The Coronavirus and Chapter 11 Bankruptcy
Posted on 03/23/2020 at 02:30 PM by Bradley Kruse
The sharp drop in the financial markets and the sharp increase in temporary business closings have placed a significant strain on many businesses across the country. Although it is important for businesses to remain optimistic and hope for a quick financial recovery, the emerging reality is that the coronavirus’ adverse impact on American businesses may last, like the virus itself, for many months, and will likely put the financial futures of many businesses under significant stress.
In these strange and uncertain economic times, having knowledge of the options and strategies presented by Chapter 11 reorganization bankruptcy is important, not only for companies seeking to reorganize, but for companies faced by Chapter 11 filings by their key accounts payable.
We are already seeing an uptick of Chapter 11 filings in parts of the country.
Chapter 11 is a powerful tool for businesses seeking protection from financial distress. Benefits of Chapter 11 reorganization are numerous. It creates breathing room for debtors by putting a halt or “stay” on efforts by creditors to continue efforts to collect debts, obtain or enforce liens, or to initiate or continue with litigation. Chapter 11 provides troubled businesses with the ability to restructure debt, for example, by extending the terms of existing loans and/or reducing interest rates, which can provide businesses with significant increased cash flow. Chapter 11 also provides troubled businesses with the ability to stretch out payments to trade Creditors and other unsecured creditors, in many cases for a number of years, until the business can stabilize operations and get back on its feet.
Another benefit of Chapter 11 is that it provides existing owners with the opportunity to maintain all, or a significant portion, of their equity interest in the business. Furthermore, throughout the duration of a Chapter 11 reorganization bankruptcy, existing management is allowed to continue operating the business, and existing equity holders are entitled to maintain their equity positions pending the completion and confirmation of a plan of reorganization.
Chapter 11 bankruptcies can be structured on a fast track, as is the case with a prepackaged bankruptcy, but often last for at least a year or more, depending on the debtor’s abilities and progress towards reorganization.
On the other hand, companies faced with bankruptcy filings by other entities that owe them money should also be aware of their options and remedies as creditors in a Chapter 11 reorganization bankruptcy. Such remedies include, but are not limited to: a) lifting the automatic stay in the event that the creditor’s collateral is not being protected; b) setting off mutual debts; c) serving on creditors’ committees; d) ensuring that avoidance actions, such as fraudulent conveyances and preferences, are adequately pursued to maximize distribution to creditors; e) conducting discovery on the debtor, including requests to produce documents and depositions; and f) objecting to the debtor’s discharge or the dischargeability of certain debts, if there is evidence that the debtor engaged in misrepresentations or misconduct either before or during the bankruptcy process.
Being mindful of the options and strategies presented by Chapter 11 is important, as the filing by one or more companies for Chapter 11 protection can potentially result in a chain reaction of other financially distressed companies who may also seek Chapter 11 protection. Simply put, the failure of a few of a company’s larger accounts to pay on time or at all, can often force an otherwise healthy business to consider filing its own Chapter 11 reorganization bankruptcy.
Dickinson attorneys are well-versed in Chapter 11 reorganization bankruptcies, having represented debtors, secured and unsecured creditors, and creditors’ committees, in virtually all aspects of Chapter 11 cases. If you would like to discuss the Chapter 11 options and strategies noted above or if you would like more information, please contact Brad Kruse here.
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