Critical vendor and utility motions for software, cloud and telecom providers

Why software, cloud and telecom vendors get missed on day one

First-day vendor lists are usually built from the accounts payable aging, sorted by spend. Software subscriptions are small line items, many are paid on corporate cards, and telecom is often lumped in with the utilities. As a result, the vendors that hold a debtor's email, files, customer histories and call records rarely appear on the critical vendor schedule or in the initial budget.

That gap matters because an established company can run on 10 to 15 or more systems, each holding years of records. If a subscription lapses during the case, the archive can lapse with it, taking sale value, the litigation record and any later license opportunity along with it.

What the Code and the courts say

The Bankruptcy Code has no critical vendor section. Debtors ask to pay selected prepetition claims under the court's general powers and the use-of-property provisions, and courts examine those requests closely, often requiring evidence that the vendor would stop supplying and that paying it benefits the estate as a whole. Practice differs by circuit and district.

Utilities sit under section 366. In general, a utility may not alter, refuse or discontinue service solely because of the filing or an unpaid prepetition bill, but it may do so if the debtor does not provide adequate assurance of payment within the period the statute sets, and chapter 11 cases have their own stricter subsection on what counts as assurance. Courts have generally treated traditional telephone service as a utility; whether internet, cloud or software providers qualify is far less settled, and most SaaS vendors are handled as ordinary contract counterparties instead.

For those counterparties, the automatic stay and the Code's limits on termination-for-filing clauses usually prevent a cutoff based only on the filing, while unpaid postpetition invoices are a different matter. The page on whether a software vendor can cut off a company after a bankruptcy filing covers where that line falls.

Matching each vendor to a first-day route

The last row deserves attention. A backup subscription is cheap and easy to cancel in a cost-cutting sweep, yet it may be the only place where records from retired platforms still exist.

The records workstream for the first-day package

1. Pull 24 months of corporate card statements and AP history for software, cloud and telecom charges, and reconcile them to the single sign-on dashboard.
2. For each vendor, note what records it holds, how far back they go and whether it holds the only copy.
3. Pick a route per vendor: ordinary-course payment, critical vendor relief, utility treatment or none.
4. Put the postpetition charges into the initial cash collateral or DIP budget, line by line.
5. Serve vendors with the first-day orders and ask each to confirm in writing that the account is flagged and data will not be suspended or deleted.
6. Before any later rejection motion, export and verify the data; the pre-rejection export checklist sets out the steps.
7. Log each preserved system in the records inventory folder of the sale data room so bidders and the committee can see what exists.

Illustrative: a fictional 320-person distribution company is preparing a chapter 11 filing. Its AP aging shows 40 vendors above the spend threshold, and none is a software company. The card statements show 31 software and cloud subscriptions, including a backup service holding the only copy of a retired ERP system covering 2011 to 2019, and a contact-center platform with six years of recorded customer calls. Counsel adds the backup service and the cloud host to the critical vendor exhibit because both suspend unpaid accounts quickly, keeps the other subscriptions on ordinary-course payment and names the telephone carrier in the utility motion. The budget gains a software line instead of burying it in general overhead.

Questions to settle before the first-day hearing

• Which vendors would suspend service fastest if a postpetition invoice were missed?
• Which telecom providers belong in the utility motion, and what assurance will be offered?
• Does the interim budget include every software and cloud line, including card-paid ones?
• Who at the debtor owns each administrator account after the filing?

Call recordings need a consent check before anyone values them

Recorded calls with proper notices are among the record types AI labs and data buyers value, and they are also among the most legally sensitive. Federal law generally permits recording when one party to the call consents (18 U.S.C. 2511), but California prohibits recording confidential communications without the consent of all parties (Cal. Penal Code 632), and other states set their own rules. Preserve recordings during the case, but do not treat them as licensable until counsel has reviewed how callers were notified.

What to say to the vendor

A short written notice, sent with the first-day orders, does more than a phone call to the vendor's billing team.

Can a debtor in chapter 11 license its records?

Debtors that keep operating through a chapter 11 case, sell their business or wind down can all hold records worth licensing, provided the company is a US business with 50+ full-time employees at peak (contractors excluded), several years of documented operations and clear rights to the records. In a case, the authorized representative is the debtor in possession acting through its officers, or a trustee if one is appointed, and any license follows the court's approval process. Check fit against who qualifies or with the company fit checker.

Advisers who introduce a debtor never handle the data. The debtor's own team builds the inventory directly with SourceX, and nothing is delivered until an agreement is executed and the debtor authorizes it.

This is general information, not legal, tax or financial advice. First-day practice varies by district and judge; confirm vendor treatment with debtor's counsel and the US Trustee before filing.

Next step

Add a software, cloud and telecom tab to the first-day vendor workbook before the petition is filed. Restructuring advisers who plan to make introductions should register as a partner before the first conversation with the debtor.