What Is A Closely Held Corporation?
Closely held corporations are corporations in which the shares are held privately and, in most instances, held by a limited number of people. The shares are not held publicly, are not for sale, and are not traded. Closely held corporations are usually the local butcher or grocery store, if incorporated. Some of these companies could be held by families, but closely held corporations are customarily local businesspeople and are the type of small business that I have represented for years.
What Is A Chapter 11 Bankruptcy In Business? When Would This Typically Be Used By A Closely Held Corporation?
In over 40 years of experience in representing debtors, I am of the opinion that a Chapter 11 bankruptcy is something to pursue when all else fails. It does have its benefits. Chapter 11 stops a bank from foreclosing on or seizing the assets of a business. It will stop the IRS from seizing the assets of the business and selling them. All of these benefits demonstrate, in my opinion, that a Chapter 11 is a last resort, a “hail Mary pass”, if you will. If a business is suffering from significant debt, there are other more effective ways to deal with it. However, a Chapter 11 can help because the Bankruptcy Code’s Section 362 automatic stay goes into effect immediately upon filing. What does the automatic stay do? It stops secured creditors in their tracks. It stops the IRS in its tracks. It stops the Massachusetts Department of Revenue. It stops creditor litigation, harassment and any other creditor activity. In short, after a filing, any activity taken by a creditor against the debtor or the debtor’s assets is stayed pending further order of the Bankruptcy Court.
In Chapter 11s, there are required documents that need to be filed monthly with the Office of the United States Trustee, the entity that oversees the bureaucratic end of Chapter 11s. Among these documents are monthly cash flow statements through which you have to be able to show that the business can make a profit going forward. The ability to make money is key to the success of your Chapter 11. Other documents that need to be filed are evidence of the payment of any taxes (sales, meal, employee). The goal is eventually to file a plan that will satisfy your creditors and result in confirmation. In dealing with a government bureaucracy such as the Office of the United States Trustee, it is best to make sure to comply with all of its filing requirements or hell may ensue!
As if this isn’t burdensome enough, it’s very costly to file a Chapter 11 bankruptcy. The filing fee is almost $2,000. Most attorneys charge between $5,000 and $10,000 as a retainer and sometimes even more. The attorney’s fees will depend on the size of the case, but oftentimes can run into the tens of thousands of dollars. Ultimately, only 10% of the Chapter 11s get as far as confirmation, gets confirmed, and actually succeed. It’s something that I recommend and pursue if there is no other alternative to reorganize or deal with a closely held company’s debts.
Is Chapter 7 Or Chapter 13 Ever Used With Struggling Closely Held Corporations?
Generally, you wouldn’t use a Chapter 7 bankruptcy for a closely held corporation. A Chapter 7 closes down a business. Its assets get liquidated by the Chapter 7 trustee and life goes on. Corporations don’t get discharges in bankruptcy, which is why I recommend other avenues when liquidating a closely held corporation. A Chapter 13 would be possible to some degree, but not for a closely held corporation.
If the debtor was a sole proprietorship, then the debtor could avail himself or herself of a Chapter 11 or Chapter 13 depending upon the size of their debt. For an individual, a Chapter 13 would wind up being like a Chapter 11. You’d have to open up a debtor-in-possession account and send them bank statements. However, that’s very rare.
Recently, I represented a debtor who was a DBA, an individual “doing business as” a company. He owned a food shop. I had him set up a corporation, and we transferred the assets to the corporation. We waited a period of time. We were originally going to file a Chapter 13 because he had some mortgage debt. He didn’t necessarily have business debt, but he had a lot of debt. Thus, I filed a Chapter 7 to get rid of about $50,000 worth of unsecured debt. Now, he is in a Chapter 13 that’s dealing with the mortgage on his real estate.
Since the business has been in a corporation for over a year, it’s struggling in these Covid times, but still providing enough income to the principal to fund his Chapter 13 and liquidate his mortgage arrears. As you can see, you really wouldn’t use a Chapter 7 or Chapter 13 for a closely held corporation.
What Are The Consequences Of Bankruptcy For Financially Viable Closely Held Corporations?
In a Chapter 11, you can do things with your secured debt, such as adjusting the balances or payment schedule. You can have time to pay your withholding, sales, or meals tax over time. It enables you to continue operating while dealing with your creditors through the Bankruptcy Court. There aren’t any clear advantages for a closely held corporation to do a Chapter 11, mostly because it should be a last resort if all else fails. The key thing is, in a Chapter 11, the debtor has to establish that it cannot only meet its current financial obligations, but at the same time proposing a viable plan to liquidate the debt that resulted in the Chapter 11.
What Has Changed That Has Affected The Practical Ability To Rehabilitate A Company Through A Restructuring Plan?
If a business no longer has any purpose, is bleeding money everywhere and the principal’s personal funds are keeping it afloat, the ability to rehabilitate the company through a restructuring plan is affected. Essentially, there is nothing to restructure if you have no cash flow. At the moment, more than a year into COVID, a lot of businesses are hanging on by their fingernails. I don’t know how they are doing it. I was consulted by somebody whose parents run a dry cleaner. The issue with that is “who’s going to the office?” “Who’s having their clothes dry cleaned?” A lot of how you deal with this is a function of how aggressive the creditors are. Right now, everybody is sort of in la la land. It’s neither here nor there. Courts are closed, so can they sue you? Sure, it will sit in the court for who knows how long. I just filed an answer to an eviction case for a restaurant, which may wind up in a Chapter 11. However, at this point, it doesn’t have to. Usually, when you evict somebody, it’s a very scheduled timeline. Currently, the summons says that the court will let us know when the hearing is going to be scheduled. (N.B. Since this writing, my client has filed for a Chapter 11 after not being able to work things out with its landlord).
Sometimes the best way to deal with companies that have debt is to figure out a way to get them out of the debt and move forward. Basically, a creditor’s interest in an insolvent company that’s having financial problems is the liquidation value of its assets. For instance, if a company has $20,000 worth of assets and owes Bank of America $50,000 that’s secured by all of the assets, but also has another $200,000 worth of unsecured debt, there is no interest there for them. That’s why it’s sometimes better to leverage that situation. My rule of thumb has always been that you may not get anything now, but at least the business is going forward. Hopefully, they will remain in business for years and be able to generate profits for all. Sometimes it works and sometimes it doesn’t.
For more information on Bankruptcy For Closely Held Corporations, an initial consultation is your best next step. Get the information and legal answers you’re seeking by calling (978) 922-8440 today.