Small Business Reorganization – Bankruptcy Protection For Small Businesses

05/06/2020

The Small Business Reorganization Act of 2019 (“SBRA”) has the potential to make Chapter 11 bankruptcy protections available to smaller businesses. The Federal government and State relief efforts are providing various forms of relief to businesses of many sizes and in many industries – what programs like the PPP and Main Street Lending Program do not do and cannot do is actually bring customers back to storefronts or kickstart “nonessential” businesses. Having no customers, landlords and lenders that are struggling themselves, coupled with the lack of access to capital resources will create many difficulties for small businesses that, before this crisis, had typical levels of debt and leverage. The SBRA may be well suited for small businesses that need some time to restructure and fend off creditors and avoid a liquidation scenario.

Under the CARES Act, the SBRA’s definition of a “small business” includes businesses with debts of $7.5 million or less.  The SBRA provides a streamlined reorganization process which should lead to decreased costs to businesses looking to reorganize.  Some of the features of the SBRA include:

  • No Creditor Committees – Creditor Committees are not appointed in Subchapter 5 cases unless ordered by the Bankruptcy Court for cause. 

  • No Disclosure Statements – Disclosure Statements are not required, although plans must include some information that is typically found in a Disclosure Statement.

  • Deferral of Administrative Expense Payments – Administrative expenses that typically must be paid upon the effective date of a plan can be deferred over the life of the plan for up to five (5) years. 

  • Residential Mortgage Modification – A small business debtor may modify a residential real estate mortgage to the extent that any proceeds from the mortgage loan were used to fund the business. 

  • Debtor’s Plan – The debtor is the only party with the right to file a plan; it must be filed within 90 days from the date of the petition. A debtor may be able to obtain confirmation of a plan through a “cram down”, if the debtor can demonstrate that the plan is fair and equitable, does not unfairly discriminate amongst creditors, and provides for the debtor’s contribution of all its projected disposable income.

  • No Absolute Priority – Small business debtors need not comply with the absolute priority rule, and the plan may be confirmed over the objection of one or more impaired classes of creditors. In the absence of the absolute priority rule, the owners are not prohibited from retaining equity, even if all the creditors are not paid in full. 

The SBRA opens up bankruptcy protection to many more businesses than were previously able to take advantage of bankruptcy protection and reorganization. If your business is facing financial distress and a reorganization of your business debt could be helpful or is critical, or your business otherwise needs relief from creditors while it recovers from the COVID-19 crisis, please contact Tom Flynn or Patrick Cole