When a vendor learns that a customer has sought bankruptcy protection, its first concern is potentially
only recovering a small fraction of the indebtedness it is owed. Although that is frequently the outcome
for unsecured creditors, under certain circumstances the vendor may be able to recover a substantial portion of its debt by becoming a so-called “critical vendor”. This article explains what a critical vendor is and
how a vendor/trade creditor can seek to be approved as a critical vendor, which status can often mean the
difference between material versus minimal recoveries as an unsecured creditor.
Bankruptcy Code General Prohibition on Payment of Pre-Bankruptcy Unsecured Creditors Prior to Plan Confirmation
The Bankruptcy Code prohibits payments during the pendency of a Chapter 11 bankruptcy case of unsecured claims incurred or due and owing to such vendor prior to the bankruptcy filing until a Chapter 11
plan is confirmed – which can take months or even years (and even once a plan is confirmed, it can take
years until any recoveries are realized adequate to provide unsecured creditors any recovery). Furthermore, the Bankruptcy Code has a priority system that ranks general unsecured claims junior to claims for
such things as taxes, unpaid wages, claims on account of customer deposits and claims that arise during
the bankruptcy case. But there are situations where certain general unsecured creditors can and do get
paid ahead of other general unsecured creditors. One of those situations involves what are known as “critical vendors.”
