Unprecedented times. Unchartered territory. There’s no crystal ball. So much uncertainty. A new normal. The calm before the storm.
Business Owners And Creditors Should Be Proactive
While these phrases are ingrained in the current-day vernacular of America hit hard by COVID-19, basic tenets of commercial law are still very much in place. Business owners and creditors should be proactive and arm themselves for the economic threats that are to come.
Since the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More
Information regarding changes in the law are overwhelming. What is not, however, and just as important, is guidance on answering the practical question, “what exactly do I do now?”
First, get your financial snapshot in focus. This means: compiling a balance sheet, listing all of your assets, all of your payables (or “liabilities”), including what may become a liability down the road (i.e., contingent liabilities), and determining what equity (if any) is left for owners. Following from that, is there an operational plan that can be implemented to lower costs while salvaging the competitive advantage of the company?
Second, take inventory of your contracts and agreements. Which contracts are critical for the business to continue operations? What constitutes an “Event of Default” under those agreements? While businesses are generally seeing payment waivers across the board, the vast majority of contracts and virtually all loans include other obligations (or “covenants”) that if not satisfied or specifically waived still render the agreement in default. Is there a “force majeure” provision that applies to your business’s obligations under the applicable agreement? Force majeure clauses are included in many commercial contracts and set forth the very limited circumstances under which a party may terminate or fail to perform without liability due to the occurrence of an unforeseen event. However, whether that “out” applies to your business requires its own legal analysis.
Third, create a budget for professional advisors needed to help you through legal and financial analyses.
Fourth, assess the realistic and honest outlook of your business. Is the problem really the pandemic? Or is the pandemic the proverbial nail in the coffin for a business that was struggling to turn profits long before its arrival.
Business Restructuring Options
Finally, understand generally informal and formal business restructuring options:
- A “Workout” or Forbearance: Business owners and creditors amicably agree on a new set of terms that are “right-sized” for the business.
- State Law Assignment for the Benefit of Creditors: Akin to a Chapter 7 liquidation, but with specific assignment arrangements for specific creditors. Companies engaged in an assignment for the benefit of creditors are not afforded protection from the “automatic stay,” a “breathing spell” provided by Federal law in a formal bankruptcy proceeding, which freezes all creditor communication and action in their efforts to collect upon filing.
- Federal Bankruptcy - Chapter 7: A “liquidation” of the company where the business is abandoned and a trustee will be appointed to sell off assets.
- Chapter 11: A “reorganization” that enables management to stay in control of the business, but wipes out equity if creditors are not paid in full. The timeline can be very short if the work is put in prior to the filing and major creditors are on board.
- “Small Business” Subchapter V of Chapter 11: A brand new, “fast track” bankruptcy procedure that enables companies with less than $7.5 million of debt to not only stay in control of their business, but also retain equity ownership so long as creditors are paid over the course of three (3) to five (5) years. Preparation is key, as the commencement of the case must be accompanied with a set of financials, and the case proceeds on a very compressed timeline.
Most importantly, take a deep breath. Organize your files. And it all becomes surprisingly manageable.
Joseph Pack, Esq., a New York and Florida attorney and Florida Certified Public Accountant, is the founder of Pack Law, a Miami based law firm specializing in business restructuring and bankruptcy including Chapter 11, Subchapter V, and Chapter 7.