For a small business needing to reorganize its financial affairs, a Chapter 11 bankruptcy case can be prohibitively expensive. New Subchapter V of Chapter 11 of the Bankruptcy Code establishes an expedited process for small business debtors to reorganize quickly, inexpensively, and efficiently. On February 19, 2020, Small Business Reorganization Act of 2019 (the “SBRA”) became effective; Congress enacting the SBRA to streamline the bankruptcy process by which small businesses debtors reorganize and rehabilitate their financial affairs.
How does the Subchapter V bankruptcy differ from a traditional Chapter 11?
Subchapter V provides qualifying debtors with some powerful and cost-saving restructuring tools not otherwise available to Chapter 11 debtors; among these benefits are:
(1) elimination of the absolute priority rule, which allows equity holders to retain their ownership interests without paying all creditors in full;
(2) no mandatory appointment of a creditors committee;
(3) no mandatory requirement to file a disclosure statement;
(4) appointment of a Subchapter V trustee to assist in developing a consensual plan, while leaving the debtor in possession of its assets and in control of its business;
(5) the exclusive right (which cannot be terminated) to file a plan;
(6) the ability to modify a claim secured only by a security interest in the debtor’s principal residence, if new value received in connection with granting the security interest was used primarily in connection with the debtor’s business and not primarily to acquire the property;
(7) the ability to confirm a plan even if all classes reject the plan;
(8) the ability to pay administrative expenses over time under a plan;
(9) modification of the disinterestedness requirements of Section 327(a) for a professional that holds a prepetition claim of less than $10,000; and
(10) elimination of the requirement to pay quarterly U.S. Trustee fees.
What creditor protections exist in a Subchapter V bankruptcy?
These extraordinary powers and cost-saving provisions granted to small business debtors are both helpful and necessary in making Chapter 11 more affordable for small businesses. That being said, the overall purpose and function of the Bankruptcy Code is to strike a balance between creditor protection and debtor relief. In balancing the special new powers available under subchapter V, Congress granted creditors a very important protection: the requirement that a Subchapter V case proceed expeditiously (i.e. subchapter V requires the court to conduct a status conference within 60 days of filing and requires the debtor to file a plan within 90 days of filing).
What next?
If you believe your business could benefit from a Chapter 11 reorganization, or if one of your creditors has served you with a notice of Subchapter V bankruptcy relief, please feel free to reach out to Michael Weishaar at 716-845-6446 or [email protected].
