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House Passes the Small Business Reorganization Act

In a breakthrough for small businesses in distressed situations, the U.S House of Representatives recently passed the Small Business Reorganization Act of 2019 (H.R. 3311). With its passage, small businesses will have restructuring tools made available in the new subchapter V of the bankruptcy code that will allow them to employ the tools of Chapter 11 to reorganize.

In testimony, ABICommission Co-Chair Bob Keach stated, "Chapter 11 doesn't work for small and medium-sized businesses because the Bankruptcy Code (a) places unrealistic and artificial deadlines on small- and medium-sized businesses, which do not give these companies an opportunity to restructure; (b) imposes substantial and costly disclosure and reporting requirements on these companies; (c) does not provide any tools that can help small businesses create and implement an effective reorganization plan; and (d) makes it difficult for a small-business owner to maintain an ownership interest in the business under the current Chapter 11."

In the new subchapter V to Chapter 11, the updated definition of "small business debtor" is $2,725,625 in aggregate or noncontingent liquidated secured and unsecured debts as of the bankruptcy filing date. With the appointment of a "standing trustee," proper planning and execution, under the SBRA small businesses will be able to emerge from bankruptcy within several months of a court-approved reorganization plan at significantly reduced costs. During the time, so long as there is no fraud, incompetence, dishonesty, or gross mismanagement, the company's management will have the right to maintain ownership and continue operating the business.

This is a major win for small businesses and their creditors seeking options to save a company and avoid liquidation as the only option.

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