Small Business Reorganization Act (TAGS) and Subchapter V – The Journal Record

In this article, we consider the new subchapter V of Chapter 11, which is open to small businesses with less than $ 7.5 million in debt.

With minimal fanfare, the Small Business Reorganization Act (SBRA) was passed in August 2019, to come into force in February 2020, ushering in Subchapter V of Chapter 11. No one could have predicted just how good this moment was. would be critical; the aftermath of COVID-19 crippling many small businesses a month later.

This Small Business Reorganization Act (SBRA) is now commonly referred to as Subchapter V. This SBRA was designed to streamline existing bankruptcy proceedings and provide new tools to increase a small business’s ability to successfully restructure. .

When the SBRA was first passed in 2019, companies could only qualify for Subchapter V with less than $ 2.7 million in total unconditional, liquidated and uninspired debt, but with COVID -19 and the CARES law adopted on March 27, 2020, this threshold has been increased to 7.5 million dollars, which allows large companies to also qualify, but with a 12-month time-out.

Why is subchapter V important for a small business?

Simply put, a small business owner now has significantly increased leverage to negotiate with all of their creditors.

The Small Business Reorganization Act shifts leverage in favor of the business owner in several key areas.

1) Under SBRA / Subchapter V, a business owner can confirm a reorganization plan without the consent of a creditor.
2) Only the business owner (debtor) has the right to change the restructuring plan after confirmation.
3) A small business owner enjoys relief from the top priority rule.
4) SBRA / Subchapter V is significantly cheaper and faster, with fewer obstacles and less expense.

1) Under SBRA / Subchapter V, a business owner can confirm a reorganization plan without the consent of a creditor.

Under the usual Chapter 11 rules for large corporations, creditors are required to consent to the restructuring plan, so they have leverage over the owner of the business (debtor). This is not true under subchapter V. While the consent of the creditor is helpful, it is not required, which reduces the leverage of the creditor on the business owner. The subchapter V trustee will help the debtor to negotiate an acceptable plan with the creditors, but if the creditors refuse to negotiate or do not agree to the terms, the debtor can submit a plan without the consent of the creditors.

2) Only the business owner (debtor) has the right to change the restructuring plan after confirmation.

In a Chapter 11, a creditor has the right to file a concurrent plan, but this is not allowed under SBRA rules, so the business owner (debtor) has greater control over the restructuring process.

3) A small business owner enjoys relief from the top priority rule.
In a traditional Chapter 11, the business owner must either provide unsecured creditors with a guarantee that they are paid in full, or the business owner (debtor) must give up his equity in the business, with the possibility of buying them back later. . This top priority rule is now gone, so the business owner doesn’t have to give up his stock. This shift from “top priority” to “best efforts” is a much lower threshold. The business owner can keep his equity in the business without paying all of the unsecured creditors, as long as the business agrees to pay all of its “projected disposable income” to its creditors for at least one month. at least three years and at most five years.

4) SBRA / Subchapter V is significantly cheaper and faster, with fewer obstacles and less expense.
Chapter 11 could cost tens of thousands to hundreds of thousands of dollars to complete and Subchapter V eliminates most of these fees. Although a subchapter V trustee is required within the first 90 days to help develop a consensual plan, it is not necessary to continue to hire a trustee if the restructuring plan has the consent of the parties. creditors, which saves considerable costs. A restructuring plan is always necessary; however, there is no disclosure requirement, which avoids another costly exercise. Subchapter V also contains a one-step restructuring plan requested and confirmed by the Court. In a traditional Chapter 11 case, administrative fees must be paid upon confirmation of the plan, but under subchapter V, they can be paid over the 3-5 year life of the plan. The aim of SBRA / Subchapter V is to complete the restructuring plan within 90 days and then confirm the plan within 30 days, compared to a traditional Chapter 11, which can take months or even years.

What is the benefit for a business owner of SBRA / Subchapter V?
Creditors understand that they now have less leverage. Therefore, the creditor has more incentive to come to the negotiating table on debt relief rather than forcing a restructuring plan under subchapter V, which is more favorable to the debtors. We expect that many more small businesses will be able to complete out-of-court restructuring by negotiating early with creditors and have a greater likelihood of successfully exiting the restructuring process with the operating business intact.

Time of filing of subchapter V
Subchapter V can allow small businesses to freeze their obligations to allow them to negotiate with lenders, landlords and other creditors and hopefully resume normal operations once the immediate financial difficulties are gone. . However, small businesses should carefully consider when to file Subchapter V, as businesses currently in bankruptcy proceedings are not eligible for the Paycheck Protection Program (PPP). Subchapter V deposits are likely to increase once PPP funds are depleted, especially among companies that are unable to meet loan cancellation criteria.

Considering subchapter V, you must first determine if your business qualifies. There are several additional criteria beyond the $ 7.5 million debt limit – give us a call and we’ll walk you through how. There are other complexities not described above; we wanted to highlight critical areas and discuss in more depth as needed.

We are here to help.

www.clearridgecapital.com/what-we-do/restructuring/

Note: The SBRA and subchapter V of the chapter is still a complicated process. We recommend a preliminary discussion with ClearRidge, as well as an experienced bankruptcy lawyer. ClearRidge describes topics business owners should consider in their business continuity and survival strategies for informational purposes only. Nothing in this document should be construed as legal advice. ClearRidge will work in a coordinated effort with experienced bankruptcy attorneys to plan the most effective options and outcomes for you in a restructuring or out-of-court bankruptcy process.

ClearRidge – Investment Bankers and Business Advisors

www.clearridgecapital.com

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About Sharon Joseph

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