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November 2, 2023

Cross-Border Update

Q4, 2023—"Strategies for Managing Distressed US Commercial Customers, Part 1: Early Warning Signs of Trouble (Before Your US Customer Files Bankruptcy)"

By Keith Costa

A customer’s impending bankruptcy is one of the most stressful experiences a supplier can face in the course of running their business. You are confronted not only with the potential loss of a major customer but also the possibility of a significant financial loss due to unpaid accounts receivable. Following a US customer’s bankruptcy, Canadian-based manufacturers will invariably ask themselves if they could have seen this coming. They will wonder what signs they missed and the obvious red flags that should have alerted them to their customer’s financial distress. Often, there are early warning signs that can signal a US customer is experiencing problems or is in financial distress—and there are steps you can take as a creditor to proactively prevent or minimize your risk of loss. To help guide you, this three-part series of articles outlines some of the more common signs of financial trouble as well as protective measures creditors can take to prevent financial loss both prior to and after a customer’s US bankruptcy filing.

Spot the Signs of Trouble

  • Delayed payment of invoices
  • Unresponsive customer
  • Changes in management or business activities of your customer
  • Trouble in customer’s industry or sector
  • Downgrade of credit rating

Once these early signs of trouble are spotted, a supplier often finds itself scrambling to limit its exposure. The legal logistics involved in protecting yourself can be confusing in these instances. For example, does a foreign supplier have the right to suspend shipments of goods due under a contract with a US customer, especially if it believes that retailer may be unable to pay for those goods? Similarly, can a supplier simply stop shipments of goods already in transit to the retail customer but have not yet been delivered? And, if the goods are in fact delivered already without payment being received, can the supplier somehow recover those goods—or the value of those goods—if the retailer ultimately files for bankruptcy protection in the United States?

Protective Measures to Take Prior to US Bankruptcy Filing

  • Demand adequate assurance and/or suspend performance with notice of basis for concern about a customer’s future performance.
  • Suspend performance or stop delivery.
  • Change payment terms going forward to cash on delivery (COD), cash before delivery, or progress payments.
  • Require or request a deposit or a formal letter of credit.

Fortunately, many states have separately adopted provisions of the Uniform Commercial Code (UCC) that govern all commercial transactions in the United States and provide specific options to suppliers when dealing with these complex issues. The two most important protections for suppliers when faced with the potential bankruptcy filing by a US customer are: 

  1. The right to demand adequate assurance from the distressed customer (UCC Section 2-609); and
  2. The right to withhold delivery due to insolvency (UCC Section 2-702).

In the second part of this three-part series, we will specifically address how to exercise your creditor rights under the UCC to demand adequate assurance and to withhold delivery of goods.
 

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