Financial Distress Isn’t Dire: Communicating Through Restructurings and Bankruptcies in the Time of COVID-19
The American Bankruptcy Code is often viewed as a tool of last resort for companies seeking to navigate through financial distress. However, as large swaths of the U.S. economy continue to shut down and Americans take the necessary steps to stem the spread of COVID-19, bankruptcy must come to the forefront of the conversation about economic revitalization and job preservation.
Chapter 11 of the U.S. Bankruptcy Code was designed to give companies facing insurmountable debt the protections necessary to continue running their businesses while they work with creditors to restructure that debt and create a fresh start. The thinking behind the Code was that it is far better to give companies a way forward and a way to continue contributing to the overall economy rather than simply let them go out of business. Given the economic havoc that is currently being wrought by COVID-19, we expect a flood of companies to voluntarily file for bankruptcy protection in the coming months in order to preserve their businesses. While obviously alarming, in these unprecedented times we should take some solace in the fact that the U.S. Bankruptcy Code exists precisely so that this crisis does not have to be the end of the road for these organizations.
To execute effectively on a path to reorganization, communicating to key stakeholders throughout the restructuring process is critical. Clear, proactive communications help companies keep employees working, customers buying, suppliers supplying and partners shipping goods and performing services. Doing all of this will be essential to demonstrating the viability of the business in the aftermath of coronavirus.
While this current economic crisis unfolded faster than anything we’ve ever seen, to the extent they can, companies should begin thinking about proactive communications as far ahead of a filing as possible. Whether that is holding conversations with lenders and creditors to determine the range of alternatives potentially available, or telling federal regulators about the incentives they’d like to see offered to financial institutions, getting ahead of these conversations can mean the difference between a well-considered plan for ongoing operations and an ultimate wind down.
Importantly, as the wave of bankruptcy filings begins, the Courts are likely to be stretched thin. Anticipating this issue, the National Bankruptcy Conference, an advisory group made up of scholars, lawyers and judges, recently suggested new provisions, including temporary halts on “evictions, repossessions, foreclosures, and similar proceedings that will follow from the severe dislocations caused by the pandemic.” Additionally, even if these measures are not taken, companies have options beyond voluntary bankruptcy filings, including out-of-court workouts. Again, the viability of these workouts will be contingent on companies creating communications with key stakeholders that set appropriate expectations, anticipate issues, and establish a common purpose and vision.
It may not always seem so, but Americans are all on the same side when it comes to building a more robust economic future for all, and bankruptcy protection is an established path to rehabilitation and revitalization for companies across the nation. In times like these, we need to embrace all available means to protect the nation’s businesses and get the U.S. economy on track. We need to remember that one of our most powerful weapons in this fight is the appropriate use of the Bankruptcy Code.