Blue Bee Bankruptcy is a law firm of local attorneys representing consumers and Utah small businesses facing bankruptcy. We are a month into the national pandemic business shutdown, and we’ve been fielding calls by business owners seeking direction. This is the second in a 3-part series. We designed it to give owners tools to assess their situation as they develop strategies for the rest of this year.
The national novel coronavirus pandemic has caused widespread economic pain not only in the United States but the world. As federal, state, and local governments grapple with the impossible task of balancing economic calamity with the health of its citizens, small business owners wonder what to do. The only certainty is uncertainty.
As of this writing, Congress is voting on whether to increase the business stimulus portion of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). How confident are you that part of the stimulus will make its way into your business bank account? The SBA seems to have allocated the first round of funding in questionable ways.
In Part One of our series, the lawyers of Blue Bee Bankruptcy Law suggest steps to determine personal exposure and business viability. We also outline the role of the United States Bankruptcy Code in saving viable businesses from liquidation.
There has never been a more critical time for entire industries to rethink their place in the economy. This is easier said than done. Have you looked at AMC’s stock price in a while? AMC is an obvious casualty of social distancing, but as of this writing, one of AMC’s most vocal analysts thinks AMC will avoid bankruptcy.
What if you have come to the unsettling conclusion that your business is not economically practical in the new economy? You need to take immediate steps to stop the bleeding. You need to salvage resources and ammunition to fight another day.
Liquidation Without Liability
If you have avoided personal guaranteeing your corporation’s debt, you may just need to wind down its operations. The best way to do this is to liquidate the business assets in an orderly fashion:
- If you cannot quickly or legally liquidate collateral, turn it over to secured creditors.
- Bring unpaid federal withholdings for employees current first. Failure to turn over your employees’ federal income tax withholdings to the IRS is a federal crime, and failure to turn over Utah income tax or sales tax is a state crime. We have seen many good people make the terrible decision to “temporarily use” the government’s money to keep a failing business afloat.
- Pay any remaining corporate funds to creditors on a pro-rata basis. You should create a spreadsheet of the company’s debt obligations and divide the balance of corporate cash in a way so that all creditors receive the same percentage of their debt. When practical, consider sharing your calculations with your creditors so they can see the math behind the distribution. Transparency can go a long way.
- File the proper forms with the Utah Department of Commerce to (a) resign from and (b) dissolve the business entity.
If you follow these steps, you can avoid filing a Chapter 7 liquidation bankruptcy for the company. The corporation will just cease to exist, but this does not mean you are entirely out of the woods. You are still the records custodian of the defunct corporation’s books and records.
Creditors will sue
The largest creditors will likely sue your defunct company. As the company’s custodian of its records, the judge will require you to take part in discovery, such as depositions, production of documents, interrogatories, etc. Your failure to follow court orders to cooperate with the plaintiff creditor could lead to civil contempt. If your compliance is not overly burdensome, you should just cooperate with the creditor. However, if you are facing multiple lawsuits, and the time you need to comply with discovery is burdensome, you should consider filing Chapter 7 for your company.
The automatic stay, a federal court order entered the second you file your bankruptcy, immediately stops the litigation and other all efforts to collect money from your company. This means you no longer answer to the state court judge, as federal bankruptcy law trumps Utah state law. As the corporate custodian, you will have to deal with just one person – the Chapter 7 trustee. Once corporate records are provided to the bankruptcy trustee and once you appear at the 341 Meeting of Creditors, there is little else to do, unless a party raises concerns about fraud. Given how difficult it is to prove actual fraud, a corporate records custodian with a good lawyer should sleep easy.
Apart from avoiding the inconvenience of litigation against your defunct company, there is rarely another reason to file a corporate Chapter 7 for your small business.
The flip side
BUT what if you are personally liable for your business debts? Continue to Part 3 of this series, where we discuss the owners of Utah small businesses facing liquidation in bankruptcy. Learn how can they reduce downside risk while minimizing the damage to their credit scores.