Small Business Reorganization Act: The Vaccine for Small Businesses Suffering From the COVID-19 Pandemic
Timing is everything. On February 19, 2020, the Small Business Reorganization Act (SBRA), which added a new subchapter to the United States Bankruptcy Code, became effective. Commonly referred to as Subchapter V, the SBRA was enacted in an effort to reduce the cost and expense of small business bankruptcy reorganizations. Just in time for the global COVID-19 pandemic, which is anticipated to have a devastating impact on small businesses, Subchapter V may be a key to their survival. Congress seems to think so, as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes the first amendment to Subchapter V, greatly expands its availability to small businesses.
Five Things Small Businesses Should Know About Subchapter V
1. Who is an eligible debtor under Subchapter V?
To be eligible for relief under Subchapter V, a debtor (whether an entity or an individual) must have total debt not exceeding $2,725,625 (subject to adjustment every three years). Section 1113 of the CARES Act increases the debt limit to $7,500,000. The increased debt limit applies to cases filed after the enactment of the CARES Act and is valid for one year after the CARES Act becomes effective. Thereafter, the debt limit will be reduced back to $2,725,625. In addition, single asset real estate debtors are ineligible for relief under Subchapter V.
2. Who are the principal players in a Subchapter V bankruptcy case?
The principal players in a Subchapter V bankruptcy case are:
- The debtor who remains in possession of its property as a debtor-in-possession; and
- The trustee appointed in the proceeding.
The trustee’s duties, significantly more limited than those of a trustee in other bankruptcy proceedings, will include facilitating the development of a consensual reorganization plan, appearing at major hearings in the case, and ensuring that a debtor commences making timely payments under a plan. Unless otherwise ordered by the Court, no creditors committee will be formed.
3. How long is the bankruptcy process?
The reorganization process under Subchapter V is far more expeditious than in a traditional chapter 11 case. The debtor need not file a disclosure statement and must file a chapter 11 plan within 90 days from its filing of a bankruptcy petition. From filing to confirmation, the process may be concluded in a few months.
4. What plan confirmation requirements are eliminated under Subchapter V?
- The Absolute Priority Rule, pursuant to which equity interest holders cannot retain an ownership interest in a debtor’s assets unless all creditor claims are paid in full, does not apply.
- The requirement that an impaired class of creditors accept the plan is eliminated. A plan can be confirmed without the vote of an impaired accepting class, providing that the plan does not discriminate unfairly and is deemed “fair and equitable” as to each class of claims. To meet the “fair and equitable” requirement, all of the debtor’s projected disposable income during the length of the plan, usually three or five years, must be applied to plan payments.
- In a traditional chapter 11 case, a debtor must pay all administrative claims (which include post-petition claims and, in limited circumstances, reclamation claims arising from goods shipped to the debtor within 20 days of the bankruptcy filing) must be paid in full to confirm a plan. Subchapter V permits claims to be paid overtime.
5. When is a discharge effective?
If the court confirms a consensual plan, a debtor is entitled to a discharge upon confirmation. If the court confirms a nonconsensual plan, a debtor receives a discharge after completing all payments due within the first three years of the plan, unless otherwise ordered. If all such payments are made, the debtor would be relieved of liability except for future payments due under the plan.
Notwithstanding the losses which many small businesses will sustain from the impact of the COVID-19 pandemic, Subchapter V, with the expansion of its eligibility requirements under the CARES Act, may provide a valuable tool to assist many small businesses in their efforts to survive.