What The Coronavirus, CARE Act, and PPP Mean For Small Businesses
Through the Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”), Congress has empowered the United States Small Business Association (“SBA”) to lend up to billions of dollars to small businesses who have been negatively affected by the widespread coronavirus pandemic.
What is the Paycheck Protection Program?
One of the most popular programs being administered by the SBA under the CARES Act is the Paycheck Protection Program (the “PPP”). Businesses request funding from the PPP through June 3, 2020 for up to two and one half times (2.5 x) their average monthly payroll cost. If the PPP funds are used to pay necessary expenses, including payroll, rent, mortgage payments, and utilities, the loan can be converted into a grant that does not need to be repaid. For those reasons, the PPP is a critical source of liquidity and emergency funding relief to distressed businesses.
Does the CARES Act Include Bankruptcy Debtors?
Unfortunately, the “fine print” of the CARES Act may exclude bankruptcy debtors, including small business debtors-in-possession under Chapter 11 of the Bankruptcy Code, from obtaining PPP funding. Specifically, page 192 of the CARES Act states as follows:
The referenced section of 12 U.S.C. § 343, in turn, states that:
“The Board [of Governors of the Federal Reserve System] shall establish procedures to prohibit borrowing from programs and facilities by borrowers that are insolvent. Such procedures may include a certification from the chief executive officer (or other authorized officer) of the borrower, at the time the borrower initially borrows under the program or facility (with a duty by the borrower to update the certification if the information in the certification materially changes), that the borrower is not insolvent. A borrower shall be considered insolvent for purposes of this subparagraph, if the borrower is in bankruptcy, resolution under title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act [12 U.S.C. 5381 et seq.], or any other Federal or State insolvency proceeding.”
What does this mean?
Stated simply, what the federal government giveth, the federal government can not giveth. In its infinite wisdom, Congress determined that American businesses need emergency assistance to survive the coronavirus pandemic. Unfortunately, Congress may have also declined to make those resources available to America’s most vulnerable small businesses, i.e. Chapter 11 debtors in possession attempting to reorganize through the United States Bankruptcy Code. Does this mean distressed businesses should not file for bankruptcy? Absolutely not. What this means is that businesses considering filing for bankruptcy need to submit their PPP applications NOW.