On February 19, 2020, the Small Business Reorganization Act (the “SBRA”) went into effect, shortly preceding the unprecedented blow to the global economy caused by the coronavirus (COVID-19) pandemic. The coronavirus, as well as government regulations to control the spread of the virus, have forced both public and private enterprises to discontinue operations, shut down facilities, and in some cases have caused companies to close their doors permanently. Thus, businesses, particularly small businesses, are now struggling and unable to pay their creditors, and will need to rely heavily on the SBRA or other alternatives to bankruptcy in order to survive in these uncertain times. This article will discuss in detail what the SBRA is and its benefits for small businesses, the related Coronavirus Aid, Relief, and Economic Security Act, as well as several alternatives to bankruptcy that could prove to be more affordable and efficient for small businesses.
I. What is the Small Business Reorganization Act?
The SBRA was signed into law on August 23, 2019 and was intended to simplify the Chapter 11 bankruptcy process and offer new methods for small businesses to successfully reorganize. Prior to the SBRA, the primary options for struggling small businesses filing bankruptcy were limited to either Chapter 7 or Chapter 11, both of which have their drawbacks. A Chapter 7 bankruptcy is less costly, but involves the debtor’s assets being liquidated by a trustee to pay creditors, rendering the business unable to survive and retain control of its operations. Conversely, a Chapter 11 bankruptcy permits the debtor to retain control of its operations and restructure its debts through a court-approved plan, but the extensive court oversight and stringent requirements associated therewith can be too expensive for small businesses.
The SBRA finds a middle ground between Chapter 7 and Chapter 11 by allowing the small business debtor to retain control of its operations, appointing a trustee to ensure the reorganization proceeds efficiently, and eliminating significant costs and time delays associated with Chapter 11. Specifically, the SBRA states that, absent a court order for cause, a committee of creditors will not be appointed, which allows the debtor to avoid considerable expenses relating to the committee and the professionals hired by the committee. Moreover, unlike an ordinary Chapter 11 case, the SBRA does not require the debtor to file a disclosure statement, and only the debtor is allowed to submit a reorganization plan, which it must do within 90 days of the commencement of the case. Both of the foregoing changes obviate the substantial costs and time delays resulting from contested hearings on creditor reorganization plans, which significantly lengthen the reorganization process.
The SBRA further affords the small business debtor greater leeway for the confirmation of the reorganization plan and permits the debtor to maintain its ownership interest following reorganization so long as the plan does not discriminate unfairly and is fair and equitable to each class of claims provided for per the plan. Furthermore, the plan requirements are less stringent, the plan does not have to be approved by the creditors, and the plan will normally be confirmed if it provides that all projected disposable income of the business will be paid to creditors over the following 3 to 5 year period. In sum, the SBRA provides small businesses with a superior path for reorganization by eliminating costs and streamlining the bankruptcy process, which will be extremely beneficial to small businesses in the current climate.
II. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)
On March 27, 2020, the CARES Act was signed into law, representing a $2 trillion dollar relief package to protect Americans from the far-reaching economic and public health effects of the coronavirus pandemic. The CARES Act provides significant aid for both small businesses and individuals, with over $900 billion dollars being allocated to these groups. For struggling small businesses, the CARES Act expands the eligibility requirements of the SBRA by increasing the maximum debt level to qualify for the SBRA from $2,725,625.00 to $7,500,000.00 for cases filed after March 27, 2020, with the increased eligibility remaining in effect for one year. As a result, the CARES Act will afford thousands of additional small businesses the opportunity to benefit from the significant advantages of the SBRA.
