COVID-19: Financial Restructuring, Creditors’ Rights, and Insolvency Issues

These are not normal times. There is no doubt that we are in uncharted waters as we all attempt to work through the impact of COVID-19 in connection with our personal and business dealings. Compounding the problem, none of us knows what might happen from day to day or for how long this might last. In our Financial Restructuring & Creditors’ Rights practice, we are already dealing with multiple businesses affected by this new reality, and we are sharing information and observations we think might be useful to our clients.

• Work with Your Lender: With many businesses evaluating their cash needs and upcoming obligations in an attempt to prioritize creditors, it is critical that businesses work with their secured lenders. Businesses should consider their ability to draw down on existing lines of credit or obtain additional financing to help them get through this crisis with the assistance of experienced restructuring counsel. In the event your company experiences a default (whether monetary or non-monetary) under its loan agreement, it is best in the first instance to work with counsel to consider all options, including efforts to work out a consensual resolution.
• Maintain an Open Dialogue with Your Creditor Body: In the age of COVID-19, many businesses have ceased operations and need to make decisions about whether, for example, paying next month’s rent makes sense for the future of the company. In this unprecedented time, we believe it is best to open a dialogue with significant creditors to determine whether a forbearance agreement or some other form of temporary accommodation can be reached.
• Avoid Incurring Personal Liability: In certain states, officers and directors can be held personally liable for the non-payment of wages and certain taxes, and for making distributions to shareholders if their company is deemed insolvent. Businesses must make sure that any such obligations, where personal liability is involved, are paid in order to avoid personal risk to officers and directors. Along these same lines, owners should be mindful of obligations that may arise under any personal guaranties that have been executed.
• Consult with External Advisors: When businesses are faced with new and uncertain situations, especially with respect to potential insolvency, it is imperative that their officers or boards retain seasoned external advisors who can assist in guiding them through difficult decisions. By assembling the right team of professionals, a company is best positioned to evaluate and respond to the ever-changing landscape.
• Keep Apprised of Stimulus and Other Governmental Assistance Programs: With federal, state, and local stimulus assistance being made available on a daily basis, it is critical that businesses familiarize themselves with these various governmental programs to make sure that they are apprised of all the resources available to them to weather this storm. The experienced lawyers in our firm’s Government & Regulatory Affairs Department are monitoring these developments daily on behalf of our clients and can assist to answer any questions in that regard. While this crisis persists, companies must stay ahead of emerging regulatory and legislative developments and be made aware of any potential delays in receipt of governmental approvals needed to consummate transactions or to otherwise operate their businesses.
• Consider Bankruptcy as a Last Resort: With the widespread impact of the COVID-19 virus, every business is having to make difficult decisions to ensure survival. Although bankruptcy is always a potential option and one with which we are well prepared to assist, we remain hopeful that, for those taking some of the proactive steps outlined above, this option will be a last resort for most otherwise healthy businesses. The $2 trillion stimulus package contained in the Coronavirus Aid, Relief and Economic Security (CARES) Act has a number of provisions that will enable more small businesses to streamline the bankruptcy process and reorganize their affairs should bankruptcy become necessary. The CARES Act includes changes to the Small Business Reorganization Act (SBRA), including an increase from $2.7 million to $7.5 million in the level of secured and unsecured debt that qualifies either companies or individuals that have debts primarily from commercial or business activities. The CARES Act’s increased debt limit of $7.5 million is effective for a one-year period.
• Remember that We Are Your Trusted Business Advisor: While the attorneys in the Financial Restructuring & Creditors’ Rights (FRCR) Department are based in New Jersey, New York, and Delaware, we maintain a national practice and regularly appear in courts throughout the country. Our attorneys are well versed in the multitude of options available to companies in distressed situations and welcome the opportunity to partner with your business as a trusted business advisor. We continue to monitor legislation and case law to remain abreast of the latest issues and solutions. As always, we stand ready to work through your issues with you and do our best to craft the most cost-effective solutions possible.

For more information regarding financial restructuring and insolvency issues in the context of the COVID-19 crisis, please contact Bob Malone, Chair of the Gibbons Financial Restructuring & Creditors’ Rights Department.

To view all client alerts in Gibbons “The Coronavirus Pandemic and Your Business: How We Can Help” Series, click here. Please also be sure to follow Gibbons on LinkedIn for a continuous feed of COVID-19 related updates and other important business, industry, and firm news.