[co-author: Hugh McDonald]*
On February 19, the Small Business Restructuring Act (SBRA) — the most significant change to the Bankruptcy Code in 15 years — went into effect. The SBRA, also known as Subchapter V of Chapter 11, removed numerous barriers that had long prevented small businesses from reorganizing in bankruptcy. On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) went a step further and significantly expanded eligibility under Subchapter V by raising the debt limit from $2.7 million to $7.5 million. This overview answers key questions about how these new laws work. For further information, please feel free to contact the authors.
Who is eligible to file under Subchapter V as a “small business debtor”?
The Bankruptcy Code defines a “small business debtor” as a person or entity engaged in commercial or business activities with aggregate secured and unsecured debts of $2,725,625 (exclusive of debts owed to insiders or affiliates), at least 50 percent of which arose from the debtor’s commercial or business activities.
Under the CARES Act, the debt eligibility threshold temporarily has been raised to $7,500,000, giving more small businesses access to Subchapter V’s streamlined procedures. The debt limit will return to its prior level after one year.
Who runs the business while a company is reorganizing under Subchapter V?
Existing management continues to operate the company in bankruptcy as the “debtor-in-possession.” Although a trustee is appointed in all small business cases, the trustee’s job is to facilitate the development of a plan of reorganization — not take control of the business. The business owner will need to provide the trustee with tax returns, account information and financial information, such as assets, liabilities and cash flows.
What is the timeline for reorganizing under Subchapter V?
Within 60 days after the filing, the court is required to hold a status conference “to further the expeditious and economical resolution” of the case. At least 14 days before the status conference, the debtor must file a report detailing the efforts it has taken and will take to attain a consensual plan of reorganization. The debtor must file a plan of reorganization within 90 days after the petition date.
Will I have to pay the fees of the professionals of a creditors’ committee?
No. Unlike in a regular Chapter 11 case, the presumption in a Subchapter V case is that a creditors’ committee will not be appointed. This reduces costs — since the debtor’s estate bears the expense of a committee’s professionals — and reduces the potential complexity of the case by eliminating a significant party in interest.
How does a plan of reorganization under Subchapter V differ from an ordinary Chapter 11 plan?
This is where Subchapter V really outshines Chapter 11 for small businesses by streamlining the process, limiting the ability of disgruntled creditors to derail a plan, and allowing current equity to retain its ownership.
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Chapter 11
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Subchapter V
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A disclosure statement (essentially a prospectus) must be filed with the plan of reorganization and must be approved by the court as providing adequate information to all creditors.
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No disclosure statement is required; instead, the plan must contain a brief history of the debtor’s business operations, a liquidation analysis, and projections showing how the debtor will be able to make the plan payments.
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All administrative expense claims — generally, expenses incurred post-petition, as well as amounts due for any goods delivered in the 20 days before the petition date — must be paid in full on the effective date of the plan.
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Administrative expense claims can be paid over the life of the plan.
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At least one impaired class of creditors must vote in favor of the plan.
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No need to obtain creditor acceptance as long as the plan commits all projected net disposable income for a period of three to five years to payments under the plan.
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Under the “absolute priority” rule, equity holders get nothing unless all creditors are paid in full.
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Even if creditors are not paid in full, existing equity holders can retain ownership of the debtor.
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I borrowed against the equity in my home in order to invest in my business. Can Subchapter V help me?
Yes. Unlike in a regular Chapter 11 case, in a Subchapter V case, the debtor can modify the secured claim. Modifications may include extending the maturity of the loan, lowering the interest rate, cramming the claim down to the value of the collateral, or possibly even stripping the lien if it is a junior lien.
Can I obtain a discharge of my debts in a Subchapter V case?
Yes. If the resolution of the case is consensual, then a discharge can be granted when the plan is confirmed (i.e., approved by the court). If the resolution is not consensual, a discharge will be granted after all payments are made under the plan.
* Troutman Sanders LLP
