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Customer and Supplier Credit Risk Toolkit
Practical Law Toolkit 6-500-3806 (Approx. 8 pages)
Customer and Supplier Credit Risk Toolkit
by Practical Law Bankruptcy & Restructuring and Practical Law Finance
| Maintained • USA (National/Federal) |
Resources to help deal with customer and supplier contract counterparty credit risk when drafting contracts, during the debtor's pre-bankruptcy financial difficulty and during the bankruptcy process.
Companies should develop strategies to protect their positions under long-term contracts against the risk that their customer or supplier contract counterparties may face financial difficulties and file for bankruptcy. When a counterparty files for bankruptcy, it may then assume, assign, or reject certain types of contracts, subject to the terms of those contracts. The debtor may also seek to recover preferential transfers made while insolvent within 90 days of filing for bankruptcy.
A non-debtor who anticipates and prepares for the possibility that its contract counterparty may file for bankruptcy should be in a better position to protect its interests and maximize its recovery in a bankruptcy proceeding. The non-debtor can use various strategies to protect its interests when drafting a contract and during the debtor's pre-bankruptcy financial difficulty, such as:
- Including an ipso facto clause in an executory contract to provide for the default and termination of an agreement due to the counterparty's bankruptcy, insolvency, or financial condition. Although ipso facto clauses contained in executory contracts and unexpired leases are generally not enforceable in bankruptcy they should still be included because they are enforceable if triggered by certain events other than bankruptcy, and if exercised before the bankruptcy filing.
- Drafting non-assignable contracts such as a personal services agreement based on the uniquely personal nature of the counterparty's performance.
- Monitoring the financial condition of the counterparty by requiring periodic credit opinions.
- Keeping accounts current and maintaining ordinary billing practices to limit exposure to preference liability.
- Establishing and documenting a cash-on-delivery (COD) payment arrangement that is triggered once the debtor fails to comply with negotiated payment terms. Also consider instituting an evergreen retainer or cash deposit.
- Exercising any right to terminate the contract before the debtor's bankruptcy.
- Filing an involuntary bankruptcy petition.
The non-debtor can use various strategies to protect its interests during bankruptcy, such as:
- Requesting that the court set a deadline by which the debtor must assume, assign, or reject the contract after the debtor has filed for bankruptcy.
- Making a request for adequate protection during the interim period while the debtor's decision to assume, assign, or reject the contract is pending.
- Asserting defenses to preference liability, such as that any payments received from the debtor within 90 days of its bankruptcy were made in the ordinary course of business or were substantially contemporaneous exchanges for new value.
- Requesting relief from the automatic stay to exercise termination rights under the contract.
- Promptly asserting reclamation rights and section 503(b)(9) claims.
- Seeking appointment of an official creditors' committee or forming an ad hoc committee.
- Requesting critical vendor treatment.
- Exercising setoff and recoupment rights.
This Toolkit contains continuously maintained practice notes, standard documents, and checklists to help counsel develop strategies to protect the non-debtor's positions both before and after a customer or supplier counterparty is in bankruptcy.