Bankruptcy code changes offer lifeline to small businesses/Opinion

Jeffery T. Kucera and Javier A. Roldán Cora
·3 min read

The pandemic has caused incredible economic turmoil for many small businesses. Many companies may need to restructure loans, terminate leases for space they no longer need, or otherwise extend payments due to creditors. While Chapter 11 of the Bankruptcy Code can be a powerful tool for business to address operational and financial restructuring, the costs have put it outside the reach of some small businesses. To address this need, Congress passed the Small Business Reorganization Act of 2019—an ambitious effort to create a manageable process for small businesses in Chapter 11 while still providing benefits like the automatic stay of litigation, rejection of certain leases and contracts, and sales free and clear of liens.

To qualify, the company must be engaged in commercial or business activity with aggregate secured and unsecured debts of $7.5 million. This limit is temporary, increasing under the CARES Act through March 2021, when it will decrease to $2.72 million. Anyone meeting this threshold can elect to use this Act by marking the appropriate box on its bankruptcy petition.

Once the case starts, a Small Business Trustee will “facilitate the development of a consensual plan of reorganization” and appear at plan confirmation. The trustee may also act as a conduit for plan payments, has the authority to investigate the financial affairs of the company, and object to creditors’ claims. Management will remain in control of the company’s business, unless the court finds that the principals committed fraud, dishonesty, incompetence, or gross mismanagement—in which case, the Small Business Trustee will take over management of the business.

While the Act creates the role of the trustee, it mostly eliminates the role of the creditors’ committee—a small group of creditors meant to represent the larger creditor body. Committees in small cases can be awkward: often there is not enough interest among the creditors to justify them, and where there is interest, the cost of the committee’s counsel and professionals could hamper reorganization. The Act provides that there will be no committee unless the court orders otherwise, removing a point of friction from the restructuring process.

The Act also seeks to save time and money by accelerating the process of negotiating, filing, and confirming a plan. The court must hold a status conference in the first 60 days of the case, and a plan must be filed 90 days after the petition date. The court can only extend these deadlines under “circumstances for which the debtor should not justly be held accountable.”

There are also substantive changes meant to accelerate the process. For example, only the company is allowed to propose a plan, which should include both the plan and required disclosures (including a brief history of the business’ operations, a liquidation analysis, and projections of the debtor’s ability to make payments under the proposed plan). As for plan terms, the company will likely have to show how much cash flow it will make in that period, and that it will be able to make the proposed payments.

The streamlined confirmation process, elimination of creditors’ committees, and the support of a Small Business Trustee are measures intended to give more small businesses a chance at reorganizing instead of liquidating. With the increased credit limits from the CARES Act, these measures may prove helpful to small businesses at a time when they need it the most.

Jeffrey Kucera and Javier Roldán Cora are attorneys in the Miami office of K&L Gates.