The Small Business Reorganization Act: Making Chapter 11 Accessible to Small Businesses
July 31, 2020
In short, 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.
The following resource provides a deeper dive into the advantages and open issues of this new provision of the Bankruptcy Code.
To qualify as a debtor under the SBRA, a person or entity must be engaged in commercial or business activities with aggregate non-contingent or liquidated, secured, or unsecured debt of $7.5 million (temporarily raised from $2,725,625 in the CARES Act).
The issue of what is contingent or unliquidated debt to disqualify a debtor will result in challenges. Also, a debtor that derives substantially all of its gross income from the operation of a single real property may not elect Subchapter V.
Although a debtor is not required to continue operating post-petition, at least 50% of its pre-petition debts must be derived from business activities.
Issues regarding eligibility as a practical matter will have to be heard and decided on an emergent basis, given that the debtor must propose a plan within 90 days of the filing of the petition. Courts may find some guidance from decisions rendered prior to the enactment of the SBRA.
A standing trustee is appointed by the United States Trustee or Bankruptcy Administrator and charged with the obligation to “facilitate the development of a consensual plan of reorganization.”
Additional powers include:
- Acting as a conduit for plan payments
- Investigating the debtor`s financial affairs upon request of a party-in-interest and court approval
- Objecting to claims
- Insertion of the trustee in the event of the removal of the debtor-in-possession
What is unclear is the role of the trustee after the plan is substantially consummated.
Key provisions in this act not only increase a debtor’s ability to negotiate a successful reorganization and retain control but also aim to decrease the burden and costs associated. A few key provisions to keep in mind:
- Only the debtor is permitted to file a plan
- No disclosure statement is needed, but the plan must contain a liquidation analysis, a brief history of the business operations, and plan payment projections
- The absolute priority rule has been eliminated by SBRA, allowing small business owners to retain ownership without having to “buy the reorganized debtor`s equity.” However, creditors retain the right to receive as much as they would in a liquidation (the best interests test) as well as their right to make a section 1111(b) election
These are just some of the notable provisions that allow a small business to go through the bankruptcy process in a more streamlined and effective way. Keeping in mind the economic fallout from the pandemic crisis, this may become an attractive alternative. Despite some ambiguities, Subchapter V provides significant benefits to small business debtors including:
- The ability to retain ownership
- Lessened reporting requirements
- Avoiding the cost and complication of an unsecured creditors committee
- A speedier reorganization
We will provide a follow on to this resource in the coming weeks that will address Section 363 Sales and D-I-P Financing in the context of Subchapter V.