The Small Business Reorganization Act
As noted in our earlier post, the Small Business Reorganization Act (SBRA), which became effective February 19, 2020, was enacted to address concerns that typical chapter 11 reorganization cases were too expensive and burdensome for smaller businesses. In order to address those concerns, Congress created subchapter V (read as “five”) of chapter 11, which provides a more streamlined, and less costly, process for a “small business debtor” navigating through the reorganization process. This post briefly discusses subchapter V.
The most obvious change is that a trustee is appointed in every subchapter V case. The trustee’s primary role is to facilitate the formulation of a plan of reorganization and generally to keep the reorganization on track. A committee of creditors, which is typically appointed in a chapter 11 case, will not be appointed in a subchapter V case without a Bankruptcy Court order for cause. This reduces the cost of the reorganization because a debtor is responsible for the payment of the costs of a committee, including its attorneys’ fees.
Several of the amendments provided in subchapter V cases are intended to streamline the plan confirmation process. A debtor is not required to prepare a disclosure statement and only the debtor can submit a plan of reorganization, reducing the cost and eliminating the complications involved with a contested confirmation hearing involving competing plans. A plan must be filed within 90 days after the case is filed, absent an extension of time granted by the Bankruptcy Court for circumstances that are not justly attributable to the debtor. This is a significant reduction in the 300-day plan filing deadline of a typical small business debtor chapter 11 case.
The process and requirements for confirming a plan were also simplified for small business debtors. First, a debtor does not have to obtain the acceptance of an impaired class of creditors in order to confirm a plan. Administrative expense claims can be paid over the life of the plan, rather than in cash at the effective date of the plan. Cram down (confirming a plan over the objection of creditors) remains an option for a subchapter V debtor, but the absolute priority rule has been eliminated, meaning that equity holders in a debtor can retain their interests even if unsecured creditors are not paid in full.
A plan must still be fair and equitable in order to be confirmed. However, similarly to chapter 13 case, a plan will be deemed fair and equitable if a debtor commits all of its “projected disposable income” or property of equivalent value for a minimum of three years and a maximum of five years. The debtor must demonstrate a reasonable likelihood that it will be able to make all payments required by the plan and must provide appropriate remedies to protect creditors if it fails to make the required payments. If a plan is confirmed under the cram down provisions, all property acquired by the debtor post-petition becomes property of the estate.
There are other significant changes that may be relevant in specific cases. Even with the streamlining and simplification, the reorganization process remains difficult and complex. The amendments to chapter 11 should make the reorganization process feasible for many more small business debtors. Blanco Tackabery is prepared to assist you with navigating through the bankruptcy process. If you have questions, contact Jim Vaughan or Ashley Rusher for assistance.
Jim Vaughan has more than 30 years of experience representing lenders in commercial loan workouts, bankruptcy cases and commercial litigation. This, coupled with his accounting background and business skills developed running a solo law practice for twelve years, gives him a common sense, results-driven approach to counselling clients and serving their needs effectively and efficiently.