CARES Act Expands Access to Chapter 11 Bankruptcy Relief

A new law raises the debt threshold of companies to request a simplified reorganization

By now, you’ve probably heard – and perhaps benefited from – Federal Coronavirus Assistance, Relief and Economic Security, or CARES. Naturally, much of the law’s focus has been on much-needed loans and other programs to help small and medium-sized businesses survive the impact of the crisis.

However, the CARES law also includes crucial reforms of Chapter 11 of the Bankruptcy Code. These reforms will allow cash-strapped businesses for which new loan programs may be insufficient to survive this downturn and reorganize successfully.

Specifically, the CARES Act amended the Small Business Reorganization Act of 2019 (SBRA) by increasing the eligibility threshold from $ 2,725,625 in debt to $ 7.5 million in total debt (excluding loans from shareholders or other insiders) for companies requesting Chapter 11 relief and choosing treatment under the new subchapter V of Chapter 11 of the Bankruptcy Code.

This increased debt threshold will provide small businesses with better access to the benefits of SBRA as businesses grapple with the short- and long-term impacts of COVID-19.

The SBRA, which came into effect on February 19, added a new subchapter V to chapter 11 of the Bankruptcy Code to provide small businesses with a streamlined, efficient and profitable opportunity to reorganize successfully under chapter 11. The SBRA was a consequence of the American Bankruptcy Institute’s Commission to Study Chapter 11 Reform, co-chaired by Bob Keach of Bernstein Shur, who also testified before relevant Senate and House subcommittees in support of the SBRA.

Here are some of the important provisions for the cases of sub-chapter V, as amended by the CARES Law:

  • Debtors whose non-contingent liabilities (secured and unsecured) do not exceed $ 7.5 million (excluding insider debt) may opt for subchapter V relief.
  • The SBRA provides that the management of the company remains under the control of the company, in the absence of exceptional circumstances, throughout the case. The SBRA, like the other cases in Chapter 11, assumes a debtor-in-possession. The United Trustee Program of the United States will appoint what has been called a “consultant” trustee in each Subchap V case, but the Subchap V Trustee does not operate the business and does not investigate the matter. debtor or its operations (unless the court orders the trustee to do so), but rather is primarily responsible for helping the debtor formulate a plan, negotiate with creditors, and otherwise ensure a successful reorganization. Except in very unusual circumstances, the trustee will not hire professionals, thus saving costs.
  • A creditors’ committee is not appointed in a Subchapter V case, unless the court orders it for good cause. Again, this reduces the costs of subchapter V business.
  • Within 60 days of filing for bankruptcy, the bankruptcy court will hold a status conference to determine the best way to handle the case, allowing the court to customize the proceedings as needed.
  • Only a debtor can file a reorganization plan, and the debtor must file their plan within 90 days of filing for bankruptcy, unless it is extended due to circumstances for which the debtor should not be held responsible. Given the authorized structure of the plans, this delay will not be problematic for the vast majority of debtors.
  • Certain requirements regarding the content and confirmation of a plan are changed through the SBRA, including provisions that allow the plan to be approved by the court, even if creditors object or vote to reject the plan, and which allow business owners to retain their interests without paying creditors in full or obtaining their consent.

The Covid-19 pandemic is causing unprecedented disruption to our economy and putting enormous pressure on businesses large and small in a wide range of industrial sectors. The CARES reforms to the SBRA offer struggling businesses greater access to the relief available under Chapter 11 of the Bankruptcy Code, giving them the opportunity to overcome this crisis and emerge stronger afterwards.

Bob Keach and Sam Anderson are co-chairs of Bernstein Shur’s Corporate Restructuring and Insolvency group, representing clients across the United States.

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