Some companies may find it makes more sense to forgo Chapter 11 given the lack of interest in competitors acquiring assets at auction: "You need to show a path toward an exit."

Until this year, the world was getting pretty good at relaxing in movie theaters. The seats were growing ever bigger and made of higher quality fabric. And unlike on airplanes, consumers were invited to recline the seat as far back as possible. But then the novel coronavirus spread, and something changed. Just what can movie seats teach us about the economic impact of a health pandemic? Consider the Chapter 11 bankruptcy of VIP Cinemas Holdings, a multinational and the world’s largest manufacturer of luxury recliner seating for movie theaters.

On Feb. 18, VIP Cinemas filed for bankruptcy, which might at first sound like bad news. But this debtor came to Delaware court with what specialists call a “prepackaged plan of reorganization."

VIP Cinemas got a lender to put up money for operations during the bankruptcy process. VIP's creditors had agreed to swap debt for equity in the company. One private equity firm even consented to a new $7 million investment. Altogether, VIP had a plan to deleverage its balance sheet by about $178 million and position its business with enough cash to not only stabilize but also grow the business.

That, at least, was the plan. On March 23, movie exhibition giant Regal Cinemas objected. In a fight with VIP over the purchase of 676,000 recliners, Regal stated: "Due to the recent and unfortunate outbreak of a novel coronavirus and resulting spread of COVID-19, many movie theaters have gone dark … There is no reasonable likelihood that the reorganization proposed by the Plan will be successful. The Plan was drafted and filed before the current economic and public health crisis developed."

Alas, herein lies the sad truth of the current economic crisis: It's gotten so bad that bankruptcy has actually become a poor option for many distressed companies. Case in point: VIP Cinemas told a judge April 3 that its debt-for-equity restructuring plan was no longer feasible and that it was abandoning its Chapter 11 restructuring. "We are truly living in an unprecedented time," said VIP attorney Cristine Schwarzman during the hearing.

"I don't think there is going to be a wave of Chapter 11s next week," says Paul Zumbro, head of the restructuring practice at Cravath, Swaine & Moore. "There's the difficulty of getting DIP [debtor-in-possession] financing. You need to show lenders a budget, and if you aren't in a position to give any predictions, it's going to be difficult to get a lender to provide that financing. You also need to show a path toward an exit."

Zumbro raises another reason why he doesn't see bankruptcies in the immediate future: the lack of interest in acquiring distressed assets. No potential buyers means less enticing bankruptcy auctions. "It almost seems like we have a quarantine on transactions as well as the quarantine that we're all doing at home," he says.

Some companies might have little choice but to go ahead with a "free fall" bankruptcy, meaning one without a well-executed plan where anything, including liquidation, could result. These firms will find themselves short of cash and creditors unwilling to renegotiate the timing of debt obligations, with a liquidity crisis where bankruptcy protections offer the only saving grace.

But for most, Brad Sandler of Pachulski Stang agrees, "To put a company in bankruptcy now would be for most companies value-destructive."

The government is doing what it can to keep the economy rolling. The Federal Reserve has been working on unfreezing credit markets while Congress passed a $2 trillion stimulus package. But unfortunately for those in the entertainment industry, the bailouts seem to have prioritized shrinking airline seats over more luxurious movie ones. Small businesses are eligible for loans under the plan, but larger conglomerates outside the transportation sector will likely have to conserve cash to ride out the recession. And down the road? One indicator of an economic recovery could be the moment when companies begin seeing the worth of Chapter 11 again.

Says Sandler: "If there's an increase in bankruptcy filings, this means credit has opened up and acquirers are back in the marketplace. Bankruptcies are generally bad news, but here, it may signal that the markets are getting back to business."

This story first appeared in the April 8 issue of The Hollywood Reporter magazine. Click here to subscribe.