United States: Borrowers Can Return PPP Loans By May 7, 2020 Without Penalty

Recently, there have been a number of high-profile cases of public companies and large venture-backed private companies that have given back loans received under the Paycheck Protection Program (PPP). Several large restaurant groups, including Potbelly Corp., Shake Shack and the parent company of Ruth's Chris Steak House, have recently returned loan funds. Other large companies from pharmaceutical, real estate management, manufacturing and other industries have also returned the funds.

While part of the decision to return the PPP loan money is based on the potential public relations problems that may impact the business going forward, this Client Alert will focus on the recent, limited guidance issued regarding the business need for the loan. If you received a PPP loan, you should be comfortable that you meet these requirements and document reasons in anticipation of an audit on your request for loan forgiveness.

Penalties are significant and could include criminal fines of up to $1 million and up to 30 years imprisonment. The Small Business Administration (SBA) has stated that if a business has taken a loan that the business did not "need," the business may return the loan by May 7, 2020 and face no criminal consequences.

Determining if the PPP Loan is Necessary

In order to receive the PPP loan, the applicant certified that:

• Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant; and
• The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments and utility payments, as specified under the Paycheck Protection Program Rule, if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.

Since the time that most applicants made these certifications, new guidance has been issued.

On April 23, 2020, the U.S. Treasury issued FAQ #31. The answer to this FAQ states, "All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification."

FAQ #31 was geared more to public companies. However, on April 28,2020, FAQ #37 was issued. It simply states the following:

FAQ #37 makes it clear that the guidance in FAQ #31 should be applied to all businesses. Unfortunately, the current guidance does not contain an easy test to be applied to determine eligibility.

Carefully Document the Reasons for Obtaining the PPP Loan

We strongly recommend that companies carefully document its reasoning for applying and retaining the PPP loan proceeds. Specifically, documentation should include the following:

• What has been the financial impact of COVID-19 on the company's current financial situation?
• How is your industry being impacted?
• Have the company's forward-looking forecasts and projections materially adversely changed due to the impact of COVID-19?
• Is the company able to continue operations substantially as before or is it required to make significant changes with and without the loan proceeds and potential forgiveness?
• Will the company need to lay off employees and/or significantly cut salaries to maintain its ongoing operations with and without the loan proceeds and potential forgiveness?
• Are alternative sources of capital (debt or equity) available to the company? What steps have been taken to acquire such other capital? Are the terms or amounts of debt significantly detrimental to the business?

In FAQ #39, the SBA has announced that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lenders submission of the borrower's loan forgiveness application. If you are audited by the SBA, supporting the decision process at both the time of the loan application through the May 7 date and beyond will be important in showing that the certifications were made in good faith.

If you have concerns about the loan application certifications and your eligibility to receive a PPP loan, you may want to involve an attorney who can help you evaluate your options and the corresponding legal implications.

Do not delay taking action, as the May 7, 2020 date is imminent.

Originally published 6 May, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.