Small Business Reorganization Act Is a Valuable Alternative

The Small Business Reorganization Act (SBRA) of 2019 will become effective in February 2020. It 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 Subchapter V.

The SBRA requires the appointment of a trustee who will have various oversight responsibilities in every Subchapter V case. Management normally will remain in place. Benefits to choosing Subchapter V include that it provides more opportunity for existing equity owners to retain their ownership interests under a Chapter 11 plan, without the need to invest new money; only the debtor will be permitted to propose a Chapter 11 plan; there will be no requirement that an impaired class of creditors accept the Chapter 11 plan. Drawbacks are a trustee will automatically be appointed, and a debtor’s management can be removed even after a Chapter 11 plan under Subchapter V is confirmed.

When the SBRA becomes effective, debtors will need to choose whether to proceed under Subchapter V or the existing small business debtor rules. Because every debtor’s situation is different, prospective debtors should carefully consider the benefits and drawbacks of each option with their bankruptcy attorney.