Caddell Reynolds filed the first Subchapter V of Chapter 11 case in Arkansas history in March.
First enacted in February 2020 through The Small Business Reorganization Act, this new subchapter is intended to give more small businesses a chance at reorganizing instead of simply liquidating.
The Small Business Reorganization Act (SBRA) was signed into law by President Trump on Aug. 23, 2019, and became effective on Feb. 19, 2020. The purpose of the SBRA is to address issues that small business debtors encounter when reorganizing under certain provisions of the U.S. Bankruptcy Code.
Since 1994, Chapter 11 of the United States Bankruptcy Code has worked for businesses with insufficient assets to fund typical Bankruptcy reorganization plans. However, it has still been difficult for small businesses to reorganize under the standard Chapter 11. In other words, one size doesn’t fit all in the context of business reorganization cases.
In an attempt to improve upon what has been tried before, the SBRA creates a new subchapter of Chapter 11. The primary focus of Subchapter V is to reduce the time and expense for small businesses. Small businesses were less likely to have the resources that large corporations have to weather a reorganization under the former Chapter 11 framework.
Rusty Sparks and Joel Hargis of Caddell Reynolds were the first in Arkansas to file this type of case. They did so on March 21, 2020. In fact, Caddell Reynolds is set file a second Subchapter V case in the coming week.
In order to qualify as a small business debtor, the debtor must be a person or entity that is engaged in commercial or business activity and have secured and unsecured debts not exceeding $2,725,625. However, under the CARES Act (the first major stimulus package enacted after the COVID-19 pandemic) the maximum debt limit of $2,725,625 has been increased to 7,500,000.00 and will remain at that level until March 27 pf 2021. The debtor must show that a minimum of half of its pre-filing debts came from commercial or business activity with some exceptions.
How Does the Subchapter V Process Work?
Compared to traditional Chapter 11 Bankruptcy, Subchapter V’s process is much speedier. The court will hold a status conference within 60 days of the filing. A minimum of 14 days prior to the conference, the debtor must put in writing the efforts that it has made and plans to make, to get a consensual plan filed and confirmed. The plan of reorganization must be filed within 90 days of the filing. Whereas creditors or other interested parties can file a plan under Chapter 11, in a Subchapter V Chapter 11 case only the debtor can file the plan.
Additionally, whereas Chapter 11 generally requires that the debtor file a disclosure statement, this is not the case for Subchapter V. Instead, the plan must include a brief history of the business’ operations, an analysis of liquidation, and a demonstration of the business’ ability to make the proposed payments. Additionally, there is no creditors’ committee to contend with which also saves time and money.
One of the biggest benefits to the Subchapter V case as compared to a regular Chapter 11 case is that removes the requirement that creditors vote on a plan. In a Subchapter V a debtor can confirm a plan regardless of creditor acceptance. The only requirements are that the plan must not unfairly discriminate between creditors and must be fair and equitable.
The new Subchapter V eliminates creditors’ committees, perpetual plan exclusivity, and creates a Small Business Trusteeship. The Small Business Trustee’s role is to aid the small business in negotiating with its creators to reach a consensual plan to reorganize – a mediator so to speak.
An Experienced Bankruptcy Attorney Can Help
If you are considering filing for Bankruptcy, the experienced and compassionate Arkansas Bankruptcy Attorneys at Caddell Reynolds can help you to figure out your best options to move forward and save your business. Indeed, in these new and uncertain times, many small businesses are turning to the United States Bankruptcy Court for help in keeping their doors open.