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.