The “Small Business Reorganization Act of 2019” or “SBRA” took effect on February 19, 2020 as part of the federal government’s response to the COVID-19 pandemic. The SBRA added a provision (namely subchapter V) to Chapter 11 of the U.S. Bankruptcy Code to make the reorganization process less complicated, and thus less expensive, for small businesses. The Act generally defines a small business as a debtor with less than $7.5 million of secured and unsecured debt. The SBRA however expires on March 27, 2022, unless Congress extends it.
This month a bi-partisan group of senators introduced S. 3823, entitled the “Bankruptcy Threshold Adjustment and Technical Corrections Act,” that sets the subchapter V debt limit at $7.5 million permanently. Michael Best and its Best Strategies affiliate have been tracking the legislation. Sen. Grassley, one of the sponsors of the Bill, advised us through his office that he will “hotline” the bill for potential unanimous passage through the Senate this week. That means, unless any Senators object, the Senate could unanimously advance this bill without taking a vote. The House would then need to also pass the bill quickly for it to become law before the deadline. If passed, S. 3823 would make subchapter V a permanent provision of Chapter 11 of the Code. Stand by for further updates as the subchapter V sunset date approaches.
As background, subchapter V of Chapter 11 includes unique small business provisions such as allowing the owner of the small business debtor to retain a stake in the company. In doing so, the Act eliminated the Absolute Priority Rule (APR) as applied to unsecured creditors that required they be paid before a debtor could own assets. Also important is that only the small business debtor may file a plan under subchapter V; lenders and other creditors may only object to a debtor’s plan, rather than file a completing plan as is their right under Chapter 11.
In addition to the small business friendly reorganization provisions, the Act also streamlines the process. For example, there are no unsecured creditor committees or lengthy disclosure statements required. The process is also accelerated, with an initial status conference required within 60 days and a reorganization plan required within 90 days of commencement.
For more information, please contact John D. Finerty, Jr., Justin Mertz or your attorney in Michael Best’s Banking & Financial Services Industry Group at (414) 271-6560.