Bankruptcy Small Business PPP Loans and Debtors – Finance and Banking

United States: PPP loans and debtors of bankrupt small businesses

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After the implementation of the Paycheck Protection Program (the “PPP”) in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, bankrupt debtors requested PPP loans. The Small Business Administration (the “SBA”) has opposed PPP loans for debtors, and courts have been divided over whether the SBA can prevent debtors from benefiting and receiving PPP loans. Next, Congress passed the Consolidated Appropriations Act, 2021 (Act) (Pub. L. No. 116-260), which was enacted on December 27, 2020 (the “CAA”). CAA amends the United States Bankruptcy Code to allow PPP loans to certain debtors, namely Small Business Debtors of Subchapter V, Chapter 12: Family Farmers, Debtors and Self-Employed, Chapter 13, Debtors. However, there was a problem. The CAA further anticipates that PPP loans will only be available if the SBA administrator, at its discretion, sends a letter to the director of the executive office for United States Trustee acquiescing to PPP loans in bankruptcy. To date, the SBA has not acquiesced.

On March 3, 2021, the SBA published guidance in its FAQ regarding borrowers who have received PPP loans under the Cares Act and who subsequently become debtors in a bankruptcy case.

If a borrower who was eligible for a first-draw PPP loan requests bankruptcy protection after the disbursement of the first-draw PPP loan, that borrower is eligible for the loan forgiveness, provided they meet all the conditions for the forgiveness. loan set out in the Interim Final PPP Rules, including, but not limited to, loan proceeds are used only for eligible expenses and at least 60% of loan proceeds are used for eligible labor costs. “

FAQ # 59. This is in line with what debtors in applicable bankruptcy cases have done – request cancellation of their loan. The SBA further discussed whether a borrower who was eligible for a first-draw PPP loan and who applied for bankruptcy protection after the disbursement of the first-draw PPP loan was eligible to apply for a second-draw PPP loan. draw. According to FAQ n ° 60:

No. Each applicant for a second-draw PPP loan must certify on the second-draw borrower application form (SBA form 2483-SD) that the applicant and any owner of 20% or more of the applicant are not currently involved in a bankruptcy proceedings. Thus, a borrower who has received a first-draw PPP loan and requests bankruptcy protection after the disbursement of the first-draw PPP loan is not eligible to apply for a second-draw PPP loan.

This does not resolve the situation where the Second Drawing Borrower has since exited bankruptcy and “is therefore not currently involved in bankruptcy proceedings”. Small businesses that have confirmed their bankruptcy plan and are looking to receive a second draw should be able to apply as long as the first draw PPP loan can be forgiven and the SBA does not suffer a loss. The application for a second draw loan asks, in part, whether the SBA has suffered a loss rather than whether a default has occurred. Failure to pay the loan by filing for bankruptcy does not necessarily mean that there has been a loss suffered by the SBA.

Meanwhile, Chapter 11 debtors still have no way of receiving PPP loans during bankruptcy proceedings.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.

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