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The Small Business Reorganization Act – Chapter 11 Made Simple.

August 29th, 2019  | Bankruptcy  | Business | By Peter F. Schneider

This week, the Small Business Reorganization Act (“SBRA”) was signed into law with the goal of simplifying the Chapter 11 process for small businesses. The law is set to take effect on February 19, 2020. This law aims to streamline confirmation of a Chapter 11 plan by eliminating certain provisions that are better suited for larger companies, and paving the way for owners to remain in control of their businesses throughout the bankruptcy process and after a successful reorganization.

“Small business” is already defined by the Bankruptcy Code as a company or an individual that has total debts of less than $2,725,625.00. These small businesses are often unable to navigate the procedural red tape associated with a Chapter 11 in a financially feasible way. Often, these businesses are unable to get a Chapter 11 Plan confirmed, and have no choice but to liquidate, taking the business out of the control of its owners. The SBRA aims to address these concerns.

First, under the SBRA, there is no requirement for appointment of a general unsecured creditors’ committee. Currently, the Office of the United States Trustee is obligated to invite creditors to organize a creditor’s committee after filing. This committee can wield significant influence in a Chapter 11 bankruptcy. The creditors’ committee can hire attorneys and other professionals at the Debtor’s expense, and can thoroughly scrutinize a debtor’s finances. These expenses come out of the estate, and can greatly increase the administrative costs. Under the SBRA, instead a “standing trustee” will be appointed to scrutinize a debtor’s financial affairs, monitor the reorganization, and work for the benefit of creditors.

Second, the SBRA aims to increase confirmation rates. Small businesses often struggle to achieve confirmation under the current Chapter 11 process. The new law aims to do this by shortening the deadline to file a plan after the petition date from the current 120 deadline to 90 days and requiring the debtor to attend a “initial status conference” within 60 days of filing to “further the expedition and economical resolution” of a SBRA case thus eliminating the time business owners spend in Chapter 11 required meetings and court proceedings. One of the most significant changes that will have lasting impact in the success of small business owners is that the Act will permit owners to retain an equity stake in the business under a more relaxed standard for treatment of creditors. Owners will simply need to demonstrate that the Plan does not unfairly discriminate against creditors and that it is fair and equitable to each class of creditors to stay in control.

Finally, the SBRA will allow for plan approval over certain creditors’ objections if the debtor provides all disposable income to plan payments over the life of the Plan similar to the “best efforts” test afforded to individual Chapter 13 debtors. The current law requires either some level of acceptance by impaired creditors or for the debtor to establish to the Court that creditors receive at least as much as they would receive in a hypothetical liquidation. Obtaining acceptance of an impaired creditors is often arduous and the liquidation analysis can be fact-intensive, and the subject of extensive and costly litigation.

These changes are significant, and the Act will substantially alter the Chapter 11 process. The attorneys at Clayson Schneider & Miller, P.C. are experts in Chapter 11 bankruptcies, and can advise you on your best options in light of the SBRA.