Why Subchapter V Might Save Your Business
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Why Subchapter V Might Save Your Business

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Why Subchapter V Might Save Your Business

In February, the Small Business Debt Reorganization Act went into effect, substantially modifying the provisions, procedures, and rights of debtors and creditors in small business bankruptcy reorganization cases. This new law amends Chapter 11 of the US Bankruptcy Code by creating Subchapter V, an alternative route for bankruptcy cases that small business debtors can elect to apply. Subchapter V gives the debtor control over his business after declaring bankruptcy, empowers the debtor to design and control the repayment plan, streamlines the entire bankruptcy process, and grants the debtor a trustee that is an ally, rather than an adversary. Subchapter V’s procedural provisions establish a smarter, faster, and cheaper bankruptcy process that just might save your business.

Chapter 11 reorganization is a form of bankruptcy where the debtor is given the opportunity to restructure its debts and form a new payment plan to creditors. Generally, Chapter 11 reorganization seeks to help the debtor get out from under unbearable debts and create a plan to start over without liquidating the company. Chapter 11 bankruptcy has traditionally been a difficult path or small businsesses because it can be complex, expensive, and lengthy. As a result, the majority of successful Chapter 11 cases had been brought by large corporations.  However, with the passage of the Small Business Debt Reorganization Act, Subchapter V makes Chapter 11 bankruptcy smarter, faster, and cheaper, allowing small businesses to reorganize under Chapter 11 and potentially save their businesses. If for some reason they choose not to elect Subchapter V treatment, small business debtors can still will follow the established, more cumbersome, procedures of Chapter 11 reorganization. But once Subchapter V is elected, the small business friendly provisions will override the standard Chapter 11 rules and govern the bankruptcy.

The timing of Congress’s enactment of Sub V is fortuitous for the many small businesses impacted by the COVID19 crisis.  The definition of “small business” under the Act was broadened by the CARES Act to, at least through March 2021, encompass businesses with total debts of $7.5 million or less.

Subchapter V election provides many benefits to small business owners filing for bankruptcy. If you are a small business owner whose business has been slammed by the COVID19 virus or otherwise find your business  with extensive debts, Chapter 11’s new Subchapter V’s small business friendly provisions just might save your business.

You Get to Stay in Control

Subchapter V contains several provisions that are designed to keep the small business debtor in control of both its business and the reorganization process. As a debtor in possession in a standard Chapter 11 case, the debtor is allowed to operate the business during bankruptcy and, upon discharge of all its debts, will be allowed to keep its business.  In a traditional case, there is no trustee to oversee the business, and the debtor is on its own in negotiating with creditors.

In standard Chapter 11 cases, when there are serious questions about how the business is being run, a party in interest may ask that a trustee be appointed to officially oversee the restructuring process who is given broad powers to investigate the debtor. These powers allow the trustee to take an active role in the legal process surrounding Chapter 11 bankruptcy and the repayment to creditors. Some of the trustee’s powers include investigating the debtor’s acts, assets, liabilities, and operation of its business; file a report based on this investigation; file periodic reports to the court throughout the restructuring process; and file its own repayment plan for how the debtor should restructure its debts. Once a trustee is appointed in a standard Chapter 11, the debtor loses control of is business.  As will be discussed below, Subchapter V sets out a very different, collaborative role for a trustee. This means that throughout the bankruptcy proceeding and repayment plan, it is more likely that a debtor would remain in control of the business and assets, making all the important decisions about the company’s operation, and is empowered to oversee the bankruptcy process.

A central component of reorganization is developing the repayment plan. While in a traditional Chapter 11, under certain circumstances creditors can propose competiting plans that favor them, in  Subchapter V debtor has the sole responsibility for developing the repayment plan and presenting the plan to the court for confirmation. These provisions again put the power in the hands of the debtor to design a plan that is reasonable under the circumstances and aligns best with the debtor’s goals.

Once the debtor has filed the plan, the bankruptcy court can confirm a plan so long as it complies with the requirements of Subchapter V and is considered “fair and equitable.” Subchapter V’s confirmation requirements are much looser than the standard Chapter 11 requirements. Specifically, under the standard Chapter 11 bankruptcy proceedings, a repayment plan could not be approved by the court unless all the classes of creditors who are “impaired” (not receiving the treatment they agreed upon pre-petition) approve the plan, and the plan meets all of the statutory requirement.  The court can “cram down” a plan even if a class rejects it, but only if at least one “impaired” class votes for it.

Subchapter V removes these requirements and allows a court to confirm a repayment plan without the consent of any impaired class. Having the freedom to confirm a plan without jumping through the hoops of confirmation from various types of creditors will significantly increase the efficiency of the bankruptcy proceeding, save the debtor a substantial amount of money, and increase the likelihood that a plan will be consensual.

Under Subchapter V, the debtor is not required to pay off all debts in order to keep his business. Instead, the debtor must simply complete the repayment plan that has been confirmed as “fair and equitable.” Under other Chapter 11 provisions, the small business debtor must follow the “absolute priority rule,” and are in most circumstances required to either repay all debts or pay a substantial amount of debt from assets outside of the business for the owners to ever get back the equity in their business. Subchapter V provides a feasible path for small business debtors to make fair and equitable repayments on their debts and keep their business after all necessary repayment has been made without having to liquidate assets that are not part of the business. This provision makes a substantial difference to small business debtors, balancing equitable repayments of debts and protecting the interests of small business owners.

