In the US, bankruptcy or insolvency law is governed at the federal level through the Bankruptcy Code. Pursuant to the Bankruptcy Code and different from many other countries, a debtor is generally not obligated to commence a bankruptcy proceeding due to financial distress or illiquidity.
Specifically, a debtor (“voluntary petition”) or a creditor (“involuntary petition”) may commence a bankruptcy proceeding. Despite this lack of a filing obligation and due to management often owing fiduciary duties to equity holders, a company may be inclined to commence a bankruptcy proceeding to avoid potential other liabilities. In the event of an involuntary petition, a debtor is usually forced to enter a liquidation proceeding under Chapter 7 of the Bankruptcy Code. The debtor may contest such a petition and subject to certain requirements convert the proceeding into a reorganization under Chapter 11 of the Bankruptcy Code.
While the continuous spread of the COVID-19 pandemic poses substantial financial challenges to various industry sectors, legislators and regulators have yet to voice any intent on temporarily changing the current bankruptcy framework. As a result, bankruptcy courts are attempting to continue operations while largely suspending in-person hearings and recognizing the need for flexibility and adjournments for non-emergent matters whenever possible. Moreover, some bankruptcy courts have encouraged the creative use of technology to allow matters to be resolved despite current restrictions.