What Businesses Need to Do Now to Cope With the COVID-19 Downturn

COVID-19 is having a negative impact on almost the entire business environment. Early financial planning is critical for management to deal with the economic downturn. For some, bankruptcy may be an option that businesses should consider.

Take these steps now!

Now is a critical time for businesses to engage internal and external advisors to assist with the following:

• Update financial projections to evaluate cash flows in worst- and best-case scenarios
• Create alternative business plans based upon the updated financial projections
• Assess cash availability from current streams of revenue, existing loans, lines of credit and collateral positions with current lenders and other lien holders
• Assess inventory of unencumbered assets that could be used to free up working capital
• Review insurance contracts to identify claims for business interruption coverage, civil authority coverage and exclusions
• Analyze current contracts with a focus on force majeure clauses, notification requirements and default provisions
• Summarize current litigation both initiated by and against the company
• Summarize employee wage/benefit requirements and available assistance programs
• Implement cost reduction plans to achieve rapid positive cash flow benefits.

A review of existing contracts and loan agreements by legal advisors is particularly important, with a particular focus on financial covenant compliance and cash-flow-related default provisions. The goal for management is to implement strategies that maintain value moving forward. Current and future lenders will expect management to have engaged competent legal and financial advisors to help with restructuring alternatives that may include forbearance agreements, waivers of certain financial and non-financial covenants, waivers of fees, amendments, increased indebtedness and/or adjustments to current principal and interest amortization schedules.

Should Bankruptcy be considered?

Management also should be prepared for lenders or advisors to suggest that the business consider bankruptcy as an alternative restructuring tool. The Bankruptcy Code was made to encourage financial restructuring to permit payments to creditors while preserving jobs and shareholders interest. The following are a few high-level bankruptcy concepts:

• The protections of the automatic stay will prohibit the immediate seizure of assets and any action to collect a debt or obtain possession of the debtor’s property.
• The business would be a “debtor in possession,” which means it keeps all its assets, management operates the business and employees retain their jobs. In bankruptcy, management owes a fiduciary duty to creditors.
• The bankruptcy court must approve key management decisions: For example, bankruptcy court approval would be required to:
  • Sell assets free and clear of all liens, claims and encumbrances
  • Execute or terminate leases and contracts
  • Retain professionals such as lawyers and accountants.
• The bankruptcy plan must allow for secured creditors to be paid at least the value of its collateral. Unsecured creditors take lower priority, and a reorganization plan can pay much less than what they are owed, depending on what assets are left after the secured debts are paid.
• Equity owners in the company cannot retain any assets or profits until all creditors, including unsecured creditors, are paid in full.

Phelps’ team of professionals are available to support management in this time of crisis by offering legal and financial counseling, whether it be for an out-of-court workout or a chapter 11 bankruptcy reorganization. Phelps also has set up a COVID-19 Client Resource Portal with information to assist individuals and businesses that are dealing with economic uncertainty and legal concerns during this time.