Expanded Access for Businesses Seeking Streamlined Subchapter 5 Bankruptcy Protection
As many are aware, Congress recently enacted the Small Business Reorganization Act (“SBRA”), effective on February 19, 2020, to add a new subchapter to the United States Bankruptcy Code, commonly referred to as Subchapter 5. The SBRA was designed to reduce the cost and expense for small businesses to reorganize their debts and emerge from bankruptcy by:
- Expediting the reorganization timeline, to provide for the filing of a Plan within 90 days after the petition date;
- Removing the burdensome and expensive requirement of filing a disclosure statement with the Plan;
- Exempting small business debtors from paying quarterly U.S. Trustee fees;
- Eliminating the requirement for an unsecured creditors’ committee; and
- Allowing business owners a greater ability to retain control of the business post-bankruptcy.
Previously, a company could only qualify for a Subchapter 5 bankruptcy if its secured and unsecured debts did not exceed $2,725,625o. However, the CARES Act temporarily increases this debt limit to $7,500,000. The increased debt limit is valid for one year before it is reduced back down to $2,725,625.
With the increase in the maximum debt level enabled by the CARES Act, more businesses may qualify for the more favorable treatment offered by a Subchapter 5 bankruptcy.
Rhode Island Superior Court’s COVID-19 Business Recovery Plan
The Rhode Island Superior Court instituted a COVID-19 Business Recovery Plan program to protect businesses impacted by the Coronavirus pandemic. This new program authorizes the Court to appoint a Non-Liquidating receiver to protect businesses and their assets from financial disruptions so they can remain operational or continue with limited operations, access new working capital, and establish a plan to pay debts. The Business Recovery Plan program applies to qualifying businesses, including sole proprietorships, through the ongoing crisis.
Unlike traditional receivership proceedings that result in a liquidation of a business, this new program is intended to provide businesses with an opportunity to implement a business plan to address financial challenges over time. By appointing of a Non-Liquidating Receiver, the Court will provide a business with Court-supervised protections and temporary relief from lawsuits and other collection actions by creditors to allow the business to attempt to get back on track by accessing new working capital though SBA programs and other potential financing options, and/or restoring its revenue streams.
A business may be eligible for a Non-Liquidating Receivership if it was paying its debts in the usual course of business prior to January 15, 2020, but can no longer pay its debts as they become due as a result of the COVID-19 pandemic. The business must hire an attorney and develop an Operating Plan that demonstrates how the business can get back to a point where it is paying its debts in the usual course of business. If the Operating Plan is approved by the Court, the business then operates in accordance with the Operating Plan and under the oversight of a Court-appointed Non-Liquidating Receiver. The Non-Liquidating Receiver will also enforce the Court-ordered protections for the benefit of the business.