By Adam Marshall
The impact of the coronavirus will result in a lot of tough financial and legal decisions for many business. These are topics I know intimately as a veteran bankruptcy and restructuring lawyer. For some stressed businesses, negotiating with creditors and lenders could be imminent while restructurings, bankruptcy filings and liquidations are also possibilities.
Here are some of my key observations:
When a business is in distress, by experiencing cash flow problems, loss of revenue, claims of creditors, or, as in these unprecedented times, all of these pressures at once, the company needs to be proactive and explore its options. Restructuring is
the umbrella term for working out financial issues. Often, a successful restructuring is conducted out of court by negotiating, often through counsel, terms with creditors. Sometimes the deal allows debt to be paid over a longer period, refinancing debt (revolving debt to a term, etc.), or can hinge upon new business terms going forward. In short, this is a fully negotiated solution in which the company and its creditor constituents reach deals.
In the event that a negotiated, out of court restructuring is not possible or is unsuccessful, a company can opt for bankruptcy. Bankruptcy is a statutorily based federal court solution. Creditor claims are handled pursuant to (1) the law (known as the Bankruptcy Code), (2) court and creditor oversight, and (3) negotiations. This process allows all creditor and lender claims to be dealt with in a singular forum. There are several types of bankruptcy, but for businesses the two most common are Chapter 11 and Chapter 7. Chapter 11 is known as a reorganization and is used by companies that intend to maintain operations in order to continue doing business after restructuring or in an attempt to maintain value in order to sell the business. It is vitally important to note that despite the Bankruptcy Code and court involvement, the most successful Chapter 11 reorganizations come through negotiated solutions.
If the business issues are too severe or the ownership group does not see a path to restructuring, then the principals can opt for a liquidation. A liquidation entails marshaling and selling any corporate assets in order to distribute proceeds to creditors. Liquidations can occur out of court, in state court (assignment for the benefit of creditors), or in federal bankruptcy court (a Chapter 7 filing).
Employers are facing a dilemma. They are encouraged or in some cases required to close their physical spaces; however, they still have payroll demands. Remote work is not possible for every industry and for others, the capital demand or loss of productivity (perceived or actual) is too great. Employers will need to evaluate terminating or laying off employees to mitigate losses. Depending on employer size, state and federal laws may impact their options. Additionally, employment contracts and agreements should be reviewed when assessing options for, among other things, “cause” or notice requirements as well as the applicability of non-compete or non-solicitation clauses.
Be Careful Borrowing Money
Businesses may experience a cash crunch as their customers delay payments or sales slow, depending on the industry. Those businesses who look to government programs or short term finance lenders should be mindful of potential terms that may impact long-term businesses health after the crisis. Among other considerations: (i) what collateral is required? Certain government backed loans require mortgages on the valuable Florida homestead. Other hard money lenders will aggressively pursue collateral post-default; (ii) is there a personal guaranty? How much is the guaranty? Does the guaranty disappear after a period of time?; and (iii) what is the actual interest rate? Certain financing is not actually a loan and is instead a purchase of future receivables, but when the interest rate is considered it could be well over 40 percent over time.
Negotiations with Creditors Gets to the Family Level
Although it is impossible at this time to determine the full extent of what the financial impact will be from this state of emergency, what is certain is that virtually all businesses and families will experience a significant decrease in monthly income or revenue. Whether you are dealing with a business closed due to a government order or your employment is terminated because your employer can no longer pay to keep you, almost everyone will be asking the same question: How on Earth are we going to pay the bills? The priority for all of us will be to focus on the essentials for our families. Eventually, however, we will need to address the other debt we carry, whether it is our home or auto loan, credit card debt or even bills owed to suppliers and vendors for our businesses. At some point in the (hopefully) near future, businesses and individuals may need to engage in discussions with their creditors to negotiate some form of repayment plan, if other restructuring options like bankruptcy are off the table. Additionally, businesses may need to work out terms with their vendors and suppliers in order to restart normal business operations.
In this unprecedented crisis, it is virtually certain that we will see an immediate and significant spike in defaults under both commercial and residential leases. While businesses and individuals focus on immediate needs such as food and basic utilities, landlords will themselves be placed in a difficult position as a result of the high default rate under leases. Both landlords and tenants will be reviewing their lease agreements for force majeure clauses and related provisions to determine what their rights are and how they will proceed. Additionally, it is expected that the state Legislature and local governments will impose some form of temporary moratorium on eviction proceedings for a period of time. If and when a potential moratorium is lifted, the state court system is expected to see a substantial increase in the filing of eviction proceeding filings. Courts will face the challenge of balancing the need to enforce contractual provisions on one hand with the reality of the difficulties most will face during this crisis.
Adam D. Marshall is a founding member of Marshall Grant, PLLC and is licensed to practice law in both Florida and Ohio. Contact him at firstname.lastname@example.org