As referenced in our first resource in this two-part series, The Small Business Reorganization Act (“SBRA“ or “The Act“), created Subchapter V of the Bankruptcy Code and became effective on February 19, 2020. The act streamlines the existing bankruptcy procedures and provides new resources to increase a small business‘s opportunity to survive bankruptcy, regain control of operations, and ultimately undergo a successful restructuring process.
Now more than ever, SBRA is timely as it can potentially provide relief to individuals and small businesses that have been impacted by COVID-19. Part two of this series or resources highlights Section 363 Sales and D-I-P Financing in the context of a Subchapter V case.
Pre-Petition Planning is Critical
It is essential that the debtor‘s counsel and the debtor take steps to either market the business as a going concern and/or secure D-I-P financing in anticipation of filing the petition. In a larger Subchapter V case, it would be prudent to engage an investment banker’s services. As discussed previously, the debtor must file a plan within 90 days after the order for relief.
Although the court may extend this deadline under “circumstances which the debtor should not justly be held accountable,” it would not be wise to rely on obtaining an extension when a lot of the groundwork could have been laid prior to the petition.
Section 363 Sale
Assuming proper marketing of the company has taken place pre-petition, there is no reason a sale cannot occur within 30-90 days after the petition is filed. An application to retain an investment banker can be filed as a first–day motion and a motion to approve bid procedures shortly afterward. Proper marketing can ensure that qualified bids can be received, an auction is held, sale hearings occur, and closing happens all within the 90 day days after the petition is filed.
Financing to Fund a Plan Payout to Creditors
For a plan to be “fair and equitable“ under the SBRA means that the debtor must commit all of its “projected disposable income“ or property of equivalent value to make payments under a plan for no less than three years but no more than five years.
The “equivalent value“ option may permit a cash payout funded by a third party lender.
The Hybrid Payout/Sale Plan
Under the SBRA, a debtor must demonstrate a “reasonable likelihood“ that it can make payments provided under a plan. A plan must also provide “appropriate remedies that may include the liquidation of non–exempt assets“ to protect creditors in the event of a default. A debtor could conceivably insert a complete bid procedure and sale process in a plan to cover the situation where the debtor fails to make plan payments. A debtor could even go so far as to naming an agent such as an investment banker to handle the business’s marketing and sale as a going concern to maximize value to creditors.
A Subchapter V debtor can emerge from bankruptcy without excessive cost and aggravation with proper pre-petition planning and post-petition drafting and creativity.
If you have any questions or would like to discuss your options, please contact us.