ON AUGUST 23, 2019 the Small Business Reorganization Act of 2019 (SBRA) was passed into law which is an amendment to the Bankruptcy Code and is designed to make it easier for small businesses to reorganize and get relief under the Bankruptcy Code. SBRA has become even more important given the coronavirus pandemic and related economic shutdown. SBRA reduces the costs associated with a small business reorganization and expedites the time it takes to compete the reorganization process. In order to qualify as a small business under SBRA the company’s secured and un- secured non-insider debts could not exceed $2.7 million. However in a move designed to make the advantages available to small businesses under SBRA more accessible, on March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was passed into law which raised the debt ceiling under SBRA to $7.5 million.
Under SBRA a small business debtor can get a reorganization plan approved without the consent of all its creditors unlike non-SBRA small business reorganization cases under Chapter 11. Non-SBRA small business reorganization cases under Chapter 11 are required to get at least one class of impaired creditors to vote in favor of the plan.
Under SBRA only the Debtor can file a plan of reorganization as opposed to the non-SBRA provisions that allow any interested party to file a plan after 120 days if the debtor has not filed a plan. A SBRA debtor must file its plan within 90 days of the filing of the bankruptcy petition much sooner that the non- SBRA 300 day limit.
Under SBRA there are no creditors committees appointed, unless deemed necessary by the Court, who can characteristically run up high fees and administrative expenses that the debtor must pay along with its other creditors.
Unlike non-SBRA small business cases, the SBRA debtor must provide that all its disposable income for 3 to 5 years following confirmation is used to fund the plan.
In SBRA cases the United States Trustee and the quarterly fees imposed are eliminated and mean a cost savings to the debtor but a chapter V trustee is automatically appointed to oversee the debtor’s formulization of a plan and may incur additional expenses.
The absolute priority rule requires that a plan cannot be confirmed over objection of creditors if the plan provides for distributions to junior creditors and equity holders when senior creditors have not been paid in full. SBRA eliminates the absolute priority rule as long as the plan does not discriminate unfairly and is fair and equitable. Additionally under SBRA administrative claims may be paid over the life of the plan rather than upon confirmation as required in non-SBRA cases.
The discharge provisions under SBRA have also changed so that in some instances the debtor does not receive a discharge until all the plan payments have been made and many exceptions to discharge apply that do not in non- SBRA cases.
In this dire economic reality we all face today, SBRA may afford small business debtors with a faster, less expensive process for reorganizing under the Bankruptcy Code. Please contact us to confer and answer any questions you have.