The Remaining Balance of the PPP Loan is Due in Full Upon a Change in Ownership
The PPP Loans have an impact on the balance sheet regardless of whether they can be forgiven or not. The default provisions of the Promissory Note used by the SBA (and adopted by issuing banks) capture a wide range of shareholder actions. They read in relevant part: “Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent.” Interestingly, the default provisions fail to expressly include the “sale of all or substantially all of the assets.” Nonetheless, the words and meaning strongly reflect an intention to apply the provisions broadly. Owners ignoring this clause by relying on legal hair-splitting are taking a big risk. The borrower may wish to believe the risk can be lowered by seeking the Lender’s prior written consent. In theory, this makes sense, in practice this should not be viewed as an iron-clad solution. It remains to be seen how the banks, who are charged with the monumental task of administering the PPP Loans, will carry out this procedure. Historical precedent is not favorable, given that the SBA, in my nearly 30 years as a consultant and attorney, has earned a poor reputation for responding to requests from business borrowers. Modifications, forbearance agreements, settlement offers, restructuring proposals, etc. are frequently delayed due to red-tape, a walked-to-slow-death, or outright rejected even where they make sense.
The PPP Loans are General Unsecured Obligations
The PPP Loans are General Unsecured Obligations
For companies considering bankruptcy or shutting the doors, it would be a serious miscalculation to regard the PPP Loan as corporate welfare that is easily walked away from. The debt is not going to magically disappear simply because the company tried but failed to survive. It was the public sector that effectively lent the money, but it appears, in my opinion, that it will be the private sector, not the government, that collects the debt. In all likelihood, it probably won’t even be the banks that will ultimately end up acting as debt collectors for unpaid PPP Loans. This is exactly what happened in the 1990’s when large private pools of capital purchased defaulted loans from the banks. The lawsuits, workout negotiations, settlement proposals, and the related administration were handled by investors who profited from buying the defaulted loan at bargain prices and converted the debt into cash from settlements, judgements, etc. It’s worth pointing out that the standard form of SBA Promissory Note contains much of the legal ammunition favored by bank’s special assets departments and similar collection organizations. And the document itself clearly states the phrase “Lender includes its successors and assigns.” It is likely to be left to the private investor-speculators to consider and use hard-ball tactics involving “accidental personal guarantee” and potential personal liability for owners and officers of companies who borrowed but did not pay back the PPP loans (see, The Hyde Opinion, Beware the Accidental Personal Guarantee).