In August, 2019, Congress enacted the Small Business Reorganization Act (“SBRA”). Congress delayed the start date of SBRA for six months, but on February 19, 2020, SBRA became effective.
The purpose of SBRA is to make it easier for smaller businesses to use Chapter 11 of the Bankruptcy Code to reorganize their debts, and continue operating. This new statute was necessary because the existing bankruptcy laws did not adequately accommodate the interests of smaller corporations and limited liability companies that needed to reorganize their debt and continue operating.
Under Chapter 13 of the Bankruptcy Code, an individual can restructure and discharge his debts and automatically retain all of his property.
This feature applies equally to an individual who operates a business as a proprietorship. Accordingly, an individual who operates a proprietorship can file a case under Chapter 13, retain all of his business assets, continue to operate the business, and restructure and discharge his debts.
However, if an individual conducts his business through a corporation or a limited liability company, then the debts of that corporation or limited liability company cannot be restructured in Chapter 13. Corporations and limited liability companies are not permitted to file a case under Chapter 13, even if an individual is the sole shareholder or sole member. A corporation or limited liability company can file bankruptcy under Chapter 7, but that would cause the immediate discontinuance of the business and the liquidation of its assets.
The only way a corporation or limited liability company can file bankruptcy, restructure its debts, keep all of its property and continue to operate its business is to file a case under Chapter 11.
However, the procedures for filing and prosecuting a case under Chapter 11 are notoriously cumbersome and often very expensive.
One of the biggest problems any company faces in Chapter 11 is the ability of the general unsecured creditors to block confirmation of its plan of reorganization. In Chapter 11, each unsecured creditor is entitled to vote to accept or reject the company’s plan. A plan cannot be confirmed unless it receives the affirmative vote of both a majority of the number of unsecured creditors, plus a supermajority of the amounts of the claims held by them.
If a company cannot get its plan confirmed then most likely the Chapter 11 case will have to be converted to Chapter 7, and then the business will be liquidated. Many companies, particularly smaller ones, do not bother filing Chapter 11 because they know in advance that their relationships with their unsecured creditors are so bad that they could never win approval of any plan.
In many Chapter 11 cases, particularly the smaller ones, a single creditor holds a claim that is more than one-third of the total amount of all unsecured claims. Most frequently this occurs where the value of the collateral securing a large debt is not sufficient to cover the entire amount that is owed to that creditor. That one creditor, usually a bank or other institutional lender, by itself can – and often does — prevent confirmation of the company’s plan by voting to reject it, even though all the other creditors have voted to accept it.
The biggest single innovation contained in SBRA is its near-elimination of the ability of the general unsecured creditors to block confirmation of the plan of reorganization of a “small business debtor” (as defined in the statute).
Under SBRA, the creditors still are entitled to vote to accept or reject the company’s plan. However, if certain minimum requirements are met, then the company’s plan will be confirmed even though all the general unsecured creditors have voted to reject it. Those minimum requirements are:
(1) All creditors holding secured claims are paid the amount of their claims or the value of their collateral, whichever is less; and
(2) All of the company’s projected disposable income for a period of three to five years will be used to pay creditors under the plan.
In order to be eligible to use the new procedures available under SBRA, a corporation or limited liability company must fit the definition of a “small business debtor”. Under the original 2019 provisions of SBRA, a “small business debtor” is one whose non-contingent liquidated debts, both secured and unsecured, do not exceed the total of $2,725,625.00.
However, on March 27, 2020, Congress enacted the “Coronavirus Aid, Relief and Economic Security Act” (“CARES”) which became effective immediately. Pursuant to the provisions of CARES, the maximum debt limitation for qualifying as a “small business debtor” was increased to the amount of $7,500,000.00. Those provisions of CARES relating to the definition of a “small business debtor” will expire in one year. Accordingly, after March 27, 2021, the maximum debt limitation for a “small business debtor” will revert back to $2,725,625.00.
If you have any questions concerning SBRA, or whether filing a Chapter 11 case as a “small business debtor” could be advantageous for your company, please call one of the business bankruptcy lawyers at Melvin & Melvin (315-422-1311): Louis Levine, Esq, Kenneth Bobrycki, Esq., or Teal Johnson, Esq.