When Arbitration Meets Bankruptcy: Considering Arbitration Options in the Wake of a Growing Rise in Corporate Insolvencies
September 30, 2020 - Quarterly Insights
Companies with arbitration clauses in their commercial agreements may wish to consider the impact of insolvency on their options for pursuing pending or future arbitrations, especially as the long-term effects of COVID-19 play out as more companies consider restructurings.
In light of the ongoing economic uncertainty, many companies are considering amending their credit agreements and other debt instruments, either to minimize the likelihood of breaching financial covenants or to rework payment schedules. However, companies should keep in mind that amending a debt instrument which is trading at a discount to par in the secondary market can result in cancellation of indebtedness income that is currently includible for tax purposes without any associated cash — even in situations where the principal amount of the debt remains unchanged.
With the intention of mitigating the effects of the COVID-19 pandemic, the obligation of companies in Germany to file insolvency applications was suspended if the company is illiquid or over-indebted. The suspension applies until September 30, 2020, and may be extended until March 31, 2021, by the German Federal Ministry of Justice and Consumer Protection.
As the coronavirus/COVID-19 pandemic continues to have major repercussions across the entertainment industry, companies are finding ways to navigate the storm. There is no single playbook for mitigating the impact of the crisis but rather a wide range of strategies and approaches for boards and management teams to consider.
As many upstream and midstream companies grapple with the prospect of severe liquidity constraints due to the rapid deterioration of the commodity and debt capital markets, borrowers evaluating approaches to capital structure management should consider the current tax landscape before embarking on a plan, particularly if that plan involves transactions such as a debt modification, sale/leaseback transactions involving real estate investment trusts, joint ventures and volumetric production payments. Distressed companies will need to carefully consider the significant consequences outlined here as they reevaluate their capital structures.