Bankruptcy in a Distressed Post-COVID-19 World

by Cathy L. Reece

Bankruptcy is a forum and an arena for resolving distressed business situations in a post COVID-19 world. Bankruptcy is not a solution for every business, but it is one of several alternatives to consider. In a chapter 11 bankruptcy reorganization, a business can find the time and the breathing room to choose and implement the right solution to save the business and jobs, and to provide the most value to repay creditors. Here are some of the steps to consider.

Seek the help of the right experienced professionals. A turnaround consultant can be very helpful. They have been through such a crisis before, understand what distressed businesses need and know how to approach and discuss solutions with creditors. An experienced bankruptcy attorney is necessary to guide the complex legal analysis and process. Look at the website for the Turnaround Management Association for a local directory of experienced professionals. [See Resources List]

Identify the financial and operational problems and the causes of the distress. The goal is to find the right business solutions for the distress. Is the problem unique to the business, or is it industry-wide? Does the business solution require the consent or assistance of others? Obtain a liquidation analysis and compare it with a going concern value to determine what creditors will likely receive. Work with the professionals on a business solution and a legal solution. Is the business plan viable and workable? 

Do not hesitate to explore a sale of all or a portion of the business. A vast majority of all bankruptcies involve a sale free and clear of liens. Buyers welcome a comfort order to assure them of what they are purchasing. Also, rethink the footprint or physical space of the business. Does the use of the real property or the nature of the business need to be adjusted or repurposed in light of the changing market? Can online sales be increased and expanded? Can square footage be reduced or subleased? Is there a strategic buyer or partner that can be approached? Is it time to refocus on the most profitable portions of the business and jettison the less profitable? Creative ideas abound. Do some research and talk with professionals about the number of different ways that businesses are solving their problems.

Review the cash flow and look for additional sources of revenue or cash. Are there spare or unused assets that can be sold? There are still Payroll Protection Program loans available. Contact an existing banker or a local community bank about obtaining such a loan. Some bankruptcy courts have required the SBA to approve the loans to a debtor even in a bankruptcy. Look at insurance policies to see if business interruption insurance has been triggered. Check to see if there is a life insurance policy that can be sold. Also, is there a damage lawsuit that needs to be pursued for breach of contract? There is third-party litigation financing available in bankruptcies on a nonrecourse basis to fund litigation costs and fees.

Finally, if a consensual plan cannot be negotiated with creditors or lenders, such as a deferral of payments, a reduction of the interest rate, modifications of the loan, a short sale or payment of less than 100 percent to the creditors, then the debtor may need to ask the bankruptcy court to overrule objections and approve the business or legal plan so the debtor can stay in business, keep its employees, stretch out repayments and maximize value for all creditors. Increasingly bankruptcy courts seem willing to use their equitable powers to assist where appropriate. 

Cathy L. Reece
Fennemore Craig (Financial Restructuring practice group)

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