COVID-19 Stimulus Package Temporarily Expands Availability of Small Business Reorganization Act
The social isolation measures so vital to our country’s public health during the COVID-19 pandemic have devastated many businesses across the country and perhaps extracted the heaviest toll on smaller businesses. As social isolation measures continue to prove necessary to slow the rate of infection and save lives, we can expect small businesses to continue to struggle notwithstanding Congress’ passage of an unprecedentedly large financial relief package, known as the Coronavirus Aid, Relief and Economic Security Act (CARES Act), intended to begin to address the economic fallout from this public health crisis.
Among many other important provisions, the CARES Act promises to provide greater access to bankruptcy relief for small businesses. Specifically, Section 1113 of the CARES Act amends the Small Business Reorganization Act of 2019 (SBRA) to make the provisions of new subchapter V of chapter 11 of the Bankruptcy Code available to small business debtors carrying debt of up to $7.5 million. This is an increase from the previous debt limit of $2,725,625 and will make subchapter V an available option for many additional business debtors. This new eligibility criterion will lapse after one year when the debt limit will return to $2,725,625.
The SBRA only became effective on February 19, 2020, and so there are currently very few examples of companies that have invoked its provisions. But there is reason to think that it will prove to be an important tool to allow smaller businesses to use chapter 11 to successfully restructure their businesses and emerge newly viable, and so it is encouraging that Congress largely heeded the recommendation of the National Bankruptcy Conference to widen the SBRA’s eligibility criteria.
In particular, the SBRA adapts the features of traditional chapter 11 reorganization proceedings in ways that will ensure that the process is quicker, less expensive, and more tailored to the needs of smaller businesses. By opting into subchapter V, created by the SBRA, a small business that is well prepared for the process can embark upon a fast track to reorganization. The key benchmarks in the reorganization timeline include 60 days from the filing of a bankruptcy petition to a status conference with the Bankruptcy Court (with an outline of a plan of reorganization due 14 days before the initial court conference) and 90 days to the filing of a plan of reorganization. Under subchapter V, no disclosure statement is required for the plan of reorganization, which will further reduce the time and expense of the process. Subchapter V debtors also are exempt from paying quarterly U.S. Trustee fees.
Reorganizations under subchapter V are likely to be more straightforward and less litigious than traditional chapter 11 proceedings. There are no creditors committees in a subchapter V proceeding, which is a significant cost saving for small business debtors and also minimizes the likelihood of disputes between business owners and creditors.
Most importantly, subchapter V dramatically alters the criteria for securing approval of a plan of reorganization in ways that allow the business owner to retain control of the business and minimize the risk of creditors derailing the reorganization process. Subchapter V does away with the Absolute Priority Rule, which imposes a strict hierarchy for the payment of creditors, and instead allows the business’ equity owner greater flexibility in retaining control of the business, so long as the plan of reorganization is “fair and equitable” and “does not discriminate unfairly.” Except in cases where the business is sold, unsecured creditors are entitled only to a pro rata share of the business’ disposable income over a three-year or five-year period, depending on the terms of the reorganization plan.
Long before the current crisis, chapter 11 was not working for small businesses. The overwhelming majority of smaller businesses that tried to go down that path found themselves in liquidation, rather than on a path to a successful reorganization. The SBRA was enacted to address the ways in which the Bankruptcy Code failed smaller businesses. The CARES Act’s temporary expansion of the SBRA’s provisions to a wider pool of eligible small business debtors may offer certain businesses an important avenue to recover from the economic blows of the COVID-19 pandemic.