Keeping the lights on is one of the most important considerations for a reorganizing business debtor. Without electricity (and other vital utility services), a business attempting to reorganize under Chapter 11 of the Bankruptcy Code is doomed to fail.

Congress recognized the importance of these services and so provided a Bankruptcy Code section focused specifically on utilities, Sect. 366. The Revised Bankruptcy Code does change the provision however, so a company contemplating bankruptcy must consider the new law.

Under the current Bankruptcy Code, a utility cannot alter, refuse, or discontinue service solely on the basis of commencement of bankruptcy proceedings. However, if the debtor or trustee fails to provide adequate assurance to the utility company within 20 days after the order of relief, then the utility company may alter, refuse, or discontinue service to the debtor. Under the current law, there are several factors which can be found to be adequate assurance. Typically, adequate assurance is cash deposits or advance payments for services, but courts have also allowed other forms such as personal or third party guaranties, granting utilities administrative expense claims for post-petition service, or establishing expedited procedures for relief if the debtor defaults. Further, some courts have analyzed the existence of a pre-petition deposit and the payment history to determine the form of adequate assurance of payment.

Under the revised act, effective October 17, 2005, Sect. 366 defines and otherwise limits what may constitute adequate assurance. Under Sect. 366, adequate assurance is limited to the following:

1. a cash deposit;
2. a letter of credit;
3. a certificate of deposit;
4. a surety bond;
5. prepayment of utility consumption; or
6. another form of security mutually agreed on by the utility and the debtor or trustee.

Further, Sect. 366(c)(1)(b) specifically states that an administrative claim status will not constitute adequate assurance.

In addition, Sect. 366(c)(3)(b) prohibits the court from considering the following factors:

1. the absence of security before the petition date;
2. the payment by the debtor for utility services in a timely manner before the petition date; or
3. the availability of an administrative expense priority.

Under the revised acts, it may have gotten a little harder to keep the lights on while reorganizing.

Ray Ivey