Valuation is a critical and indispensable element of the Chapter 11 bankruptcy process. It drives many aspects of a Chapter 11 case, from petition to plan confirmation, in all circumstances. But the COVID-19 pandemic has added a layer of complexity—and volatility—to bankruptcy valuation issues. This is likely to affect decisions about whether and when a company should enter Chapter 11, and how creditors and shareholders will be treated as a result of Chapter 11 filings.

Historically, many companies seeking bankruptcy protection have attempted to streamline and shorten their Chapter 11 cases to reduce cost and risk.¹ But the COVID-19 pandemic may be disrupting that trend, especially in industries that rely on in-person shopping or dining or are otherwise disproportionately affected by the economic slowdown. Across the country, many businesses are seeing revenues dry up as consumers stay home, following concerted governmental and social efforts to “flatten the curve” of the novel coronavirus’s transmission.²

When a company faces financial distress and seeks to sell its assets, both the seller and the buyer may prefer to implement the transaction through a Section 363 sale in a Chapter 11 bankruptcy case of the seller. A Chapter 11 sale process provides certain protections to the buyer from fraudulent transfer and other claims of the seller’s creditors, and a seller may be able to maximize the purchase price of its assets through a Section 363 auction process.

Timing is key to valuation of all types and in all contexts. But in bankruptcy, valuation timing can take on heightened importance because a central element of bankruptcy involves distributing value as of a specific point in time. Higher valuation means larger creditor recoveries in bankruptcy, and lower valuation means smaller creditor recoveries. Valuation can also affect which creditors receive those recoveries and the extent to which various stakeholders retain an interest in the reorganized debtor.