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.

Faced with constantly evolving circumstances in these challenging times, officers and directors should not lose sight of what is arguably their most important corporate role–that is, as a fiduciary. The question, particularly as a corporation’s financial situation changes and restructuring is being considered, is: Who is that fiduciary duty owed to? Unfortunately, the answer depends on whether the corporation is insolvent or near insolvent, which is why being vigilant now will help avoid scrutiny by creditors later.

Many companies are currently experiencing dramatic reductions in revenues due to the COVID-19 pandemic. Such companies (along with their investors and creditors) are justifiably concerned that they may need to restructure and even potentially seek bankruptcy protection. Below is a list of items that any potentially distressed company should attend to as soon as possible to increase the likelihood of obtaining the most favorable outcome under the circumstances.

I. Focus on Cash

As the impact of COVID-19 is felt across the globe, many airlines have grounded their fleet, ceased operating flights, and are potentially in breach of any financial covenants that they may have in their debt or lease documents, if not already in technical insolvency.

If an airline does go into insolvency, what should banks and lessors do to protect their assets? What issues, practical and legal, should they be aware of?

The Warning Signs

A new trend is brewing in bankruptcy courts: debtors are increasingly able to use the courts’ general equitable powers for assistance in weathering the current economic storm. These pandemic-related equitable arguments may significantly impact the marketplace—positively or negatively depending on your position—specifically as it relates to lease performance and also in general.

In light of the ongoing economic impacts of the COVID-19 pandemic, and although Chapter 11 of the U.S. Bankruptcy Code pertains to many industries, there are certain real estate related provisions of which owners and tenants should remain particularly aware in planning strategies to cope with the fallout from the current health crisis.

To raise awareness in that regard, the following is a general summary of some of the more critical provisions of the Code.

Single Asset Real Estate Entity

The sudden fall of the oil market is already wreaking havoc on companies, and recent bankruptcy filings may be just the beginning.

Enacted March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) places short-term obligations and restrictions on lenders and servicers of federally backed loans. As part of these limitations due to Coronavirus Disease 2019 (COVID-19), lenders and servicers are temporarily subject to moratoriums on foreclosures, mandatory forbearance obligations, and revised credit reporting obligations.

In an increasingly desperate business climate, thousands of businesses are expected to apply for emergency loans created by the Coronavirus Aid Relief and Economic Security Act (CARES Act) – but unionized employers may want to think twice before walking this path. Certain commitments necessary to secure these loans– including a commitment not to abrogate existing collective bargaining agreements – could impact your labor relations strategy well beyond the course of the COVID–19 emergency.

Debtors in bankruptcy, including hospitals and skilled nursing facilities, left out under the CARES Act PPP