December 14, 2020

Subchapter V: A Lifeline for Small Businesses During Global Pandemic

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• Subchapter V offers more distressed small businesses cheaper, streamlined reorganization.

• Small businesses may continue operations while working out their plan.

• Key Modifications to plan confirmation requirements work in debtor’s favor.

• From start to finish, the Subchapter V case can be completed within a few months.

Recently, we alerted our readers to the CARES Act’s temporary expansion of the Small Business Reorganization Act (SBRA)—a potential lifeline for small businesses to withstand the ongoing global pandemic.¹ Specifically, many more eligible small businesses may now be able to make use of a new streamlined Chapter 11 reorganization. This means that distressed small businesses could continue their operations while: (1) pausing their obligations during negotiations with creditors and (2) applying to obtain relief via emergency loans and any other available relief options—all done for the purpose of eventually getting back to operating profitably.

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In this article, we look closer at the SBRA itself (also known as Subchapter V, which refers to Subchapter V of the Bankruptcy Code) and highlight the most important features of Subchapter V that a small business owner should remember.

Remember, this is very new legislation—meaning there’s a lack of legal precedent for how courts will interpret and apply the new laws. We urge you to consult an experienced bankruptcy attorney to guide you through this process.

Subchapter V Eligibility

Pre-CARES Act, qualification for relief under Subchapter V required that a company’s secured and unsecured debt could not exceed $2,725,625; however, the CARES Act dramatically increased that threshold to $7,500,000—making many more businesses eligible to elect the more streamlined “small business case” process.

The increased debt limit is applicable to cases filed after the enactment of the CARES Act. Furthermore, it will be reduced back to $2,725,625 one year after the enactment of the CARES Act.

Note that single asset real estate debtors are ineligible Subchapter V relief.

Subchapter V Debtor and Trustee Roles

The Subchapter V debtor has at least 50% of their debt arising from the business, meets the $7,500,000 debt limit, may remain in possession of its assets as a debtor-in-possession, and may continue to operate its business.

The Subchapter V trustees, according to the United States Department of Justice:

are appointed on a case-by-case basis from pools created across the country when a debtor elects to proceed under subchapter V of chapter 11 of the Bankruptcy Code.  These trustees are not appointed to operate the debtor’s businesses unless so ordered by the court, but instead, their primary goal is to facilitate the confirmation of a consensual plan of reorganization.² “[emphasis added].

Key Modified Plan Confirmation Requirements Under Subchapter V

The following modifications should make Subchapter V process easier and much cheaper for the debtor:

  • Only the small business may file the reorganization plan
  • Creditors are precluded from proposing a competing plan
  • The Absolute Priority Rule is inapplicable in these cases. This means, for instance, that an equity interest holder (such as the owner of a small business debtor) can retain their ownership interest in a debtor’s assets without making a new capital contribution.
  • The requirement that an impaired class of creditors accept the proposed plan is inapplicable in Subchapter V cases, as long as the plan is equitable and doesn’t unfairly discriminate as to each non-consenting class.
  • Small business debtors will not have a requirement to file a disclosure statement (and, thus, no additional legal costs for preparation), unless court ordered. Part of the history of the business will be included in the status report and filed plan of reorganization.

Timeline

The Subchapter V reorganization will be much faster than in a traditional chapter 11 case. The court has only 60 days from the date of the petition to hold a status conference. The small business debtor is required to file its plan within 90 days of the relief order (subject to extension if the bankruptcy court finds it necessary). The case could have a confirmed plan within a few months and be looking forward to plan payments or, if all agree to the plan, a discharge.

Discharge

The discharge of debts is obtained either: (1) upon confirmation of a consensual plan, or (2) timely completion of plan payments for nonconsensual plans.

Notwithstanding the losses which many small businesses will sustain from the impact of the COVID-19 pandemic, Subchapter V, with the expansion of its eligibility requirements under the CARES Act, may provide a valuable tool to assist many small businesses in their efforts to survive.

Conclusion

Unfortunately, even small businesses that were operating profitably just a couple of months ago are now being forced to consider every option available to survive the impact of COVID-19. Subchapter V may be the best option to keep your business afloat. Again, this is new law, but the attorneys at Frost Law are well-prepared to assist you and guide you through the Subchapter V process.

If you need help with reorganizing your business under Subchapter V, give us a call at (410) 862-2890 or contact our team online.

Footnotes

  1. https://askfrost.com/cares-act-streamlined-small-business-chapter-11-bankruptcy/.
  2. https://www.justice.gov/ust/private-trustee-information.
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