On March 31, 2020, in response to the COVID-19 pandemic, Rhode Island Superior Court Presiding Justice Alice Bridget Gibney announced that the Court has implemented a new Business Recovery Plan, to be administered through the Court’s Business Calendar. To assist businesses experiencing disruptions resulting from the impacts of the COVID-19 pandemic, the Court has issued Administrative Order No. 2020-04 (“Order”), which allows the use of a Non-Liquidating Receivership to enable certain qualified businesses to remain open, operational, and intact until they can access additional capital and resources and “get back on their feet.” This program will serve as a vital judicial lifeline to businesses facing already impactful and yet-to-be fully identified financial hardships for the foreseeable future. We summarize below key aspects of this judicial program to promote business recovery and encourage all interested businesses, as well as creditors and claimants, to review the Order in its entirety, which is accessible on the Court’s website with other key information about the program’s implementation.
A business entity, including a sole proprietorship, is eligible to seek the judicial protection of a Non-Liquidating Receivership if it can show through a verified petition that:
- the business was not in default of its financial obligations as of January 15, 2020, and the Order provides details on precisely what constitutes a disqualifying default; and
- the business experienced a reduction in gross revenue of at least twenty (20%) percent during any sixty (60) day operating period beginning January 15, 2020, as compared to a similar operational period before January 15, 2020; or
- the business was forced to cease a substantial portion of its operations due to any governmental or regulatory order at some time after January 15, 2020; or
- can otherwise sufficiently demonstrate to the Court’s satisfaction that the COVID-19 pandemic created an adverse impact on the business’ operations resulting from either a government and/or regulatory mandated partial or complete closure, or a substantial interruption of cash flow occurring after January 15, 2020, attributable to COVID-19, which results in the business no longer being able to continue or resume operations and pay its debts as they become due in the usual course of business.
The appointed Non-Liquidating Receiver, as a fiduciary of the Court, will work interactively with the business’ principals, subject to any operating protocols prescribed by the Court. A key component of this interactive relationship concerns the development of an Operating Plan, addressing payment of debts as they come due, pre-petition debts, and a plan to exit the Non-Liquidating Receivership successfully, which will be served upon creditors for comment and ultimately presented to the Court for approval. Once judicially approved, the Operating Plan will be updated and monitored through the Non-Liquidating Receiver’s reports to the Court.
In the implementation of the Operating Plan and to save administrative expenses, the Non-Liquidating Receiver shall continue to have the business conduct its operations on a day-to-day basis. The business cannot make expenditures or dispose of or encumber assets outside of the parameters of the Operating Plan, absent judicial approval. The Order specifically emphasizes that the program “has not been implemented to eliminate debt,” while noting that a business and its creditors and claimants remain free to consent to terms and conditions relating to a pre-existing debt that can be incorporated into the final order concluding the receivership. Further, a business found to be in default of the Operating Plan, such as the failure to pay its debts as they come due, could find the Court ordering the Non-Liquidating Receiver to take control over all operations and assets of the business or otherwise transitioning the receivership to a liquidating receivership.
Comparable to an automatic stay, the Non-Liquidating Receivership enjoins any attempt by persons or entities to take an adverse action against the entity. For example, the injunction would prevent any attempt to commence or continue a judicial or administrative proceeding against the business, any enforcement of a judgment obtained against the business prior to the receivership, any act to obtain possession of or otherwise exercise control over any property in the receivership estate, and any attempt to perfect a lien against property of the receivership estate. This protection allows for the business essentially to press pause on any potential legal threats while under the protection of the receivership, so that the business can focus upon obtaining the capital and resources necessary to continue its operations.
Given the pending conditions of the COVID-19 pandemic and until the Court orders otherwise, all conferences or other proceedings relative to this program will be conducted via video or audio conferencing. The procedure for this novel approach is developing, and the Court has specifically reserved the power to enter future orders in any Non-Liquidating Receivership on a case-by-case basis to address specific issues that pertain to a business.
Nixon Peabody’s attorneys appear regularly before the Rhode Island Superior Court’s Business Calendar, which will have jurisdictional oversight over this special receivership process. We will carefully monitor and report on all key aspects of this judicial initiative of vital importance to Rhode Island’s businesses and economy.