As the EPA nears finalizing recently proposed environmental regulations related to per- and polyfluoroalky substances (“PFAS”), corporate America waits with bated breath.
Section 365(n) of the United States Bankruptcy Code (11 U.S.C. Title 11) protects the rights of intellectual property (IP) non-debtor licensees. Section 365 of the Bankruptcy Code allows a debtor –in-possession, or a trustee (e.g., a software vendor) to: (a) assume, (b) assign, or (c) reject certain executory contracts – which would typically include software licenses. A debtor in possession’s decision to assume, assign, or reject an executory contract is subject to court approval, certain deadlines and other requirements detain Section 365 of the Bankruptcy Code.
While COVID-19 may have helped some businesses, such as food delivery services and internet retail shops, many other businesses have struggled to generate any income during the pandemic. Not only restaurants, but also fitness centers, bowling alleys, and similar businesses have been required to shut down or operate at reduced capacity.
Nobody would deny that some companies have struggled to pay rent or invoices on time due to COVID-19. In many such cases, landlords and suppliers of goods or services have accommodated these struggling companies by explicitly or implicitly agreeing to postpone or defer payments in the hope that their customers/tenants would recover after the pandemic is resolved.
Several lawsuits have emerged in the last week involving the Small Business Administration’s Paycheck Protection Program (PPP). “The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.”1 The listed criteria for eligibility is very broad. Companies that have 500 employees or less, pay salaries or payroll taxes and were in operation on Feb. 15, 2020, are eligible to apply.2
The global COVID-19 pandemic continues to wreak havoc on the U.S. economy. Stay at Home orders issued by governors in all but a handful of states required, with certain exceptions, closure of all but those businesses deemed to be “essential.” While Congress has passed a series of measures meant to stem and mitigate financial impacts, a very large percentage of American small businesses will struggle to survive as states, counties and cities slowly lift restrictions and permit businesses to reopen.
Q: What is a Chapter 11 bankruptcy?
A: It is one tool, but perhaps the most dramatic remedy, in the toolbox of restructuring attorneys. Chapter 11 is the business reorganization section of the U.S. Bankruptcy Code. Most corporations, LLCs and other business entities are eligible to file for bankruptcy protection in one of two places: the state where they were created or the site of their principal place of business/assets.
Q: Why do companies file for bankruptcy?
A: Some of the most common reasons to file for bankruptcy include:
Capital intensive businesses often raise capital from multiple sources, including loans from senior and subordinated lenders and hybrid financing – most typically loans accompanied by warrants – from so-called mezzanine lenders. A borrower’s cost of funds with respect to each depends on the quantum of risk associated with the particular credit. Senior lenders enjoy priority in payment and recourse to discernible collateral and are able to offer lower interest rates and lower fees.
A troubled company may use Chapter 11 bankruptcy to restructure its debts or to sell its assets. The assets of a troubled company can often be sold or otherwise liquidated relatively quickly and efficiently in a bankruptcy proceeding and leave far fewer loose ends afterward than most any other sale method.
As a corporate officer or director, the only way to take a bad situation like bankruptcy and make it worse is to be confronted with personal liability for the company’s debts, when you could have taken simple steps to position yourself better. Senior management must pay close attention to specific responsibilities and the resulting potential for liability when insolvency is on the horizon. This is especially important during the COVID-19 pandemic when bankruptcies are on the rise.
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