COVID-19: Bankruptcy & Restructuring Options
Houston — March 24, 2020 The COVID-19 pandemic is causing extreme disruptions in business operations and immediately impacting revenues in most industries. Business closures, social distancing, and quarantine orders are all aimed at flattening the curve of the pandemic but are equally causing an immediate global economic crash. Businesses attempting to weather this storm face a unique set of challenges and many need immediate financial relief from creditors who all want to be paid now.
Whether through a bankruptcy proceeding or out of court agreement, any “fix” to the ongoing economic crisis should be tailored to preserve jobs and operations, and maximize value to all impacted stakeholders. Chapter 11 bankruptcy is tailored to provide a single forum and to encourage a global resolution of claims and liabilities, through collective negotiations with creditors, customers and contractual counterparties. Although a consensual resolution is the goal, not all of the creditors must agree to a court-approved plan of reorganization that will ultimately be binding on all parties.
Perhaps the most powerful benefit of filing bankruptcy is the imposition of the automatic stay, which automatically stops substantially all collection activities and legal proceedings against a company and its property. From the debtor’s prospective, this provides a breathing spell to address business problems and negotiate a plan of reorganization. A debtor will have the exclusive right to file a plan of reorganization within 120 days of filing its bankruptcy case. From the creditor’s perspective, it prevents the “race to the courthouse” or exercise of self-help remedies to the detriment of other creditors.
Companies are usually driven into bankruptcy because of a shortage of cash. Ensuring the availability of cash is one of the most important aspects of chapter 11 bankruptcy, and the bankruptcy code is designed to encourage creditors to lend to debtors in bankruptcy. Emergency debtor-in-possession (DIP) financing is usually considered within the first few days of filing bankruptcy so that a debtor can obtain the necessary funding to continue operations, including paying employees, taxes and insurance. Lenders in bankruptcy are typically afforded extraordinary protections and incentives for providing financing, and depending on the circumstances, are provided releases and other protections that mitigate risks for a lender.
An additional solution in bankruptcy is the ability to sell assets. The bankruptcy court has the power to approve the sale of assets free and clear of liens and competing claims, which may otherwise prevent a sale outside of chapter 11. Buyers also have the ability to assume favorable leases or executory contracts, or choose to have those contracts rejected without any further liability to the buyer. Another benefit of filing a chapter 11 bankruptcy is the ability of debtors to evaluate executory contracts (contracts with ongoing obligations) and leases, and then decide whether to reject or assume those agreements. Keeping beneficial contracts and rejecting unfavorable contracts can significantly assist in the reorganization of a financially distressed company.
The COVID-19 crisis will have a significant negative impact on many businesses. However, that does not mean that companies should be forced out of business. To that end, the filing of a chapter 11 bankruptcy does not mark the end of a company’s operations, rather it should be viewed as a second chance to reemerge as a profitable business.
Celebrating 30 Years in 2020
Founded in 1990, with offices in Houston and Austin, Andrews Myers, Attorneys at Law, is a corporate law firm and recognized market leader in Texas construction law. The firm focuses on the concentrated disciplines of commercial litigation, construction, commercial real estate, corporate and business transactions, with additional emphasis on related issues including bankruptcy and insolvency, energy, employment and capital formation. A seasoned team of attorneys provides timely and cost-effective solutions to the most complex problems facing entrepreneurs and middle-market industry leaders throughout the state and the nation. For more information please visit www.andrewsmyers.com.