Small Business Chapter 11 Eligibility Expanded Under CARES Act

Mintz - Bankruptcy & Restructuring Viewpoints
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Mintz - Bankruptcy & Restructuring Viewpoints

President Trump signed the Small Business Reorganization Act of 2019 (the “SBRA”) into law in August of last year and it became effective on February 20, 2020.  The SBRA amended the U.S. Bankruptcy Code and is designed to simplify and shorten the reorganization process for “small businesses” and to make the entire process more cost effective.  At the same time that the SBRA was coming online, the U.S. economy experienced a severe downturn as a result of the COVID-19 pandemic.  The same smaller businesses intended to benefit from the SBRA seem especially vulnerable during this economic slump.

To help ameliorate the devastating effect of the COVID-19 crisis on smaller businesses, as part of the newly enacted Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), the federal government has expanded the scope of the SBRA to include somewhat larger businesses within the meaning of “small businesses.”  Because the SBRA is intended to make it easier for businesses of meager financial means to take advantage of the benefits and protections of chapter 11 of the Bankruptcy Code, expanding access to the streamlined and simplified small-business reorganization process makes eminent sense in these uncertain times.

Highlights of the SBRA, as modified by the CARES Act, include:

  • To qualify as a small business under the SBRA, a debtor must have non-contingent, liquidated debts (secured and unsecured) of no more than $2,725,625.  Under the CARES Act, this limit has been increased to $7,500,000, meaning more businesses will be able to access the new small business reorganization subchapter of the Bankruptcy Code.  Note that this threshold will revert to the lesser amount one year after the enactment of the CARES Act.
  • Only a debtor may file a plan of reorganization.  The plan must contain certain information traditionally addressed in disclosure statements and, among other things, must provide for the use of all disposable income of the debtor to pay creditors over a 3 to 5 year period. Importantly, the SBRA permits a debtor to retain ownership of the business even if creditors are not paid in full under the plan, effectively eliminating the applicability of the absolute priority rule for small businesses.
  • A small business debtor must file its plan within 90 days of the petition date.  The court can extend this deadline “if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.”  Conventional wisdom suggests that, in the current environment, courts will freely grant extensions.
  • There is no unsecured creditors committee in a small business case, unless ordered by the court for cause.  The lack of a committee saves money during the bankruptcy process.  In lieu of a committee, an administrative trustee is appointed to assist the debtor in formulating its plan of reorganization and to serve as a disbursing agent under a confirmed plan.

The COVID-19 crisis and its attendant economic fallout may force an inordinate number of smaller businesses to explore the possibility of bankruptcy relief and its immediate benefits, such as the breathing space afforded debtors (through the automatic stay) as they assess their needs and deal with creditors.  Under the CARES Act, even more businesses will be able to take advantage of the streamlined and more cost-effective process established under the SBRA. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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