The bankruptcy code can be your friend, sort of

Nobody likes to file for reorganization under the bankruptcy laws, but it happens. And while it's usually bad news for a company's stockholders, in the area we're talking about Chapter 11 has one major advantage -- the ability of the bankrupt company to 'reject' executory contracts, a category that includes ongoing IT and network service agreements. 

This means that a bankrupt company can terminate its ongoing contracts without normal liability for shortfall charges, early termination charges, and the like. Needless to say, this is a powerful source of leverage when dealing with vendors. The right to retain or reject executory contracts can also enhance the value of a bankrupt company in the eyes of potential purchasers.

Smart planning and coordination with a potential purchaser as to which services contracts add value and which may impede consolidation may tip the balance between acquisition of the bankrupt firm as a going concern and the piecemeal acquisition or liquidation of its assets. In addition to the right to reject contracts, bankruptcy also offers a respite from service provider claims, although it is short-lived. 

Filing for bankruptcy stops a company's service providers, including telecommunications providers, from cutting off service for at least 30 days. That is good news for those trying to keep a business going, but 30 days goes by quickly. If the bankrupt company can provide "adequate assurance" of current payments within that 30-day period, the service provider is bound to continue providing service under the applicable contract. If it can't, it must spend this period of reprieve working out a plan to obtain service going forward. Rejection rights can serve as a useful lever in these negotiations. 

The bankruptcy laws also render unenforceable clauses allowing the provider to cut off service immediately. Why do lawyers insert these so-called ipso facto clauses? It is mostly wishful thinking, reflecting the desire of clients to be rid of service providers in financial trouble and the hope that changes in the law will allow them to exercise the right in the future. But service providers have an interest in terminating insolvent customers or using the threat of termination to extract concessions. The bar on enforcement of ipso facto clauses may frustrate when a provider is in dire straits, but it is a boon to struggling customers.

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