discussions about payment of invoices.
- Do not change the terms of payment (for example, do not switch from 30-day to 15-day payment terms). If you would like to change the terms of payment to ensure that the client makes payment, talk with your attorney about the risks.
- Review any agreements and terms and conditions to ensure your actions and the payment relationship are consistent with the terms contained in those documents.
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