While the Payroll Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (CARES) has captured the headlines these past few days, this amendment to the 2019 Small Business Reorganization Act (SBRA) that went into effect on February 19, 2020, should not be overlooked by small businesses. For the next year, small businesses with $7.5 million or less in debt can qualify for streamlined and less costly restructuring provisions under Chapter 11 of the Bankruptcy Code. For small business owners, what is most appealing is that they can do so with the ability to preserve their ownership interests even over the objection of creditors, in exchange for roughly three years projected disposable income (net profit). For many debtors that will be looking to rebuild their business in the wake of the COVID-19 pandemic, projected disposable income over a three-year period may be a fraction of current, outstanding debt. These new provisions could not come soon enough.
Small Business Reorganization Act
The SBRA establishes a new Subchapter of Chapter 11 of the Bankruptcy Code, the provision used by most large corporations to reorganize in the face of financial hardship. The SBRA’s new Subchapter 5 covers small business debtors with debts below a statutory threshold of $7.5 million for the next year under an immediate amendment to it in the CARES Act. After a year, the debt threshold returns to approximately $2.7 million.
The SBRA is intended to streamline Chapter 11 cases for small businesses and reduce the costs to them of the attendant proceedings. An attractive feature allows owners to reorganize and keep their stakes in return for the next three years’ projected profits. A summary of changes implemented by the SBRA follows:
Relaxed Confirmation Requirements
The Bankruptcy Code generally precludes business owners from retaining equity under a Chapter 11 plan if creditors are not paid in full, and a class of impaired creditors votes to reject the plan. Under the SBRA, a plan that does not pay creditors in full may be confirmed, so long as it provides for the debtor to pay all of its projected disposable income over a three-year period (or such longer period as the Court permits, not to exceed five years), or distribute value (e.g., sale proceeds or another contribution) of at least that amount. Disposable income is defined as income not reasonably necessary for the continuation, preservation, or operation of the business. In a significant change from current law requiring that at least one class of creditors vote to accept a plan that impairs creditors, a Subchapter 5 plan need not be accepted by any class of creditors in order to be confirmed. These provisions will enable small business owners to reorganize with the prospect of retaining their businesses in these unparalleled times.
Expedited Timetable for Filing a Plan; Exclusivity
There is a strict ninety-day limit for the debtor to file a Chapter 11 plan following the commencement of a Subchapter 5 case. Only the debtor may file a plan during this period. While the debtor has the ability to request an extension for cause, the shortened time also insures less costs and less disruption to the business and its owners.
No Disclosure Statement
The debtor need not file a disclosure statement to accompany its Chapter 11 plan, again saving significant time and resources.
No official committee of unsecured creditors will be appointed unless the Bankruptcy Court orders one for cause shown, a substantial cost savings that permits debtors greater leverage to successfully turn around their businesses.
Subchapter 5 Trustee
Although the small business debtor remains in possession as in a typical Chapter 11 case, a “standing trustee” is nevertheless appointed who has some oversight authority, can assist with plan formulation, and is charged with disbursing payments under a confirmed Chapter 11 plan. It remains to be seen how this will work in practice. But proper representation will require an ability to work with these standing trustees towards obtaining plan confirmations.
Amini LLC has significant experience representing trustees and debtors in Chapter 11 cases, and is well equipped to advise as to whether commencement of a Subchapter 5 case is appropriate, as well as work with our clients to integrate the prospect of a filing in their contingency plans.
As is true with virtually all of our clients, together we face an unparalleled crisis with its uncertainty, disruption, and economic and emotional stress. We have no easy answers, but believe that all of us, friends and adversaries, need to work together to keep the engines of ingenuity, change, and most of all hope alive to face our uncertain future. While we struggle with all of you, we are here to assist, whatever your circumstance, to persevere through this calamity. Thank you all for your concerns, well wishes and support. We hope we can reciprocate as needed.