Daily Archives: August 28, 2020

The Small Business Reorganization Act

The Small Business Reorganization Act became effective on February 19, 2020. The new law added Subchapter V to Chapter 11 of the Bankruptcy Code, allowing businesses to reorganize rather than liquidate. It streamlines the process for small businesses. Only individuals or entities engaged in commercial or business activities with non-contingent liquidated debts below $2.7 million, adjusted for inflation, may file under this code section. However, the CARES Act temporarily increased this amount to $7.5 million, but that expires on March 26, 2021. Only the debtor may file a plan in Subchapter V; consequently, there are no creditor competing plans. No financial documents need be filed.

The debtor must complete detailed schedules and a Statement of Financial Affairs to provide the court and creditors with information as to its assets, liabilities and financial condition. Additionally, 50% of the total debt must have arisen from the commercial or business activities of the debtor. The debtor remains in control of its business although it can be removed for cause. The trustee will then step in. A trustee is appointed in every case, but the trustee has limited powers.

Some of the more burdensome requirements of Chapter 11 are eliminated. The debtor is not required to pay fees to the United State Trustee. The debtor is not required to obtain or write a Disclosure Statement, unless ordered by the court. There are no Creditor’s Committees unless the court allows it. There is no requirement that at least one class of impaired creditors vote to accept the plan; only the debtor files a plan.

The administrative expenses must be paid as soon as the plan is confirmed. There is no absolute priority rule. Thus, equity owners may retain their interest in the company even if they do not pay creditors in full and do not provide any new value. Instead, the debtor projects its disposable income for a period of 3 to 5 years and this income must be paid to creditors. Provided the debtor can satisfy these requirements, reorganization under this new code section is preferable.