In February 2020, simply previous to the COVID-19 outbreak, the Small Enterprise Reorganization Act of 2019 (Subchapter V) took impact. Subchapter V amends Chapter 11 of the Chapter Code to permit sure people and companies with money owed of lower than $2,725,625 to file a streamlined Chapter 11 case with the aim to make small enterprise bankruptcies quicker and cheaper.
Subchapter V contains some distinctive Chapter 11 provisions, similar to: (i) appointment of a standing trustee; (ii) solely permitting a debtor to suggest a plan of reorganization, which should be filed inside 90 days of the petition date; (iii) until courtroom ordered, no unsecured creditor’s committee; (iv) elimination of the rule requiring that new worth be given to ensure that the fairness holders of the debtor to retain their fairness curiosity with out paying collectors in full; and (v) permitting the modification of sure residential mortgages if the underlying mortgage was not used to buy the residence and was primarily utilized in reference to the enterprise.
Very shortly thereafter, in response to the COVID-19 outbreak, the Coronavirus Help, Reduction and Financial Safety Act (CARES Act) was enacted on March 27, 2020, which, amongst different issues, amended the definition of “debtor” for Subchapter V functions to extend the debt limitation from $2,725,625 to $7.5 million.
Within the wake of those new legal guidelines, inventive particular person debtors have filed below Subchapter V to restructure private guaranties of defunct enterprise money owed. Along with the $7.5 million debt limitation, to be able to qualify as a debtor below Subchapter V, not lower than 50% of the debt will need to have arose from the business or enterprise actions of the debtor. Inside these parameters, chapter courts have lately discovered that people with money owed comprised of at the very least 50% of enterprise money owed, similar to particular person guaranties, qualify to be small enterprise debtors below Subchapter V.
As an illustration, the Chapter Courtroom for the Jap District of Louisiana held that particular person debtors’ guaranties of enterprise loans constituted enterprise debt such that the debtors certified to be small enterprise debtors below Subchapter V. The courtroom discovered that as a result of nearly all of the debtors’ money owed arose from operation of the debtors’ at present working companies, in addition to their now defunct companies, and have been in an quantity beneath Subchapter V’s statutory debt limits, the debtors certified below Subchapter V.
Following the CARES Act, companies obtained further COVID-19 reduction with the enactment of the Consolidated Appropriations Act, 2021 (CAA) on December 27, 2020, which incorporates a number of amendments to the Chapter Code designed to help companies.
Previous to the enactment of the CAA, the Small Enterprise Administration (SBA), which administers the Paycheck Safety Program (PPP), opposed PPP loans for debtors and promulgated guidelines denying chapter small companies entry to PPP loans. In response, the CAA now expressly permits debtors in Subchapter V of Chapter 11 circumstances (in addition to in Chapter 12 and 13 debtors) to use for a PPP mortgage. Nonetheless, irritating for bigger companies, debtors in conventional Chapter 11 circumstances weren’t included and, due to this fact, would doubtless proceed to be denied PPP loans in chapter.
One other profit to Subchapter V debtors is the CAA’s modification to part 365(d) of the Chapter Code, which permits the courtroom to increase the debtor’s time to carry out below an unexpired lease of non-residential property as much as 120 days from the petition date if the debtor is experiencing or has skilled a hardship resulting from COVID-19.
The CAA additionally amends part 365(d)(4)(A) of the Chapter Code – for all debtors not simply Subchapter V – to increase the deadline for a debtor-tenant to imagine or reject a non-residential actual property lease by an extra 90 days to a complete of 210 days after the petition date. Part 365(d)(4)(B)(i) of the Chapter Code already permits the courtroom to increase the deadline to imagine or reject a lease, for trigger, by an extra 90 days. Subsequently, a debtor might doubtlessly have as many as 300 days to determine whether or not to imagine or reject an unexpired business lease with out the consent of the owner.
Moreover, the CAA goals to incentivize landlords and distributors to supply versatile cost phrases to debtors by amending the desire provisions of part 547 to offer that any “lined cost of rental arrearages” or “lined provider arrearages” can’t be prevented as preferences. In an effort to qualify for the exemption, the debtor and the counterparty will need to have entered right into a lease or contract earlier than the petition date, the lease or contract will need to have been amended on or after March 13, 2020, and such modification will need to have deferred or postponed funds due below the lease or contract.
Subchapter V, the CARES Act and the CAA present a number of new avenues for sure companies and people to restructure their money owed in a Chapter 11 case. The CARES Act is at present set to run out on March 26, 2021, nevertheless, new bipartisan laws was lately launched to increase the CARES Act Subchapter V debt limitation improve to March 27, 2022. The CAA provisions mentioned on this article are all scheduled to run out on December 27, 2022.