SMALL BUSINESS SUBCHAPTER V BANKRUPTCIES
Small business Subchapter V bankruptcies may be attractive for small businesses. The Small Business Reorganization Act (SBRA), commonly known as Subchapter V, refers to the new Subchapter V of Chapter 11 of the Bankruptcy Code. The SBRA was signed into law in 2019 and became effective February 19, 2020. It was then expanded by the CARES Act to allow small business debtors whose liquidated debts were less than $7.5 million to utilize this chapter and may provide a much-needed lifeline to small businesses struggling to survive.
Subchapter V is attractive for a small business because:
- It eliminates the complexity of a Chapter 11 and, in most instances, eliminates the need to file a Disclosure Statement, which is like a prospectus for an investment and sometimes requires substantial legal work and expense;
- It provides for an abbreviated Subchapter V Chapter 11 Plan of Reorganization;
- It requires the Plan of Reorganization to be filed within 90 days of the filing of the bankruptcy;
- It provides no United States Trustee fees to be paid;
- No Creditors’ Committee will be appointed;
- No competing Plans by creditors are allowed; and
- It eliminates the “Absolute Priority” Rule which, in order to confirm a plan, requires equity owners to either obtain the creditors’ consent for less than full payment, a new capital contribution, or the potential sale of the debtor’s ownership equity interest and control as part of the bankruptcy process.
The Advantages to a Debtor
A Subchapter V provides for continued ownership and management of the small business owner, eliminating the Absolute Priority Rule.
And, much like a Chapter 13 case for individuals with regular monthly income, Subchapter V allows a debtor to spread its debt over three to five years, unless extended by the court, during which time the debtor must devote its projected disposable income to paying creditors. Disposable income includes income that is reasonably necessary to be expended for the payment of expenditures necessary for the continuation, preservation or operation of the business of the debtor thus, providing sufficient sums for the operation of the debtor prior to payment to the pre-petition creditors.
It also eliminates the requirement of a Disclosure Statement, although the Plan must contain a brief history of the debtor’s business operations, a liquidation analysis that shows what creditors would receive if the debtor’s assets were liquidated, and projections of future cash flow.
Finally, only the debtor may file a Chapter 11 Plan in a case under Subchapter V.
Reorganizing under Subchapter V should be less expensive for the debtor because certain administrative expenses that a small business would normally incur in a chapter 11 case have been eliminated.
First it delays payment of administrative expenses, allowing them to be paid over the term of the Plan. In contrast, in a traditional Chapter 11 case, administrative expenses have to be paid as of the date the Plan is confirmed or as of the Plan’s effective date.
Second, no Creditors’ Committee exists, thereby eliminating the cost of the Creditors’ Committee and its professionals paid for by the debtor. A Subchapter V does have a specialized Trustee appointed, who has a function to monitor the debtor’s affairs, evaluate the debtor’s assets, assess the debtor’s prospects for success, and make recommendations concerning the terms of the debtor’s Plan. In a consensual Plan (where the Plan is confirmed by agreement), the Trustee is discharged at confirmation of the Plan. In a non-consensual Plan, the Trustee collects and distributes the Plan payments and would have to be paid a fee.
Third, in a traditional Chapter 11, a creditors committee and/or a creditor can, after a certain time, file a Plan that may call for the liquidation of a debtor, change of management or other change a debtor may oppose. Creditor plans are not permitted in Subchapter V cases.
Finally, there are no United States Trustee fees. Trustee fees can be substantial and, along with the additional administrative burdens that come with a traditional Chapter 11 case, can often result in a debtor’s liquidation.
In summary, the simplicity of a Subchapter V allows for retention of equity ownership by the small business owner, the ability to spread out the administrative expenses of the case over the Plan period, as opposed to requiring a lump sum payment at confirmation, and protects the debtor from other parties filing competing Plans of Reorganization.
If you have questions or would like additional information, please contact a member of our Bankruptcy Team at 316-267-2000.