Much of the recent news regarding the Coronavirus Aid, Relief and Economic Security Act has been focused on the impacts of the direct-to-taxpayer checks, bailouts for major corporations and other benefits aimed at stimulating the slumping economy. However, there is one aspect of the CARES Act that should not be overlooked by struggling small businesses: the temporary amendments to the Small Business Reorganization Act of 2019 (SBRA) that make streamlined Chapter 11 procedures more broadly available.
The SBRA, which took effect in February, created a new subchapter V of Chapter 11 of the United States Bankruptcy Code. Subchapter V provides a streamlined process for businesses with debts less than or equal to $2,725,625 to conduct a reorganization proceeding under Chapter 11. Prior to the SBRA’s enactment, the barriers to entry often prevented such businesses from pursuing the benefits of Chapter 11, leaving small businesses in a position where a closure and liquidation were the only available options.
The SBRA (primarily codified at 11 U.S.C. §§ 1181-1195) substantially reduces those barriers to entry and makes Chapter 11 a viable option for small businesses. Among other things, the SBRA replaces unsecured creditors’ committees, and their attendant expense, with a standing trustee that is empowered to assist the company in navigating the Chapter 11 process. The SBRA also eliminates the requirement to file a disclosure statement concurrently with a Chapter 11 plan, eliminates the obligation to pay quarterly United States Trustee fees, allows administrative expense claims to be paid over the life of the plan and permits equity holders to retain their ownership stake even if unsecured creditors’ claims are not fully satisfied under the plan.
With the recent enactment of the CARES Act, the subchapter V debt threshold has been raised from the original $2,725,625 to $7,500,000, but this increase will remain in place for only one year. This means that while the number of businesses eligible to take advantage of the SBRA’s streamlined Chapter 11 process has dramatically increased, this increase is only temporary and companies considering a subchapter V restructuring should act quickly in order to preserve their rights.
As the COVID-19 pandemic wreaks havoc on businesses, the modifications to the SBRA under the CARES Act are a welcome development for small and lower middle-market businesses. It is hoped access to subchapter V will save otherwise healthy businesses from an untimely and unwarranted demise. The ability of these companies to restructure their indebtedness through a streamlined Chapter 11 process benefits nearly every constituency, including business owners, vendors, customers, employees, landlords and lenders. Even governmental entities benefit since they would preserve the ability to collect tax revenue from restructured businesses in the future. While Chapter 11 is not necessarily a panacea for the staggering losses that those constituents will incur, it is an important mitigating event. The health of the U.S. economy is dependent upon the ability of small businesses — which account for approximately half of private sector employment and generate more 40% of total economic activity — to survive and quickly resume full operations. We anticipate expanded availability to the Chapter 11 process and the ability of debtors to use the protections of the Bankruptcy Code to restructure debt obligations, renegotiate leases and key supply contracts, and manage trade indebtedness will enable many small and lower middle-market businesses to ride out the storm and position themselves for the post-COVID economy.
The relief afforded by the SBRA and the CARES Act should not be viewed in a vacuum, but rather as part of an emerging set of relief options designed to help small businesses survive in these unprecedented times. Companies considering subchapter V relief also should be sure to explore other options offered by the U.S. Small Business Administration and the Department of the Treasury, including the Paycheck Protection Program, the Economic Injury Disaster Loan program and the SBA Debt Relief program. Successfully accessing such relief may allow a business to avoid a bankruptcy filing altogether.
A partner in the Chicago office of Tucker Ellis, Thomas R. Fawkes practices in the areas of bankruptcy, creditors’ rights and financial restructuring. He can be reached at firstname.lastname@example.org.
Frederick D. Cruz, an associate in the Cleveland office of Tucker Ellis, is an experienced trial attorney who practices in the areas of commercial litigation, construction litigation, personal injury defense, products liability defense and creditors’ rights. He can be reached at email@example.com.