Regulation

CARES Act Update: Small Business Administration Releases Paycheck Protection Program Regulations

 

On April 2, 2020, six days after the CARES Act was enacted, the Small Business Administration (“SBA”) released an interim final rule (the “Interim Final Rule”) implementing the Paycheck Protection Program (“PPP”). For an overview of the PPP sections of the CARES Act, see our previous alert, which is available here.

Read our discussion of the key provisions of the Interim Final Rule, along with a brief discussion of the revised Borrower Application Form and related guidance from the Treasury Department and the SBA, here. Significantly, the Interim Final Rule states that the SBA also intends to promptly issue additional guidance regarding the applicability of its affiliation rules to PPP loans.[1]

The Coronavirus Aid, Relief and Economic Security (CARES) Act Becomes Law – With Major Enhancements

 

By voice vote on March 27, the House of Representatives passed the Coronavirus Aid, Relief and Economic Security Act (the “Act”), a version of which the Senate passed on a 96-0 vote two days earlier. President Trump promptly signed the Act into law. The Act includes significant amendments to the Senate bill resulting from legislative negotiations that took place since we last analyzed it here. The final version of the Act increases funding for loans to small and large businesses, increases oversight on the Department of the Treasury’s loans and grants to businesses, and adds funding for struggling state, tribal and local governments, individuals and healthcare providers. We summarize key changes here.

Congress Has Passed Phase III of the Federal Coronavirus Relief Legislation: Here’s What You Need to Know about the Legislation’s COVID-19-related Small Business Administration Loan Resources

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act – the third phase of Congress’s response to COVID-19, which was enacted on March 27, 2020 – includes a Paycheck Protection Program. The proposed program would, among other things, expand the scope of the Small Business Administration’s available 7(a) loans during a “covered period” beginning on February 15, 2020 and ending on June 30, 2020. (The Small Business Administration (SBA) provides 7(a) loan guarantees for certain loans made by participating lending institutions to qualifying small businesses.) Certain key elements of the Paycheck Protection Program are described here, followed by a discussion of various other SBA loan resources. The final version of the bill reflects substantial changes from the version introduced into the Senate on March 19, 2020.

CARES Act Inches Closer, but Terms for Economic Relief Still Uncertain

 

When we last wrote, we advised that the CARES Act’s provisions granting extraordinary power to the Secretary of the Treasury to determine those businesses’ eligible for financial relief without legislative oversight was likely to be a significant point of contention during legislative negotiations over approval of the Senate Bill. Our prediction proved correct, with passage of the Bill being delayed for several days through procedural measures. Recent reports have indicated that Secretary Mnuchin has agreed to strict legislative oversight over his authority to designate eligible businesses entitled to receive funding, which has increased in the aggregate from $150 billion to $500 billion in aid for corporations and municipalities. The agreement purportedly also includes hundreds of billions of dollars in funding for hospitals – a significant increase from the Bill’s initial allocation. Read our key takeaways here.

What You Need to Know About Proposed and Existing COVID-19-related Small Business Administration Loan Resources

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act – which was introduced into the Senate on March 19, 2020, as the third phase of Congress’s response to COVID-19 – includes a Small Business Interruption Loan program. The proposed program would, among other things, expand the scope of the Small Business Administration’s available 7(a) loan guarantees during a “covered period” beginning on March 1, 2020 and ending on December 31, 2020. (The Small Business Administration (SBA) provides 7(a) loan guarantees for certain loans made by participating lending institutions to qualifying small businesses.) Read our key takeaways here.

What You Need to Know About the Proposed Senate Coronavirus Aid, Relief and Economic Security (CARES) Act

 

The goal of the trillion-dollar Coronavirus Aid, Relief and Economic Security Act (CARES Act) introduced yesterday in the Senate is the quick distribution of cash to individuals, small businesses and critical economic sectors such as the airline industry, providing financial assistance to students, expediting coronavirus testing and easing shortages of medical supplies and personnel. While the bill as drafted has met with resistance from Democratic leaders, we expect a version of this bill to be enacted soon. The CARES Act is 247 pages long and seeks to address many critical problems. We summarize below some key provisions here.

The Rule in Gibbs: Safeguarding Creditors’ Rights or Aiding and Abetting “Hold Out” in Foreign Insolvencies?

There is an English common law rule that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. This rule is derived from a Court of Appeal case: Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.

The rule has been heavily criticised. Many do not consider it to be relevant in modern day cross-border insolvency proceedings following the continuing trend towards recognition of foreign insolvency proceedings (and their effects). As explained further below, some commentators see the rule as assisting creditors to “hold out” from participating in collective insolvency measures which are designed to benefit the creditor class as a whole.

The English court recently had the opportunity to review whether Gibbs still applied in Bakhshiyeva v Sberbank of Russia [2018] EWHC 59 (Ch). The court considered an application by a foreign representative to the English court on behalf of a debtor, International Bank of Azerbaijan, for a permanent stay on a creditors’ enforcement of claims in England under an English law governed contract contrary to the terms of the foreign insolvency proceeding. Under local law, the English creditors were purportedly bound. The Azerbaijani proceedings were not “terminal” liquidation proceedings and therefore, any stay would need to apply beyond the duration of the proceedings to properly bind the English creditors and to permanently give effect to the insolvency proceedings.

