Specific Provisions of the New Bankruptcy Law Give Small Businesses Invaluable Tools to Successfully Reorganize
By: Leo M. Gibbons, Esq.
In a recent article, we discussed the enactment of The Small Business Reorganization Act (“SBRA”), which went into effect on February 19, 2020. This article will discuss some of its more significant provisions, which give small businesses effective new tools for dealing with debt and creditors, and for successfully reorganizing under the amendments to Subchapter V of the Bankruptcy Code.
There are numerous significant changes under Subchapter V benefitting the debtor. There is no unsecured creditors committee. An individual case trustee is assigned to each case, whose role is supervisory and to facilitate the debtor getting a consensual plan with creditors. These changes, along with others referenced herein, evidence the intent of the amendments to encourage consensual plans and avoid the contentiousness that sometimes arises in regular Chapter 11 cases between the debtor and the creditors committee and/or the US Trustee.
There are also no US Trustee fees and no requirement to file a disclosure statement in Subchapter V cases. Unlike regular Chapter 11 cases, only Subchapter V debtors may file a plan and only Subchapter V debtors may modify that plan. Some deadlines are also accelerated in comparison to a regular Chapter 11 case; for example, the Subchapter V debtor must file its plan within 90 days of commencement of the case.
Also, of great significance is the fact that the Absolute Priority Rule does not apply, which was often a significant impediment to small business debtors confirming and completing a plan of reorganization. The Absolute Priority Rule prevents a debtor from retaining any property if it does not pay all of its creditors in full. Moreover, the debtor is not required to contribute new value in order to get a plan confirmed. The Subchapter V debtor also has the ability to “cramdown” or, in other words, reduce or discharge the debt owed to unsecured creditors. These provisions will not only enhance the odds of putting together a confirmable plan but will facilitate the debtor’s ability to successfully negotiate with creditors.
Because of the tighter deadlines in Subchapter V bankruptcy cases, and the new provisions for dealing with creditors, it is expected that Subchapter V cases can proceed more quickly, can be completed for less cost and will result in consensual plans between a debtor and its creditors.
These attributes are of great value to small businesses seeking to reorganize and will place a premium on pre-bankruptcy planning and negotiations with creditors.