COVID Cash Crunch: Options for Reorganizing or Liquidating Your Business in Illinois | Cozen O’Connor

The financial distress caused by the COVID-19 pandemic has left many businesses reeling. With no clear end in sight, the bad news is that some companies will be forced to seek liquidation or reorganization options. The good news is that there is are options.

Which of these options is best depends largely on the specific circumstances of the struggling business. But whatever the situation, it is better to act quickly and decisively than to delay. Inaction often leads to creditor-driven liquidation terms, limited financial maneuverability, and reduced asset value.

STATE DISSOLUTION PROCEDURES

The first option to consider is a simple dissolution under Illinois law, which allows business entities of all types to dissolve, wind up operations, and liquidate assets. The process is generally simple and ideal for solvent companies, ie companies that can otherwise meet their obligations in the event of liquidation. Company stakeholders simply vote to dissolve, file dissolution documents with the Illinois Secretary of State, and make necessary distributions to creditors and shareholders.

State Dissolution Laws can also be a good option for insolvent businesses with little or no assets available to satisfy creditors. However, for a company that is insolvent but has material assets available to partially satisfy creditors, it generally does not make sense to rely solely on state dissolution laws, for several reasons. Creditors require assurances that the company equitably satisfies claims; legal proceedings are often required to resolve disputes and approve distributions; and third parties may be reluctant to buy the company’s assets for fear of making the successor liable for the company’s debts.

ASSIGNMENT FOR THE BENEFIT OF CREDITORS

Another possibility of business liquidation is the “assignment for the benefit of creditors” (ABC). An ABC is a voluntary assignment of all assets of the company to a third party (the assignee) pursuant to a written trust agreement, whereby the assignee receives the assets subject to all liens, claims and encumbrances of the company’s creditors. . The role of the assignee is to wind up the company and distribute the proceeds to secured and unsecured creditors, less any administrative costs incurred.

The advantages of an ABC are that an independent third-party trustee chosen by the business is responsible for winding up and winding up the business, and the management of the business is not subject to direct scrutiny by the creditors (as it would be in the event of bankruptcy). ABCs also tend to be faster and cheaper than filing for Louisiana bankruptcy attorney. The disadvantages are that there is no automatic stay of litigation with creditors and that assignees are not vested with the avoidance powers of a trustee in bankruptcy to “claw back” certain transfers and maximize value for unsecured creditors of the company.

CHAPTER 7 BANKRUPTCY

A Chapter 7 bankruptcy case is a liquidation of a business under the supervision of a federal bankruptcy court. Chapter 7 bankruptcy cases are initiated by filing a bankruptcy petition, after which an independent third-party trustee is appointed to oversee the liquidation of business assets and make distributions to creditors.

The role of a Chapter 7 trustee is to maximize the value of the bankruptcy estate for the benefit of creditors. To this end, the duties of a fiduciary will include: (i) investigating the financial affairs of the company and any lien exercised on the assets of the company; (ii) sue third parties to recover preferential or fraudulent transfers made by the Company; (iii) analyze and, if necessary, contest claims filed by creditors; (iv) sell any illiquid assets of the company; and finally (v) distribution of the assets of the bankruptcy estate to creditors and, if there are sufficient assets, to shareholders.

The advantages of a Chapter 7 bankruptcy case, as opposed to an ABC, include predictability, transparency, and finality. All litigation with creditors is suspended, and the trustee and creditors are permitted to question company management and examine its books and records. The Bankruptcy Code ensures prompt liquidation of assets according to an established priority scheme and provides assurances to asset acquirers that they will not be tagged with successor liability.

CHAPTER 11 BANKRUPTCY

Chapter 11 of the Bankruptcy Code is used by a going concern to (1) reorganize its balance sheets in accordance with a Chapter 11 plan of reorganization or (2) sell its assets as a going concern and liquidate. The advantage of a Chapter 11 bankruptcy case is that it gives the business “breathing room” while it negotiates with creditors the terms of a plan or sale.

Like a Chapter 7 case, a Chapter 11 case is administered under the supervision of a federal bankruptcy court and begins with the filing of a Chapter 11 bankruptcy petition. Unlike a Chapter 7, however, a Chapter 11 can continue to operate and its pre-bankruptcy management continues to control the business. Additionally, a committee of unsecured creditors may be appointed to represent the interests of all unsecured creditors in the case.

A Chapter 11 business emerges from bankruptcy by confirming a “plan of reorganization,” a contract setting out how the business will meet its obligations to creditors. Companies have wide latitude in determining how to implement the plan and fund payments to creditors, but most successful reorganizations involve direct negotiations with stakeholders. Once the plan is formulated, creditors must vote to confirm it. If the business is unable to confirm a plan, the bankruptcy court will either dismiss the bankruptcy case or convert it to a Chapter 7 case.

The benefits of filing Chapter 11 include the company’s ability to resize its balance sheet, reduce its liabilities, reject or restructure onerous enforceable leases and contracts, renegotiate funded debt, and sell its assets. One of the main disadvantages of a Chapter 11 bankruptcy case is its cost. The cost is significantly higher in a Chapter 11 than in a Chapter 7 or an ABC.

SMALL BUSINESS REORGANIZATION ACT (CHAPTER 11 SMALL BUSINESS)

Last year, Congress enacted a new form of Chapter 11 pursuant to the Small Business Reorganization Act (SBRA) which became effective February 19, 2020. The main purpose of the SBRA was to allow small companies with unconditional and liquidated debts of $2,725,625 or less to successfully emerge from bankruptcy with a plan of reorganization, without incurring the costs associated with larger and longer Chapter 11 filings.

Responding to the economic impact of COVID-19, Congress temporarily amended SBRA to increase the limit on eligible business debt to $7.5 million. The debt limit will return to the lower number in March 2021, unless extended by Congress.

If a company currently looking to reorganize meets the $7.5 million debt limit, an SBRA case is a particularly attractive option. An SBRA bankruptcy case is similar to a regular Chapter 11 case, but includes additional benefits. The owners are allowed to retain their interest in the reorganized company; creditors may be prevented from seizing the property owner’s pledged residence; and no formal committee of unsecured creditors is appointed, which significantly reduces administrative burden and costs.

Another difference is that a “permanent administrator” is appointed and will remain throughout the payment period provided in a confirmed Chapter 11 plan. The duties of the permanent trustee include accounting for all property received by the company, reviewing the debtor’s financial condition and business operations, and facilitating a plan of reorganization.

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