A Faster and Cheaper Process

Subchapter V amends the procedural provisions of Chapter 11 to make reorganization faster and cheaper. Specifically, Subchapter V eliminates the need to have a committee of unsecured creditors, eliminates the requirement for the debtor to file a disclosure statement, mandates a status conference and debtor report, expedites the timeline for filing, and eliminates trustee fees. Making Chapter 11 bankruptcy faster and cheaper prevents the business owner from spending unnecessary time and money on the legal process of filing for bankruptcy and allows the business owner to put that money back into his business.

Subchapter V decreases procedural costs of Chapter 11 Bankruptcy by eliminating bureaucratic committees of unsecured creditors whose attorneys are paid for by the bankruptcy estate. Under standard Chapter 11 bankruptcies in North Carolina, the Bankruptcy Administrator could appoint a committee of unsecured creditors to assist in the facilitation of the reorganization. Some of the powers of the unsecured creditors’ committee include investigating the acts, conduct, assets, liabilities, and financial condition of the debtor, investigating the operation of the debtor’s business and the desirability of the continuance of such business and participating in the creation of the repayment plan. Subchapter V eliminates this committee in most cases, with a committee only appointed by court order.

Subchapter V also decreases the cost a business owner spends on the legal process of reorganization under Chapter 11 by eliminating the requirement to file a disclosure statement with the plan of reorganization. In a standard Chapter 11 case, the debtor is required to file a lengthy disclosure statement that must be approved by the court after notice and hearing.  Subchapter V eliminates these disclosure requirements for the debtor unless the court finds cause to require it. Removing this procedural requirement saves the business owner from spending money preparing the disclosure statement and the resulting notice and hearing requirements.

Subchapter V also requires the parties to have a status conference no more than sixty days after an order for relief, which keeps the court and trustee apprised of the progress toward plan approval.  The status conference is designed to “further the expeditious and economical resolution” of the reorganization by ensuring the court and the parties have all the necessary information to execute a successful case. Requiring the status conference seeks to limit surprises and delays in the bankruptcy process to save the business owner time and money.

Subchapter V cases also have an expedited timeline for filing the repayment plan that could save a business owner precious time and money during the reorganization process. Normally, in standard Chapter 11 reorganization for small businesses, the business owner is required to submit the plan within one hundred and eighty days of order for relief and obtain confirmation of that plan within forty-five days. Under Subchapter V, the business owner only has ninety days to file the plan but has an unlimited amount of time to obtain confirmation of the plan. Subchapter V has a stricter timeline to file the plan to ensure the reorganization is done efficiently and is resolved as soon as possible. However, conversely, Subchapter V also gives the business owner unlimited time to get the repayment plan confirmed. By having a relaxed timeline, the business owner is given more time to get confirmation of the repayment plan without the burden of procedural requirements if the business owner misses the deadline. Overall, the timeline for filing and confirmation seeks to ensure the bankruptcy is efficient so the business owner can save time and money.

Finally, Subchapter V eliminates quarterly fees, which directly saves the business owner money that can be put back into the business or the debts. Under standard Chapter 11 proceedings, the debtor is required to pay a quarterly fee for every quarter the case is pending. This fee is based on the total disbursements made during the debtor’s case.  Subchapter V eliminates these fee requirements to directly save the business owner a significant amount of money.

Overall, Subchapter V amends Chapter 11 to create a more efficient and inexpensive reorganization process. By saving the debtor time and money, the debtor can repay his debts faster and put remaining resources back into the business.

A Trustee That is an Ally

During a Subchapter V reorganization proceeding, in North Carolina the office of the Bankruptcy Administrator will appoint a trustee to help facilitate the confirmation of a repayment plan and generally supervise the case. A Subchapter V trustee is a small business debtor’s ally in the proceeding and is charged with several duties that seek to create an efficient and mutually beneficial bankruptcy process. Unlike, trustees under other bankruptcy chapters, the Subchapter V trustee is not charged with investigating the debtor. Rather, the Subchapter V trustee should be involved in the planning process, appear at various hearings, examine different claims from creditors, object to allowances of claims from creditors, facilitate communication between the debtor and the creditors, and oppose the discharge of the debtor. Having a trustee that is an ally will help the business owner create a plan that protects the owner’s interests and save the company as much money as possible.

Conclusion

The enactment of Subchapter V presents small business owners an appealing alternative from the standard Chapter 11 bankruptcy. The provisions of Subchapter V empower the business owner to retain control over the company and the repayment of debts and eases the burden of the procedural process of bankruptcy. All of these factors, and the procedural changes of Subchapter V, create a much smarter, faster, and easier bankruptcy process that may empower you to save your business.

This post was co-written with Mallory Miller, JD.

Jim White
jwhite@jcwhitelaw.com

Jim White helps people and companies facing serious financial injury by bringing and defending lawsuits and representing debtors in bankruptcy. He has successfully taken on banks, large financial institutions and other corporations in “David v. Goliath” cases. You can reach him at 919-246-4676.