New Chapter 11 Subchapter V May be Option for Small Businesses Affected by COVID 19

The economic effect of the COVID 19 pandemic is unknown, but it seems safe to say that the effect will be significant and widespread. In our community, businesses are shuttered. The City of Reno is grappling with unknown losses in revenue. Tourism groups and experts warn that the effect on the tourism industry will be in the billions of dollars. Alone, each of these developments is dramatic. Together, these events present a staggering set of circumstances. Small business owners face singular challenges and should consider some of these options as they navigate these uncharted economic times:

  1. Consult early and often with your financial team, particularly your accountant, before incurring additional debt to attempt to stay in business. The approach may be short-term – can the business meet its financial obligations for the next week, two weeks, month – but it should give you important information to prepare for more difficult decisions in the future. No business owner wants to lay off employees. However, the decision to continue to pay employees, to attempt to work remotely, to cut back on salaries across the board, or to lay off employees should be made only after careful consideration of your financial circumstances with your accountant and financial team.
  2. If you think reorganizing the business may be an option to weather these turbulent times, a law that recently went into effect may be an attractive alternative. Small businesses face many challenges in the world of chapter 11 reorganization, mainly because of the costs associated with chapter 11 and the influence creditors have over the process by the rights given to them in chapter 11. On February 20, 2020, a new law went into effect called Subchapter V of chapter 11. Here are some of the features of new Subchapter V that could be advantageous for small businesses seeking to reorganize:
  • a “small business debtor” is defined as a person that has aggregate noncontingent liquidated debt of $2,725,625, at least 50 percent of which arose from the commercial or business activities of the debtor;
  • a “small business debtor” may be a debtor whose primary business is owning or operating real property, but may not include a publicly-traded company;
  • Subchapter V is centered around keeping costs down and arriving at a consensus between the constituents to arrive at a reorganization. A Subchapter V trustee is appointed in every Subchapter V case. The trustee’s job is to monitor the debtor’s operations and affairs, evaluate its assets, make recommendations regarding a plan, and mediate disputes between the parties regarding plan terms;
  • The debtor continues to act as a debtor in possession and to manage and operate its business. As in any chapter 11 case, the automatic stay applies, the debtor may use, sell or lease property of the estate, assume or reject executory contracts and leases, obtain credit, modify unsecured and secured claims and interests through a plan, and seek to recover preferences and fraudulent conveyances;
  • Committees, which can be overwhelmingly expensed in any other small business chapter 11 case, are not appointed in a Subchapter V case.
  • A disclosure statement is generally not required.
  • The cramdown provisions are more favorable to a small business by eliminating the “absolute priority rule” with respect to creditors and shareholders who have not accepted the plan.

These are a few of the highlights of the new Subchapter V law that fortuitously went into effect on February 19, 2020. This is merely a brief summary of some of the important provisions of Subchapter V, and consultation with experienced bankruptcy counsel should be sought to determine if Subchapter V is a viable option for any small business.