Now is the time for companies in all industries to consider proactive measures to help mitigate their risk and prepare for how they will deal with the fallout from the coronavirus. As opposed to reacting to positions imposed by lenders, vendors, and other business parties, an effective proactive plan under a distressed scenario should include establishing an interdisciplinary crisis response team to identify, assess, and manage the risks presented. The team should include personnel from purchasing, operations, quality, finance, and legal. In the event your business is facing an insolvency scenario, bankruptcy should be evaluated among your options and discussed with your finance and legal professionals.
A Chapter 11 bankruptcy is a significant and often times expensive business tool and, accordingly, should only be used as a last resort. However, to manage and preserve sufficient liquidity to survive this crisis, a bankruptcy filing may be the best option available.
First, create a conservative and achievable cash forecast, taking the negative effect of the virus into consideration.
If your projections indicate a looming liquidity crisis, DO NOT delay and DO NOT spend your valuable cash “running in place.” You must be proactive and start negotiations NOW with your lenders, critical trade creditors and landlords to reach agreements that will provide you with sufficient liquidity to survive. These may include waivers of financial covenants, agreements to reduce and/or defer payments, forbearance agreements, grace periods, and any other appropriate agreements needed to make sure you have sufficient liquidity for the near term.
From the perspective of a company’s constituents, this crisis might provide you with some opportunities to renegotiate terms. For example, your landlord may not want your space to “go dark,” your creditors may not want to lose a customer and future sales volume, and your lender may not want a nonperforming loan and would be amenable to a forbearance arrangement. A potential bankruptcy filing could facilitate modified contract terms to gain sufficient liquidity to go through the crisis.
If you can’t reach “out of court” agreements necessary to preserve sufficient liquidity, a Chapter 11 bankruptcy filing WHILE YOU STILL HAVE A CASH to adequately fund the Chapter 11 might be your best and only alternative.
So, once you are in bankruptcy, what do your business operations look like?
A Chapter 11 bankruptcy filing:
will allow you to continue operating your business in the ordinary course (hopefully for long enough to allow this crisis to pass);
will automatically stay or freeze payments to your pre-filing trade creditors pending the formulation and confirmation of a plan of reorganization;
will prevent your landlord(s) from terminating your lease(s) and from collecting unpaid pre-filing rent, at least for some limited period of time as long as you pay your post-filing rent; and
will bring all of your constituents to the bargaining table simultaneously to facilitate a long term resolutions.
A Chapter 11 bankruptcy filing:
will NOT allow you to ignore governmental mandates that may affect your business operations;
will NOT discharge all of your pre-bankruptcy debts;
will NOT magically transform a bad business model into a successful or profitable business model; and
will NOT allow you to keep your assets without repaying the debts secured against those assets.
This is a very general description of the potential benefits of a Chapter 11 bankruptcy proceeding. Bankruptcy should only be used as a last resort, but be the tool that allows you to preserve the liquidity necessary to survive this unprecedented crisis.
In summary, it is important for companies in distress to take additional steps now in order to mitigate the looming risk. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.
Foley will continue to keep you apprised of relevant developments. Click here for Foley’s Coronavirus Resource Center for insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form.
