If a business entity is having financial difficulties and is seeking bankruptcy protection, there are only two choices. Either Chapter 7, which is a “liquidation” model, or Chapter 11, which is a “reorganization” model (to learn more about the distinctions between these models, please see our Bankruptcy Basics post). However, on August 23, 2019, Congress enacted the Small Business Reorganization Act of 2019 (“SBRA”), which aims to, among other things: (1) streamline the reorganization process for small businesses filing Chapter 11 bankruptcies and (2) adjust certain rules to protect creditors that may have received preferential transfers from the debtor before bankruptcy.
The SBRA became effective as of February 19, 2020 and was modified (in a business-friendly manner) when Congress enacted the Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES”). The key provisions of the SBRA that will help streamline the reorganization process include:
- Qualification. To qualify under the SBRA, the small business, which can be either an individual or an entity (“Debtor”), may not have debts greater than $2,775,625. However, CARES increased this debt cap to $7,500,000, but this increase will only last for one year.
- Exclusivity. Under the SBRA, only the Debtor may file the Chapter 11 Plan of Reorganization (“Plan”). Traditionally, either the Debtor or the Creditor may file the Plan.
- Timing. The Plan must be filed within 90 days of the date that the Debtor commenced its bankruptcy case, unless the Court orders otherwise.
- No disclosure statement. The Debtor is not required to file a disclosure statement (the equivalent of a proxy statement), unless the Court orders otherwise. This alone will save considerable time and money from not having to argue about what is “adequate information.”
- No creditors committee. There will be no creditors committee. However, a Chapter 11 trustee will be appointed similar to Chapter 13.
- Modification of secured claim. The Plan can modify the rights of a creditor with a security interest in the Debtor’s home if the loan was not used for the purchase of the home, and the money was used in the Debtor’s business.
- No absolute priority rule. Without getting overly technical, if the Plan is fair and equitable, and does not discriminate unfairly, then the Plan can be confirmed without creditor consent (cramdown) and the “absolute priority rule” does not apply. This rule normally requires that the shareholders of the Debtor may not retain their equity interest in the business unless the unsecured creditors consent or are paid in full.
Traditionally, a Chapter 11 can be difficult for small of businesses because the time and resources required may make it cost prohibitive. As such, by adopting the above provisions, business reorganizations will be much more accessible for small businesses.
To read about the SBRA’s additional protections for creditors, please see Part 2 of this series.