The Small Business Reorganization Act of 2019 (SBRA or Act) became effective on February 19, 2020. The new provision represents a substantial change in bankruptcy law and practice for small business debtors.
The new provision (Subchapter V) is available to Debtors engaged in commercial activities (excluding the ownership of a single asset real estate venture), who have secured and unsecured debts less than $2,725,625.00. At least fifty (50%) percent of the Debtor’s obligations must be business related. On March 27, 2020, Congress enacted the Coronavirus Aid Relief and Economic Security (CARES) Act that increased the debt limit to 7.5 million. If not extended, the increased limitation will expire one (1) year from the enactment.
The Subchapter V case offers a more straight forward and cheaper path to reorganization. The new Subchapter V applies to entities (LLC’s and corporations) as well as to individuals.
Some of the significant changes include:
Only the Debtor may file a plan. Under the Act, no creditor or other interested party may file a plan. However, the debtor must file the plan within ninety (90) days after the bankruptcy is filed, with limited exceptions.
No creditors’ committee. In a typical Chapter 11 case, the U.S. trustee may appoint a committee of unsecured creditors, to represent this group of creditors. Under the Act, no creditors’ committee is appointed, unless ordered by the Court.
No Disclosure Statement. A disclosure statement, which is similar to a financial prospectus describing the plan, is no longer necessary under the Act.
Appointment of a trustee. Under the Act, a trustee with limited duties and powers is appointed in every case. The trustee’s role is to facilitate the development of a consensual plan and make distributions under the plan, if necessary. Unless the court, for cause, orders otherwise, the debtor still runs the business and generally has the same rights as in a typical Chapter 11 case.
Votes are not needed. Perhaps the most radical change imposed by the Act is that a debtor now has the ability to confirm a plan without having any creditors vote to accept the plan. Prior to the Act, a debtor could not confirm a plan unless at least one impaired class of creditors voted to accept the plan. This requirement alone made many Chapter 11 plans impossible to confirm. Under the Act, if other requirements are met, a plan can be confirmed with no votes at all.
No absolute priority rule. Another hindrance to confirming a typical Chapter 11 plan is the absolute priority rule. The rule essentially provides that if the company is unable to pay its debts in full (and all impaired classes do not vote to accept the plan), then the owners cannot retain their interests under a plan unless they contribute new value to the business. The Act does away with the absolute priority rule, allowing business owners a greater opportunity to retain their ownership interests.
Benefits to Individuals. The Act also provides substantial benefits to individual small business debtors. Many business owners are ineligible for Chapter 13 bankruptcy because of its strict debt limits and are forced to file an individual Chapter 11 case in order to reorganize their financial affairs. Many of the same rules that apply in a typical business Chapter 11 apply to individuals. The more advantageous procedures under the Act will also be available to individuals who meet the qualifications. In addition, unlike a typical Chapter 11 case, under the Act, an individual debtor will be able to modify certain residential mortgages, if the underlying loan was not used to acquire the residence and was primarily used in connection with the small business of the debtor.
These are just a few of the many benefits that are now available for small business debtors. The Act also renders many of the existing provisions of Chapter 11 inapplicable for small business debtors who elect to have the new Subchapter V apply in their case. Struggling businesses should strongly consider these new provisions as a potential remedy to their financial problems.