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Bankruptcy: An Option to Help Companies Survive COVID-19 Fallout

March 25, 2020

By: James D. Silver and Andrew Kamensky, Partners in Kelley Kronenberg’s Fort Lauderdale office handling matters related to business bankruptcy and commercial litigation.

These are unprecedented times.  Several nations are on lockdown, social distancing is the norm, and the financial markets are in turmoil as both individuals and businesses deal with the impacts of the coronavirus pandemic.  The stark reality is that precarious financial conditions have worsened significantly for many industries, including hospitality, travel, and retail, among others.  Government-mandated closures of businesses and schools, coupled with major travel restrictions, makes the long-term economic consequences unclear.  Indeed, nobody knows how long this predicament will last.  As economic conditions worsen with supply chain disruptions, businesses can expect lower demand for goods and services.  This economic chaos will lead to reduced profits, less capital investment and layoffs.  What options are available to businesses to help them survive? The answer may surprise you.

Bankruptcy.  Although a bankruptcy filing has a negative stigma, for decades numerous public and private companies across many industries experiencing financial problems have successfully reorganized their businesses in Chapter 11 cases during difficult economic times.  In a Chapter 11 case, a debtor may be able to restructure its business by reducing debt, obtaining financing, resolving expensive and time-consuming litigation, and rejecting burdensome contracts and leases.  Yes, a Chapter 11 bankruptcy filing could be an opportunity to save a company, preserve jobs, and provide a return to equity.

Bankruptcy is not a magic wand that can save each and every business.  Rather, it is a well-recognized legal tool that can tip the scales in favor of a struggling business and afford it an opportunity to be successful.  A successful Chapter 11 case that provides a debtor with a fresh start requires careful preparation.  Working with experienced bankruptcy counsel, a client can evaluate the financial needs of its business while being cognizant of market conditions.  One of the primary concerns in most Chapter 11 bankruptcy cases is cash flow.  A bankruptcy professional can help a business review its income and debts to develop a budget.  If there is a cash shortfall, which is common in bankruptcy, the debtor may need to obtain debtor-in-possession financing.  You might ask yourself, who would make a loan to a company in bankruptcy?  Such financing is often attractive to lenders who are granted special protections. .  Experienced Chapter 11 bankruptcy attorneys can assist clients in communications and negotiations with all key stakeholders, including customers, vendors, and employees.

Some of the advantages of filing for Chapter 11 bankruptcy include, but are not limited to, the following:

  • Business can continue to operate while formulating a plan to pay off debts.  This means that the business name, goodwill, and customer base are not lost – referred to as “preservation of going-concern value.”
  • Chapter 11 plan can discharge debtor’s debts and allows debtor to partially pay back unsecured debts rather than in full.
  • Automatic stay allows a debtor to take a deep breath, prohibiting creditors from collecting on debts.  This injunction immediately stops all lawsuits, foreclosures, repossessions, bank levies, wage garnishments, and other collection activities.
  • Freedom to restructure secured debts where payments can be lower and spread out over a longer period of time.
  • Ability to reject unprofitable leases and contracts, and cancel the debtor’s obligation to perform thereunder.
  • Ability to avoid and recover certain bank levies, lien notices, and transfers of estate property that occurred prior to the bankruptcy filing.
  • Temporary deferral of making certain rent or debt installment payments.
  • Sell property free and clear of liens and interests.
  • Extend payment of unsecured tax debts for up to five years.

Finally, the Small Business Reorganization Act of 2019 (SBRA), which took effect on February 19, 2020, has added a new subsection to Chapter 11 of the Bankruptcy Code, creating a faster and less expensive reorganization path for small business debtors.  To be eligible, a debtor’s total debts must be less than $2,725,625, with at least one-half of the debt coming from business activity.  Only the small business debtor may file a Chapter 11 plan, with the debtor filing its plan within 90 days from the date it files its bankruptcy petition.  A standing trustee similar to those appointed in Chapter 13 cases is appointed to oversee each small business case.  A creditors committee will not be formed.  The Court can confirm a plan without creditor support as long as the plan does not discriminate unfairly and is deemed to be fair and equitable with respect to each class of claims.  The SBRA contains other provisions that differ from a traditional Chapter 11.  If you are a small business debtor experiencing financial turmoil due to COVID-19, contact a bankruptcy attorney to see if the SBRA is right for you.

Disclaimer: This article is intended to provide you with general information regarding the impact of a potential or actual coronavirus pandemic. The contents of this article are not intended to provide specific legal advice.

For more information, please contact James Silver, jsilver@kklaw.com, Andrew Kamensky, akamensky@kklaw.com.
or TEXT, 954-281-7970.