Dealing with Bankruptcies in the Energy Sector

By Kenneth A. Rosen, Esq.,

The turbulence in the oil and gas industry, marked by plummeting oil prices, has triggered a wave of bankruptcies, affecting not only exploration and drilling companies but also businesses peripheral to the energy sector. In this comprehensive guide, we explore the nuances of bankruptcy law in the context of the energy sector, shedding light on essential considerations and strategies for companies navigating these challenging times.

Introduction: Weathering the Storm in the Energy Sector

The oil and gas industry's recent spate of bankruptcies, reminiscent of the telecom sector's challenges in the early 2000s, has created a domino effect. Businesses supplying products or services to energy-related companies are grappling with financial uncertainties, emphasizing the need for a nuanced understanding of bankruptcy dynamics.

Bankruptcy Law Basics: Chapter 7 vs. Chapter 11

Distinguishing between Chapter 7 (liquidation) and Chapter 11 (reorganization) is crucial. While Chapter 11 is often seen as a reorganization tool, it frequently results in liquidation. When a customer enters bankruptcy, it's imperative to suspend business until the details are clarified. The nuances of Chapter 11's success underscore the importance of vigilance.

Credit Extension and Administrative Claims: Assessing the Risks

Companies may be asked to extend credit to customers in bankruptcy, accompanied by assurances of an "administrative claim" for post-bankruptcy credit. Understanding the hierarchy of payment priorities, especially in comparison to secured debt, is vital. Regularly monitoring the bankruptcy case's progress, facilitated by claims agents and online updates, helps in informed decision-making.

Large Deposits and Escrow: Mitigating Risks in Asset Purchases

In cases involving substantial deposits for asset purchases during bankruptcy, understanding the financial health of the seller is paramount. Deposits held in escrow offer protection, while those used by the seller as part of regular operations pose risks. The buyer's priority status may not guarantee full reimbursement in the event of a seller liquidation, emphasizing the need for due diligence.

The Automatic Stay and Proof of Claim: Navigating Collection Challenges

The Bankruptcy Code's automatic stay prohibits collection efforts once a customer commences bankruptcy. Filing a timely "proof of claim" is crucial for securing a position in line for potential payments. Understanding the intricacies of preferences and their implications on past-due claims is essential for companies seeking to collect amounts owed.

Preparing for the Unpredictable: Lessons for Companies

As Chapter 11 outcomes vary, companies must proactively gather information about their partners' financial health. Being caught off guard can have significant consequences, and companies should strive to avoid being blindsided by unforeseen bankruptcies in their business networks.

In navigating the complexities of energy sector bankruptcies, informed decision-making and proactive measures are key to safeguarding businesses from potential disruptions. This guide equips stakeholders with the knowledge needed to navigate the challenges and uncertainties inherent in the current landscape.