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Restructuring Debts In Troubled Times

Restructuring Debts In Troubled Times

Unless you were really lucky and had a horde of cash going into the coronavirus pandemic, you will likely have to face restructuring your debt, deferring lease payments and perhaps seeking additional investment capital. As you develop your long-term strategy, you should bring in experienced advisors to help you through the process. You will need financial expertise and attorneys who know how to do debt restructuring. You may also need an attorney to advise you on the bankruptcy alternatives. If you are raising new capital, you need financial and legal advisors who handle securities matters.

In restructuring debt, the business seeks to change its debt structure to match its cash flow and asset structure after considering the initial economic shock of the coronavirus pandemic and the changes that have occurred in the future prospects of the business as a result of business shutdowns or other restrictions. The business may need to shrink the number of its locations and its employee base to survive and then slowly build back its business. The business debt after the restructuring must be appropriate for its reduced size and earnings capacity.

The business creditor seeks to minimize its losses in the restructuring. The creditor will also seek to minimize the overall impact the restructuring will have on the creditor's business. For example, if the creditor is a small bank, the banker wants to keep each of its borrowers in business because each business failure in the community impacts the surrounding businesses. Landlords who are renting multiple tenant properties have the same concerns about the broader impact of a tenant's business closure.

In negotiations, the parties are seeking the “win-win” solution to the extent that is possible in current economic conditions. The boundaries for restructuring negotiations are defined by economic factors. What is achievable for the business? How far can the creditor go before its survival is also threatened? There are also legal boundaries. Each party can resort to its legal remedies or defenses. The creditor can foreclose. The landlord can evict the tenant. The debtor can seek relief in the bankruptcy court. In the “win-win” solution, the parties often agree to use the legal system to implement the restructuring solution. For example, a “prepackaged bankruptcy” is a plan for financial reorganization that a company prepares in cooperation with its creditors that will take effect once the company enters Chapter 11.

Your business advisors will help you through the complexities of restructuring. One must be very careful not to accidentally create preferential transfers or fraudulent conveyances that may be challenged by other creditors or by the trustee in a business bankruptcy. Care must be taken to avoid passing business liabilities to successor entities or asset purchasers by failure to comply with applicable laws. See Utah Code 6-1-1 and successor liability for Utah sales taxes. See Utah Code 59-12-112.

If you are selling securities as part of the restructuring, you must comply with applicable federal and state securities laws. The disclosure requirements are extensive. The federal disclosure rule is called Rule 10b-5. It states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

The Utah disclosure standard is in Utah Code 61-1-1. It provides:

It is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly to:
(1)  employ any device, scheme, or artifice to defraud;

(2)  make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

(3)  engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

Civil and criminal penalties can be imposed for violations of the disclosure rules.

This firm does not do bankruptcy work, but we can be an important part of your restructuring team. Mark has dealt with more business issues and problems than most people see in their lifetimes: workouts, foreclosures, class actions, bankruptcies, partnership dissolutions, receiverships and bank closures.

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At the Mark Thompson Law Firm, P.L.L.C., I focus on Business Law, Banking Law, General Counsel Services and Independent Director Services. I am here to listen to you and help you navigate the legal system.

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The Mark Thompson Law Firm, P.L.L.C. is committed to answering your questions about Business Law, Banking Law, General Counsel Services and Independent Director Service law issues in the Salt Lake Valley.

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