New Small Business Reorganization Act May Provide Easier Bankruptcy Relief for Many Small Businesses Impacted by COVID-19

By Blakeley E. Griffith and Jill H. Perrella

By happenstance, on February 19, 2020, soon after the first case of the COVID-19 virus (the “Virus”) was confirmed in the United States¹ ,  the Small Business Reorganization Act (“SBRA”) became available as a form of debt relief for small businesses. The purpose of the SBRA is to reduce the high costs of reorganization proceedings for small business debtors², improve the prospects of success for these businesses and simplify the process. 

The SBRA was not enacted in response to the anticipated severe economic impact from the Virus, but its availability is timely as a form of debt relief for small businesses affected by the Virus. Indeed, the National Bankruptcy Conference recently sent a letter to Congress requesting an increase in the eligibility debt threshold under SBRA to $7.5 million or higher to help more businesses suffering the economic side effects of “social distancing,” mandatory closures and shelter-in-place orders.³ Currently, a “small business debtor” eligible to file under the new SBRA limits is one with total debts of $2,725,625 or less (see 11 U.S.C. § 101(51D)).

The SBRA adds a new Subchapter V to Chapter 11. Notably, the SBRA eliminates certain traditional hurdles for confirmation of a plan of reorganization under the Bankruptcy Code, such as (1) the absolute priority rule (i.e., that creditors must be paid prior to shareholders retaining their ownership interests) and (2) the requirement that one impaired accepting class must vote in favor of the plan. These changes, among others, permit a quicker, easier and more cost-effective path to confirmation of a plan, and, in turn, to the successful reorganization and rehabilitation of a distressed business. The bankruptcy court must still determine that the plan does not discriminate unfairly and is fair for creditors, but these tests are easier for a debtor to satisfy.

Three other new debtor-friendly changes are significant:  First, a costly disclosure statement is not required as part of the plan confirmation process. Second, only the debtor may file a plan. Third, a committee of unsecured creditors may only be appointed by order of the court. These three changes should lessen the time and cost of the reorganization process while also providing the small business debtor more control.

Finally, under the SBRA, a trustee is appointed to oversee the case and assist the debtor negotiate the plan terms with creditors.

The current health crisis is causing an economic downturn and placing incredible stress on small businesses. The SBRA is timely medicine to help suffering enterprises in these uncertain and trying times.