How to keep trading and collecting from a customer under bankruptcy protection
The challenge
When a customer files for bankruptcy, one of the first questions is whether to keep doing business or end the relationship. Since companies in bankruptcy usually cannot survive without trade support, they often reach out to suppliers to ask for trade terms, or at least a steady supply of goods (after a Chapter 11 reorganisation bankruptcy is filed).
When any customer files for bankruptcy, the key question for Microsoft is not ‘should we allow business’, but ‘how do we facilitate business and not compromise on credit risk/collection principles’. Microsoft was able to facilitate US$10.2m business (with a US$5m upside) with Pacific Gas & Electric Co (PG&E) which filed for Chapter 11 Bankruptcy in January 2019. By challenging the status quo mindset of not touching companies under bankruptcy protection, through careful due diligence Microsoft was able to increase its top-line.
The solution
One approach to dealing with bankrupt customers is to stop doing business with them. Another is to find alternative ways to enable business and yet manage the credit risk. By taking the latter path, Microsoft achieved a perfect balance between enabling sales and ensuring prompt collections.
It took a top-down approach. In the case of PG&E, the customer was legally permitted to pay for post-petition (post-bankruptcy filing) purchases of goods and services in the ordinary course of business. Microsoft wanted to see how it could facilitate sales, post the customer filing for bankruptcy, and still manage credit risk.
Since this was a Chapter 11 filing, after going through the court order, PG&E could continue to pay employee wages and benefits without interruption, and also make payments to suppliers and vendors in full, under normal terms, for goods and services provided on or after the bankruptcy filing date.
To ensure that PG&E was willing to make current post-petition payments under contract, Microsoft confirmed this understanding with PG&E in writing. To ensure then that the company had the required budgets and approvals to pay, Microsoft contacted PG&E’s finance leadership, seeking official confirmation through approved POs. Microsoft was then able to match the future billing amounts to approved POs on the customer side. It was necessary to ensure that these POs were reflected on the customer portal, and that Microsoft was able to match invoices to the POs to ensure prompt payment by PG&E.
At the time, the market cap of PG&E was US$10bn, providing adequate comfort. In the end, Microsoft not only facilitated a sale of US$10m in June 2019, but more importantly ensured customer satisfaction without compromising on its own risk principles and due diligence processes. It also ended up collecting all the invoiced amounts on the due date in July.
Best practice and innovation
This case study has now set a benchmark for how Microsoft manages and supports its customers who are going through bankruptcy proceedings. It’s seen as a win-win situation for all, enabling profitable sales for Microsoft and minimal business disruption for the customer. It now has a ready-made standard operating procedure (SOP) on hand.
Key benefits
- Able to replicate the programme with other customers under bankruptcy protection.
- Increases customer loyalty, knowing support offered in tough times.
- Facilitated sale of US$10m.
- Did not compromise risk principles and due diligence process.
- Collected all invoice amounts on the due date.
