WINTER 2020 TODAY’S GENER AL COUNSEL
Small Business Reorganization Act a Valuable Alternative By Michael J. Riela
S 56
mall and mid-sized companies often find it difficult to use Chapter 11 to successfully reorganize. Chapter 11 cases typically require the expenditure of significant professional fees, and the United States Bankruptcy Code imposes numerous administrative burdens. In addition, if an official committee is appointed, the debtor must pay the court-approved fees and expenses of the committee’s professionals. As such, Chapter 11 may not be a viable restructuring alternative for many distressed companies. Even if Chapter 11 is feasible, the Bankruptcy Code’s “absolute priority rule” often requires existing equity owners either to relinquish their ownership interests, or to invest new money to retain their Michael J. Riela is ownership stakes. a partner at the law Because of firm of Tannenbaum Chapter 11’s shortHelpern Syracuse comings, small & Hirschtritt LLP in and mid-sized New York City. He regularly advises discompanies may tressed companies, choose alternative boards of directors, restructuring proprofessional services cesses instead of firms, private equity bankruptcy. Some firms and shareholders in bankruptcy companies may be cases, restructurings, forced to liquidate, distressed M&A resulting in job transactions and losses and destrucinsolvency-related tion of enterprise litigation. Riela@thsh.com value.
The Bankruptcy Code currently provides that a “small business debtor” may proceed in Chapter 11 under modified rules. However, these rules do not materially reduce the costs and burdens of Chapter 11, nor do they increase the likelihood that existing equity owners can retain ownership of the business. Additionally, there are rules specific to small business cases that may make it more difficult for a debtor to successfully reorganize under existing law. For example, a Chapter 11 plan must be filed within 300 days of the bankruptcy. This deadline may prove insurmountable if the case is complex, or if there are significant disputes. Moreover, small business debtors are subject to heightened oversight from the Office of the United States Trustee; and small business debtors that file multiple bankruptcy cases might not benefit from the automatic stay.
NEW CHAPTER 11 TOOLS Into this breach steps the Small Business Reorganization Act (SBRA) of 2019, which will become effective in February 2020. The SBRA is designed to foster successful restructurings of small businesses. Among other things, it adds a new Subchapter V to Chapter 11 of the Bankruptcy Code, containing new tools to increase a small business debtor’s chances for a successful reorganization. Once the SBRA takes effect, a small business debtor that files Chapter 11 may proceed under either the existing small business debtor rules or the new