III. Alternatives to bankruptcy
For small businesses that would like to avoid the overall expense and negative stigma associated with filing bankruptcy, there also exist several state law and other alternatives to pursue in an attempt to limit the detrimental impact of the coronavirus. However, it is important for businesses to understand the similarities, differences, advantages, and disadvantages between traditional bankruptcy and its alternatives, such as assignments for the benefit of creditors, receiverships, and out-of-court workouts. Below is a brief overview of each:
A. Assignment for the Benefit of Creditors
An assignment for the benefit of creditors, commonly referred to as an “ABC,” is when an assignor irrevocably transfers substantially all of its property to an assignee for the purpose of applying the property or the proceeds thereof to pay the assignor’s creditors and returning any remaining property back to the assignor after administration. The powers and duties of the assignee are comparable to those of the bankruptcy trustee, and include collecting and liquidating assets, providing notices to creditors, operating the assignor’s business if necessary, and submitting a final report, among other things. As such, an ABC is similar to bankruptcy in many respects, but there are also significant differences, as well as advantages and disadvantages.
On the one hand, an ABC is cheaper, faster, and more discrete than a traditional bankruptcy, which benefits both the debtor and the creditors because there will be more money available for distribution. Moreover, unlike the selection of a bankruptcy trustee, the assignor is permitted to choose the assignee to ensure its property is distributed efficiently, and the assignor is more involved in the decision-making process of an ABC. On the other hand, there is no automatic stay in favor of the assignor during an ABC, the assignee does not have the authority to avoid preferential transfers, and most importantly, ABCs do not provide for the discharge of the assignor’s debts.
Receiverships are court ordered proceedings in which all of a company’s property that is subject to a dispute is placed under the control of an independent third-party, otherwise known as a “Receiver,” to preserve distressed assets and attempt to maximize the value of the property. Just like an ABC, receiverships have some advantages when compared to traditional bankruptcy proceedings, but also have significant disadvantages. Receiverships are quicker, less expensive and require less maintenance than bankruptcy, and the remedies available in a receivership proceeding are more flexible and allow for creativity. However, there is no automatic stay, owners of small businesses are ordinarily replaced by the receiver, and there is usually no opportunity for the business to reorganize.
C. Out of Court Workouts
When circumstances allow, the best option for a struggling small business may be to avoid the expense of legal proceedings altogether, and instead negotiate a workout agreement with its creditors to resolve outstanding financial issues and attain economic stability. This could be accomplished through an agreement to extend the time for the business to satisfy its obligations that are in default, or through an accord and satisfaction, among other things. Out of court workouts will be less expensive than bankruptcy, will normally allow the small business to maintain control of its operations, and on most occasions there will be little to no reporting requirements or court oversight. However, the business’ creditors must consent to the out of court workout, and there is no ability to bind non-consenting creditors, making this option often difficult to achieve.
It is undeniable that the coronavirus pandemic has created significant obstacles for businesses all over the globe, particularly small businesses. Although some small businesses have been able to weather the storm, more and more continue to find themselves underwater. As a result, these struggling businesses will need to lean heavily on the SBRA and the CARES Act to reorganize and maintain operations for the future. In the alternative, these businesses may be able to utilize state law avenues such as ABCs or Receiverships, or they could attempt to negotiate an out of court workout with creditors. Because no two situations are exactly alike and the foregoing options will have differing impacts on each business, choosing the right option for your particular situation requires the expertise of bankruptcy and commercial attorneys who understand both the law and the effect each of these options will have on your business. The attorneys at Stok Kon + Braverman have substantial business and legal experience, understand the bankruptcy code and the options available to businesses thereunder, and can help you navigate through these uncertain times to find the best option for your business. Therefore, if you are a Florida business that is struggling to pay creditors and is seeking guidance regarding the best option for your particular situation, be sure you have the maximum protection possible by retaining the skilled bankruptcy and commercial litigation attorneys at Stok Kon + Braverman.
For further information and guidance regarding the SBRA, the CARES Act, or alternatives under state law and how they relate to your business or personal circumstance, contact the lawyers at Stok Kon + Braverman online at www.stoklaw.com or by telephone at (954) 237-1777 to schedule your consultation.