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The Small Business Reorganization Act For Troubled Companies

April 14, 2020

The Small Business Reorganization Act of 2019 went into effect on February 20, 2020.  The Act was designed to streamline the restructuring process for small businesses facing financial woes: entities whose total non-contingent liquidated secured and unsecured debts do not exceed $2,725,625.  Recently, under the CARES Act, Congress voted to increase the limit of debts to $7,500,000 for twelve months. For a small business, the Act is much more debtor- friendly than the regular Chapter 11 process and provides expedited processes that make it easier to confirm a plan of reorganization and emerge as a restructured entity.

Some of the highlights include:

  • Only a debtor can file a plan of reorganization, which has to be filed within 90 days after filing the Chapter 11 petition. A debtor does not have to file a separate disclosure statement which typically adds time and costs.  Rather, all relevant information must be contained in the plan of reorganization.
  • There isn’t an “absolute priority rule” which means that equity holders can retain their interests even if unsecured creditors are not paid in full.
  • The plan is like a Chapter 13 wage earners’ plan wherein all of the company’s net operating income will be paid to creditors for three years. That means a plan can be confirmed even if unsecured creditors receive 20 cents on the dollar, as long as the debtor makes the plan payments.
  • A Chapter 11 trustee is appointed, primarily to disburse plan payments to creditors; there is no committee of unsecured creditors (absent a court order  that is entered for cause).

 

If you think your company is in need of restructuring help and you want to learn more about this process, please don’t hesitate to contact the Shulman Rogers attorney you typically work with, or send a message to Michael Lichtenstein, Chair of the Bankruptcy, Restructuring and Creditors’ Rights Group by clicking here.