Attorney David A. Mawhinney advises businesses and individuals in areas of commercial litigation, restructuring, and insolvency at Worcester law firm Bowditch & Dewey LLP.
Updated: March 15, 2021
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How the Consolidated Appropriations Act helps companies in bankruptcy
By David A. Mawhinney
On Dec. 27, the Consolidated Appropriations Act 2021 – the second round of federal coronavirus-related stimulus – became law. In addition to providing coronavirus relief, the act helped small businesses going through bankruptcy.
Rent abatement
A business filing for Chapter 11 must meet its obligations under a commercial lease. If the business wants to remain in its office space post-bankruptcy it must pay all outstanding rent and charges. Most small businesses rent their space, and their ability to pay their landlords is directly tied to the revenue they generate at the leased location. Filing bankruptcy does not stop rent obligations from accruing. Prior to the most recent amendments, businesses could delay paying rent for, at most, 60 days. Recognizing the havoc coronavirus has wreaked on small businesses, the new law now temporarily allows small business debtors in subchapter V to defray rent payments for up to 120 days, as long as the bankruptcy court approves.
The business must still pay deferred rent as an administrative expense of the Chapter 11 case. Under a subchapter V plan, however, a small business debtor may pay over the course of its plan instead of immediately at plan confirmation.
PPP borrowing
The Paycheck Protection Program is one of the more innovative and publicized efforts from last year’s CARES Act. Administered by the Small Business Administration, the question of whether a business in bankruptcy could take out a PPP loan was unsettled until the SBA answered with an unequivocal “no” in its implementation rules.
The new stimulus law expressly authorizes small business debtors in subchapter V to obtain loans supported by the SBA, including PPP loans. Subchapter V plans can repay the unforgiven portion of the loan according to the payment schedule.
This relief comes with a giant caveat: debtors cannot access SBA loans unless and until the SBA independently determines they are eligible for a particular program. In other words, while the bankruptcy code will allow it, unless the SBA changes its current position on eligibility, PPP loans will remain unavailable to companies in bankruptcy.
Conclusion: Pragmatic bankruptcy relief
Unless extended, these relief efforts will expire on Dec. 27, 2022. They nevertheless offer pragmatic solutions for small businesses in financial distress during the pandemic. While bankruptcy relief cannot revive a business without a general improvement in economic conditions, bankruptcy gives a business the time and tools to catch improving economic tailwinds and survive financial catastrophe. The new stimulus law is not a panacea to the devastation the pandemic has caused, but it adds useful tools for helping businesses survive long enough to recover when the economy comes back.
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