In this unprecedented time, businesses across all industries are reporting cash shortages, leading many, including their vulnerable employees, to fear they will fail. While businesses of all sizes will suffer from the economic downturn, small businesses may have a more difficult time surviving because there is less room to downsize and there are fewer assets available to negotiate with creditors.

New hope for small business

In August 2019, the Legislature passed the Small Business Reorganization Act, or SBRA, of 2019, also known as Subchapter V of Chapter 11 of the Bankruptcy Code. The SBRA addresses many of the issues that made it difficult over the last two decades for an insolvent small business (i.e. a business which is in debt) to take advantage of the traditional provisions of Chapter 11 of the Bankruptcy Code.  On March 27, 2020 President Trump signed into law the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act), which in part amended the SBRA to increase the eligibility threshold for businesses filing SBRA from $2,725,625 of debt to $7,500,000 (although, the eligibility threshold will return to $2,725,625 after one year).

Simpler Plan Process

The business’s goal in Chapter 11 is to obtain approval of a plan that restructures and, in many instances, eliminates debt. Under the traditional provisions of Chapter 11, the business is required to solicit acceptances of its plan and if creditors do not vote in favor of the plan, the Court may not approve its proposed Plan of Reorganization.  Moreover, prior to solicitation the business is required to file a disclosure statement to confirm a plan of reorganization.  The disclosure statement often provides leverage to creditors to object to the Plan of Reorganization, causing this process to be time-consuming and costly. Under the SBRA, the business is not required to file or obtain approval of a disclosure statement which should make Chapter 11 cheaper, more manageable, and more likely to succeed.

Easier for Existing Owners to Retain Equity

Traditionally, if a Chapter 11 Plan of Reorganization was not supported by the unsecured creditors, existing owners would have to choose to either give up their equity or pay unsecured creditors were paid in full.  This gave creditors incredible leverage over the Plan proponent and, generally, was a major disincentive to small businesses contemplating Chapter 11. Under the SBRA, existing owners of the debtor can retain their equity over the objection of a class of unsecured creditors so long as they commit all of the disposable income of the debtor to pay creditors over a three- to five-year period.

Faster and Cheaper

Traditionally the Office of the U.S. Trustee would appoint a committee of unsecured creditors, worse still, the committee’s legal fees were the responsibility of the Debtor. Under the SBRA, there are no committees of unsecured creditors, thereby removing leverage in favor of creditors who could join forces against the debtor at the debtor’s expense.

New hope for small businesses

Utilizing the streamlined nature of SBRA, small businesses facing distress will have additional leverage to negotiate with creditors before and, if necessary, in the course of an ongoing bankruptcy case.

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