Since the passage of the CARES Act and the completion of the first round of PP loans by the SBA, companies have faced an ever-changing set of guidelines interpreting the conditions of eligibility for a PPP loan and possible cancellation. of the loan. Unfortunately, no clear guidelines are yet available.
On April 23, 2020, the Treasury Department posted its Question 31 to its CARES Law Frequently Asked Questions, which states:
- Question: Do companies belonging to large companies with adequate sources of liquidity to support day-to-day business operations eligible for a PPP loan?
Answer: In addition to reviewing the applicable membership rules to determine eligibility, all borrowers should assess their economic need for a PPP loan against the standard established by the CARES Act and PPP regulations at the time of application. ready. Although the CARES Act suspends the ordinary requirement that borrowers must not be able to obtain credit elsewhere (as defined in Section 3 (h) of the Small Business Act), borrowers must still certify good credit. faith that their PPP loan application is required. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that “[c]The current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations. Borrowers must do this certification in good faith, taking into account their current business activity and their ability to access other sources of sufficient liquidity to support their current operations in a manner that is not materially detrimental to the business. For example, a state-owned enterprise with substantial market value and access to capital markets is unlikely to be able to perform the required certification in good faith, and such an enterprise must be prepared to demonstrate to the SBA, on request, the basis of its attestation. Lenders can rely on the certification of the borrower regarding the need for the loan application. Any borrower who has applied for a PPP loan before the publication of these guidelines and repays the loan in full by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith.. [Emphasis added]
The Treasury Department further highlighted the issue of “sufficient liquidity resources” on April 28-29 by issuing Questions 37 and 39, as follows:
- Question: Are businesses owned by private companies with sufficient sources of liquidity to support the day-to-day operations of the business eligible for a PPP loan?
Answer: See the answer to FAQ # 31.
- Question: Will the SBA review individual PPP loan files?
Answer: Yes. In FAQ # 31, the SBA reminded all borrowers of an important certification required to get a PPP loan. To further ensure that PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Treasury Department, that it will review all loans over $ 2 million, in addition to other loans, if applicable, following the lender’s notice submission of the borrower’s loan forgiveness request. Further guidance implementing this procedure will be published.
This orientation suddenly drew attention to the certification given by each borrower that “[c]the current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations ”and that certification must be done“ in good faith, taking into account their current business activity and possibility of accessing other sources of liquidity sufficient to support their ongoing operations in a manner which is not significantly detrimental to the business ” [Emphasis added].
The fear has been that the borrower’s decision to apply for a PPP loan, the rationale for certification, and whether the certification was done in good faith will be judged in retrospect. Are businesses and their owners required to assess their own wealth, liquidity, and borrowing capacity before performing certification when applying for a PPP loan? The CARES Act suspends the normal requirement that a borrower cannot obtain credit elsewhere. Thus, it appears that the availability of funds on a line of credit or the possibility of obtaining a loan from a lender, are not the equivalent of having access to other sources of liquidity. Even more puzzling is the caveat that available cash is not “significantly damaging the business”. Does that mean “significantly detrimental” to current business owners in terms of dilution or otherwise, or does that important phrase rather mean what it says: such available alternative liquidity is not ” significantly detrimental to the business’ of the business?
On May 13, 2020, the Treasury Department provided additional guidance that will provide relief to all businesses that have received a PPP loan of less than $ 2 million and reassure borrowers with larger PPP loans. The new guidelines state: “Any borrower who, together with its affiliates, has received PPP loans with an initial principal amount of less than $ 2 million. will be deemed to have made in good faith the required certificate concerning the necessity of the loan application” [Emphasis added]. The guidelines also recognized that borrowers with loans greater than $ 2 million may still have an adequate basis for obtaining the required good faith certification, depending on their individual circumstances, but will remain subject to review by the SBA for verify their compliance with program requirements. If the SBA determines during its review that a borrower did not have an adequate basis for the required certification regarding the necessity of the loan application, the SBA will request repayment of the outstanding balance of the PPP loan and notify the lender that the borrower is not eligible for loan forgiveness. But the guidelines provide that if the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies.
Thus, we would expect state-owned companies, large private companies, private equity fund holding companies and any other company that may be presumed to have “sufficient sources of liquidity to support operations” and receive a loan. PPP of more than $ 2 million, will benefit from increased government control over certification. But if the SBA determines that the borrower is not eligible for loan cancellation, the borrower can repay the PPP loan and benefit from SBA protection, the assurance that no further action will be taken.
To meet the requirement of this guide, businesses that have received a PPP loan or plan to apply for a PPP loan over $ 2 million should determine whether the business has access to cash to support operations and, if so, whether such access would have been significantly detrimental to the business. If the response to either of these requests is negative, the company must compile all documents, correspondence, minutes, e-mail messages, research and notes on which it relied to arrive at such a conclusion and which also support the obligation of “good faith”. in obtaining the necessary certification. Evidence gathered by the company should include information about the advice sought from external sources, including lawyers and CPAs. This evidence will be essential in the event that the PPP loan obtained by the company is audited by the government.
Borrowers who determine, in light of recent SBA guidelines, that they had adequate sources of liquidity at the time of application and that access to these sources would not have been materially detrimental to the business may return the entire loan proceeds in May 18, 2020 and the company will be “considered by the SBA to have performed the required certification in good faith”. The same goes for any business that determines that due to membership rules, it was not eligible to receive a PPP loan. This safe harbor was established to ensure the prompt repayment of the proceeds of the PPP loan obtained “on the basis of a misunderstanding or misapplication of the required certification standard”. In addition, it binds the SBA.
 Initially, the SBA set the deadline for May 7, 2020, but the deadline has been extended to May 14 and now to May 18.