11 May 2020

The Small Business Reorganization Act of 2019 – A Practical Restructuring Tool

Many small businesses will face difficult financial issues as they attempt to reopen after the COVID-19 shutdown.  As a result, some will opt to file for bankruptcy protection as they seek to reboot their businesses.  Whether you are a small business seeking protection from creditors as you get back to normal operations, or a creditor dealing with a business which has filed a bankruptcy proceeding, you will benefit from knowing which options are (and are not) available to small businesses under the United States Bankruptcy Code (“Bankruptcy Code”).

The Small Business Reorganization Act of 2019 (“SBRA”), which became effective on February 19, 2020, created a new subchapter V of chapter 11[1] of the Bankruptcy Code.  The SBRA[2] amends several sections of the Bankruptcy Code, and its purpose is to “streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.”[3]  Hence, the SBRA is meant to be a practical restructuring option for small businesses, and may be especially helpful once businesses reopen and are able to assess the true damage the COVID-19 shutdowns have caused.

So what is a small business?  Originally, the SBRA defined a small business debtor as being engaged in commercial or business activities with aggregate noncontingent liquidated debts of not more than $2,725,625 (the “Debt Limit”), 50% or more of which arose from commercial or business activities.[4]  However, recently, the Coronavirus Aid, Relief, and Economic Security (CARES) Act increased the Debt Limit to $7.5 million, which significantly expanded the definition of a small business debtor.  Unless further amended by Congress this higher Debt Limit will expire in 2021.

The traditional chapter 11 reorganization process can be expensive, complicated, and last for years, and therefore is sometimes not ideal for smaller businesses.  The SBRA changes several features of chapter 11.  These modifications are designed to move a small business through bankruptcy faster and at less cost.  For example, in a small business case only the debtor can file a chapter 11 plan, and the plan must be filed on an expedited timetable – within 90 days of the bankruptcy filing date.  In contrast, in a traditional chapter 11 only the debtor can file a plan within the first 120 days of the bankruptcy but thereafter any creditor may file one, and there is no firm deadline to file the plan (unless the court sets one) which means it could take months or years to file and confirm a plan.  In a small business case, plan confirmation requirements are also less rigorous than in standard chapter 11s.  For instance, a debtor’s reorganization plan can be confirmed even if all classes of creditors reject it, even if those creditors are not being paid in full.  Further, in a small business case, unless the court orders otherwise, there is no committee of unsecured creditors and a trustee is appointed with only a limited role.[5]  This leaves the debtor with more control over its financial destiny.  The SBRA also eliminates the quarterly fees typically payable to the United States Trustee for small business debtors.  It also allows the debtor to pay administrative expense claims, like professional fees, over three to five years rather than all at once upon the debtor’s emergence from bankruptcy.  These changes to the Bankruptcy Code make a small business chapter 11 bankruptcy reorganization more accessible and affordable to many more businesses which may be struggling to get back on their feet after COVID-19.

If you are experiencing liquidity issues, pressure from lenders or other financial strain, or if you are dealing with a customer, tenant or another party who is unable pay what they owe, the Miller Johnson bankruptcy and creditor rights team can provide guidance and options.  Please contact John Piggins or Rachel Hillegonds if you would like to schedule an appointment.

[1] Chapter 11 is a form of bankruptcy that involves restructuring a debtor’s business affairs, debts and assets, in which a debtor proposes a plan of reorganization to keep its business alive and pay creditors over time.  Chapter 11 is also available to individuals, although it more often used by corporate entities.

[2] The SBRA is codified at 11 U.S.C. §§ 1181 – 1195.

[3] Report of Committee on the Judiciary, House of Representatives, Report 116-171, 116th Cong., 1st Sess., on Small Business Reorganization Act of 2019, at 1.

[4] The definition excludes debtors whose principal activity is owning or operating a single asset real property and corporate debtors (or debtors with an affiliate) subject to the reporting requirements under § 13 or 15(d) of the Securities Exchange Act of 1934.

[5] Generally, unless the debtor has been stripped of control by the court, the trustee’s duties are to oversee and monitor the case, appear and be heard on specified matters, facilitate a consensual plan, and make distributions under a nonconsensual plan confirmed under cramdown provisions.