The foreign proceedings were conducted in Azerbaijan and had been recognised in England under the Cross-Border Insolvency Regulations 2006 (the “CBIR“) (implementing UNCITRAL Model Law). The CBIR are a procedural mechanism whereby foreign insolvency proceedings (conducted outside the EU) can be recognised and foreign representatives can seek “assistance” from courts in other jurisdictions to effect the insolvency proceedings (subject to any restrictions on the exercise of such power under local law).

The English High Court found that the rule in Gibbs did apply to prevent the court granting a permanent (or indefinite) stay on the enforcement of creditors’ English law governed contractual claims. Any stay granted by the court would be more than simply procedural and would go to the substance of creditors’ claims – the court would, in effect, be ordering the discharge of the creditor’s claim and was prohibited from doing this, following the rule in Gibbs.

The message for creditors with English law claims which are purportedly extinguished under a foreign (non-EU) insolvency process is therefore, to adopt a “hold out” position. Following the expiry of the foreign proceedings (and any related stay on creditor action), objecting creditors may then take steps to enforce English law governed contractual claims provided however, that they have not participated in the foreign insolvency proceedings (they may otherwise be deemed to have accepted the jurisdiction of the foreign proceeding).

We note many holders of English law governed bonds issued by the Greek government adopted a “hold-out” strategy knowing that the English courts would not recognise any provision of Greek law extinguishing or amending the sovereign debt.

The “territorial” nature of the rule in Gibbs is, arguably, “out of step” with trends in modern insolvency law. In the US, for example, in proceedings under Chapter 15 of the Bankruptcy Code (the US statute adopting UNCITRAL Model Law) (“Chapter 15“), US courts have enforced foreign court judgements made in foreign proceedings, including judgements which alter or vary US law governed debts or claims. Chapter 15 does however, include important public policy protections for creditors designed to forestall recognition of clearly abusive procedures.

The US has a longstanding policy of recognising restructurings of US law governed financings of foreign companies. The Supreme Court’s 1883 decision in the famous Gebhard case (Canada Southern Railway Co v Gebhard [1883] 109 US 527) set the precedent for US recognition of foreign restructuring processes in which Chief Justice Waite endorsed the recognition of the implementation of a Canadian scheme of arrangement with the words “under these circumstances the true spirit of international comity requires that schemes of this character, legalised at home, should be recognised in other countries“.

The “public policy” exception to recognition under Chapter 15 only applies in “exceptional circumstances” and includes, for example, circumstances where a creditor was denied due process and notice of the foreign insolvency proceedings of the debtor; and the denial of privacy rights. The fact that a creditor may make a more limited recovery, and the fact that the substantive law of the insolvency proceeding was not the same as US law, were not held to be “manifestly contrary” to public policy.

We note the Gibbs rule has been disapplied in the context of EU insolvency proceedings, on the basis that English courts recognise the jurisdiction of courts in respect of insolvency proceedings in Member States under the European Insolvency Regulation (“EIR“); and similar “public policy” exceptions apply. It is difficult to justify the radically different approach English courts take to non-EU insolvency proceedings particularly given the UK’s recent decision to leave the EU.

Our view is that as part of any withdrawal treaty of the UK from the EU, the parties should look to negotiate a process for mutual recognition of insolvency proceedings based on the EIR “recognition” approach. Looking outside of its relationship with the EU, it would also seem sensible for the UK to look to adopt an approach similar to US Chapter 15, for the UK courts to recognise foreign insolvency proceedings with safeguards for creditors to avoid the application of such rules only if limited public policy reasons exist to void the application of the foreign insolvency proceedings. The English court will want to avoid “re-litigating” issues dealt with under foreign insolvency proceedings, and should not examine actual recoveries made by creditors. However, a carve out on “public policy” grounds could protect English creditors if it captured circumstances where the process was evidently “discriminatory” to foreign (English) creditors.

We acknowledge there are strong arguments to retain the Gibbs rule. By entering an English law contract, creditors may feel strongly that they wish to retain the impartiality, commerciality and due process English courts are well known for.

As we near BREXIT, in this issue as in so many others, the UK has a decision to make: adopt English “exceptionalism” or take a more ‘universalist’ view implied by the recognition of foreign insolvency proceedings exemplified by the current arrangements under the EIR? The choice is looming.

Recast EU Insolvency Regulation Comes into Force

 

On 26 June 2017, the Recast EU Insolvency Regulation (Council Regulation (EC) No. 2015/848) came into force. It will apply to all relevant insolvency proceedings (although existing and ongoing proceedings will continue to be bound by the EU Insolvency Regulation (Council Regulation (EC) No. 1346/2000) (the “EIR”)). The Recast EU Insolvency Regulation will have direct effect in all EU member states (except Denmark).”

The Recast EU Insolvency Regulation is an update of the EIR following ten years of insolvency practice and experience since the EIR’s implementation. Largely, it represents a codification of well-established insolvency practice developed across the EU under the EIR however, it also introduces new innovative steps which, it is hoped, mark a step forward in light of learnings under the EIR to address perceived issues or “gaps” in existing legislation. READ MORE