USA: Small business bankruptcy protection in the era of the coronavirus
Large and small companies face the same challenges in dealing with debt that their cash flow cannot cover, but Chapter 11 reorganization under the Bankruptcy Code is too cumbersome and expensive to be useful for small business. The SBRA, added to the Bankruptcy Code effective February 19, 2020, is tailored to allow small businesses to reorganize relatively cheaply and quickly, in a manner similar to Chapter 13 plans for wage-earners. The SBRA provides: A Cost Effective Streamlined Process. The SBRA simplifies small business reorganizations by removing many of the procedural burdens and costs associated with typical corporate reorganizations. First, the debtor (company or individual) is the only party that can propose a plan to reorganize the business (avoiding the costly situation where other parties-in-interest propose competing plans). Second, the debtor is required to file its plan within 90-days of filing for bankruptcy. Third, the debtor is not required to incur the cost of preparing, filing, and serving a separate disclosure statement in support of their plan or to solicit votes to confirm a plan. Fourth, the debtor is not required to pay certain fees to the Office of the United States Trustee that would otherwise be required. Finally, unless the bankruptcy court orders otherwise, there is no committee of unsecured creditors, but instead a trustee is appointed to oversee the process and facilitate plan payments. Practical Plan Confirmation Requirements. The SBRA removes the requirement that the owners of a small business provide “new value” to retain their ownership in the debtor when creditors will not be paid in full. Further, unlike in a traditional chapter 11 plan, a debtor under the SBRA may confirm a plan even if none of its creditors agree to the terms of the plan. Instead, for a plan to be confirmable under the SBRA, the plan must not discriminate unfairly and must be fair and equitable. A plan is deemed to be fair and equitable under the SBRA if it meets three criteria:- all secured creditors retain their liens in their collateral and receive payments through the plan equal to the value of the secured creditor’s interest in the debtor’s property as of the effective date of the plan,
- that similar to Chapter 13, the plan provides either (i) that all of the debtor’s projected disposable income for a minimum of three years up to a maximum of five years as fixed by the Bankruptcy Court (the “Applicable Commitment Period”) will be applied to payments under the plan or (ii) for distribution to creditors of property equal in value to the projected disposable income of the debtor for the Applicable Commitment Period, and
- that the debtor will be able to make the required plan payments (or that there is a reasonable likelihood that the debtor will be able to make the required plan payments). Additionally, the SBRA removes the requirement that the debtor pay in cash on the effective date of the plan 100% of all administrative expense claims – including those claims incurred by the debtor for post-petition goods and services. Unlike a typical chapter 11 debtor, a small business debtor may now stretch payment of administrative expense claims out over the term of the plan, although they ultimately must be paid in full.