February 24, 2020

Bankruptcy Update: The Small Business Reorganization Act

Sonali Doshi

The Small Business Reorganization Act (“SBRA”), the newest addition to the Bankruptcy Code was passed as law on August 23, 2019 and is set to take effect on February 19 2020. Bankruptcy lawyers, judges, and scholars are in dire anticipation to see the extent of its transformative powers.

Since the enactment of The Bankruptcy Code, small businesses have been compelled to restructure under Chapter 11. However, Chapter 11 is a relief that was originally engendered for multimillion-dollar corporations. Regardless, smaller businesses had to labor under a system that was built primarily to serve larger scale businesses. This proved to be too burdensome, egregious and expensive. Numerous issues were occurring trying to restructure smaller businesses under Chapter 11. It was clear that the “one size fits all” model wasn’t working. A new system was needed for companies that had fallen upon hard times. At last, the SBRA was designed to give relief to these small business owners.

This act will resonate under Subchapter V and will apply to small business debtors that have a combined secured and unsecured debt of less than $2,725,625.  The structure of this new law remains the same, other than a few modifications. The SBRA incorporates Chapter 11, Chapter 12 and Chapter 13 and will include the following modifications. For one, the new law will streamline these reorganizations and remove the financial burdens placed on these smaller businesses. Similar to Chapter 12 and Chapter 13 cases, a trustee shall always be appointed to “facilitate the development of a consensual plan of reorganization.” This law will facilitate a small business debtor’s plan confirmation process. It will not need the votes of any impaired consenting class to confirm a plan. A plan will be confirmed despite the resentment of secured creditors, as long as it is “fair and equitable.”

In addition, the requirement of a disclosure statement will be eliminated. However, some of the requisite disclosures still stand: a liquidation analysis, the debtor’s history of its financial operations, projections of future performance, and submission of future earnings to fund the plan. The small business debtor will have a 90-day time span, post commencement of the case, to file a plan and 60-day time span for the initial status conference.

Most importantly, after great debate, the small business owner will finally be relieved of having to appoint an official committee of unsecured creditors under §1102 of the code. In fact, unless the court orders one for cause, a committee will not be appointed. The Absolute Priority rule has also been deemed inapplicable in Subchapter V cases.

This amendment to the Bankruptcy Code was a necessity to help lift the procedural and monetary burdens that stalled these companies off. Something was needed to assist in a higher chance for a stronger turnaround. The Bankruptcy industry is quite hopeful that the SBRA will be the tool that will strengthen these business owners and aid them in getting back on their feet.

Sonali Doshi