The Coronavirus Aid, Relief and Economic Security Act of 2020 is a great legislative response in helping thousands of struggling businesses navigate the financial disaster presented by the coronavirus pandemic. The response to COVID-19’s spread has shut down thriving businesses, put people out of work, and is having ripples throughout the economy.
Despite the intent to provide wide and sweeping economic relief to affected businesses, Congress made an ill-advised exclusion when determining what businesses can be an eligible participant in the CARES Act loan program:
“(V) the recipient is not a debtor in a bankruptcy proceeding…”
As the plain language indicates, any business that is a debtor-in-possession in an active Chapter 11 bankruptcy reorganization is ineligible for relief under the CARES Act.
This is a terrible oversight.
When a business files for relief under chapter 11 of the Bankruptcy Code, it then operates as a “debtor-in-possession,” continuing its pre-bankruptcy operations under the oversight and subject to the approval of the Bankruptcy Court.
The goal for the debtor-in-possession is to address, correct, and overcome whatever financial or operational issues that caused the bankruptcy and then reorganize its operations, finances, or governance structure in a way that a more successful business will result.
So, in short, a business operated by a debtor-in-possession operates like any other business. It has employees. It pays rent. It pays taxes. It buys goods and inventory.
If the DIP struggles and can’t pay employees, rent, taxes, and other operational costs, it fails. Just like any other business.
And, just like any other business, a global pandemic has a catastrophic impact on its operations.
The exclusion of CARES Act financial relief to a debtor-in-possession in a chapter 11 reorganization is, in essence, a death sentence to that debtor’s ability to reorganize. It lays off employees. It can’t pay rent. It can’t pay taxes. It can’t confirm a plan of reorganization. It simply figures out a way to survive, without any help, or close.
Here, I’m guessing that Congress wanted to exclude the shutting down or liquidating bankruptcy debtor’s ability grab some cash. But, by including a broad exclusion, they’re hurting legitimate businesses that may already be on a path to survival.
With this exclusion, the Act forces the debtor to ponder a strange choice: Whether to voluntarily dismiss an otherwise viable bankruptcy proceeding in order to apply for federal relief.
Creditors Rights 101 