D. What are the Advantages of Filing for Relief under the SBRA Compared to a Traditional Chapter 11 Case?
If you fall under the definition of a “small business debtor”, the SBRA has many improvements compared to a traditional chapter 11. First, it is less expensive. Small business debtors do not have to prepare and file a lengthy disclosure statement in order to confirm a plan of reorganization, a requirement which is costly and builds in delay. Furthermore, unsecured creditors committees may not be appointed unless ordered by the court for cause. This is important because creditor committees increase administrative costs and those costs are paid by the debtor. Under the SBRA, the debtor must file its plan of reorganization within 90 days of filing and that deadline can be extended only if circumstances exist for which the debtor should not be held accountable. And as a matter of strategy, there is no reason not to file a plan of reorganization almost immediately upon filing the case so the restructuring process can be concluded as soon as possible. Thus, the plan process is quicker than in a traditional chapter 11, which decreases administrative costs. Finally, in a traditional chapter 11, administrative expenses must be paid on the effective date of the plan. Under the SBRA, however, administrative expenses can be paid over time.
1 Under the Keeping Americans Workers Paid and Employed Act likely to be signed into law this week, the debt threshold limit has been increased from $2,725,625 to $7,500,000 for one year from that and then the eligibility threshold limit will revert back to $2,725,625. Therefore, if you have debts over $2,725,625 but less than $7,500,000 and you are interested in filing bankruptcy utilizing the new Act, it would be prudent to file this year.
There are also major changes that alter the leverage over the restructuring process in favor of the small business. First, unlike in a traditional chapter 11, the SBRA permits equity owners to retain their ownership in the company under a restructuring plan without requiring that either (1) unsecured creditors are to be paid in full, or (2) unsecured creditors vote to accept less than full payment, or (3) the owners infuse significant “new value” (cash) into the company. Instead, in order for equity owners to retain their ownership, the SBRA requires that the plan commit the debtor’s disposable income to pay creditors over a three to five-year period. This commitment of disposable income may not be a significant “go forward” obligation of the business because “disposable income” consists only of income of the debtor that is not reasonably necessary for (A) the maintenance or support of the debtor or a dependent of the debtor; or (B) a domestic support obligation that first becomes payable after the date of the filing of the petition, or, (C) the payment of expenditures necessary for the continuation, preservation, or operation of the business of the debtor.
Many small businesses will not have significant projected disposable income for the first three years. Therefore, many small businesses will be able to reorganize, and the owners continue to own the business, yet pay only a fraction of their unsecured debts. And there is nothing that prevents the amount of the projected disposable income from being paid early or up front if resources are available.
Second, normally in a chapter 11 case, the debtor must obtain consent for confirmation of its plan from at least one impaired class of non-insider creditors. This requirement has been eliminated for small business debtors under the SBRA, which likewise tilts the leverage over the restructuring process in favor of the small business.
To file a plan, a debtor must attach to its plan a liquidation analysis (which shows creditors are being paid as much under the plan as they would receive if the business was liquidated) and feasibility projections (i.e. projections of cash flow which demonstrate that the business should be able to make the projected payments under the plan). The debtor must demonstrate that there is a “reasonable likelihood” that it will be able to make the payments under the plan.
The SBRA provides for the appointment of a non-operating trustee who monitors the case, ensures it is moving in the right direction and is supposed to facilitate the confirmation of a plan. Unfortunately, this is a cost that a small business debtor will incur during the case; however, there are no US trustee fees which must be paid, the trustee’s role is limited, and the trustee will likely help the debtor in moving the case forward.