It’s crunch time for some businesses as they examine the short- and long-term prospects of survival after Covid-19.
But even as worries compound with a lack of further financial assistance from the federal government, a piece of the CARES Act may provide an outlet.
The federal legislation expanded rules that had come into play earlier in 2020 surrounding bankruptcy and reorganization options for businesses. Under legislation passed in 2019 that took hold in February, businesses with debts under $2,725,000 qualified for a simpler procedure in Chapter 11 bankruptcy. The CARES Act expanded that further to allow more businesses to qualify, raising the threshold to $7.5 million.
“If you think about Western New York, most businesses now fit into that window,” said Robert Feldman, a partner at Gross Shuman PC.
He said the simplified process is less expensive and doesn’t require as many approvals as a typical bankruptcy, such as extensive disclosure statements or negotiations with a committee of creditors.
It is, however, a limited opportunity.
“After March 27, 2021, it returns to the pre-existing legislation," he said. "The simplified procedure will still be available to companies with debts under $2,725,000 but it will be lost unless there's new legislation for companies with debts between $2,725,000 and $7.5 million."
The business bankruptcy scene in the region has been quiet thus far in the pandemic, but attorneys anticipate that will change. Feldman said this route can be a cushion for businesses that are still determining how to proceed.
“I think there will be a fair amount of activity,” he said. “Part of it is there is simply nothing to lose by making the attempt if your business, without attempting to restructure, will fail.”
Kenneth Africano, partner at Harter Secrest & Emery LLP, said smaller company reorganizations via Chapter 11, prior to either change, were few and far between.
“They became very unpopular for smaller businesses,” he said. “It just wasn’t very viable because of the fees and the fact that you really needed a creditor to be with you the whole way.”
The simplified process can take several days to several months, Feldman said.
“If it’s a business that’s going to be shut down by a creditor in a day or two, we can get it filed then,” he said. “But if it’s a business that wants to first make sure that it has its vendors in line to continue operating after it files or its customers in line to continue utilizing the business, it may be that there are a couple months of planning that go into it.”
Feldman said businesses that received money through the Payroll Protection Program are eligible, as well.
Africano agreed the incentive is worth considering.
“What the CARES Act did was redefine for a one-year period the size of the business that can participate,” he said. “It’s significant if you are not a national or chain business. What’s happening now is it’s hitting a much larger group of businesses, and Covid-19 put a whole lot of companies into needing to think about it" as an option.