Dealing with the Other Side of COVID-19 – The Revival of Small Businesses

The adverse impact of the global pandemic emanating from the COVID-19 virus on small businesses undeniably has been extreme, with the full brunt possibly yet to be realized. While PPP loans (to the extent received), creditor forbearance, landlord extensions and lender cooperativeness have enabled some small businesses to navigate the uncharted territory of "shelter in place" and related government business closure directives, the most substantial hurdle remains on the horizon - namely, how and when will small businesses re-open when we all reach the "other side" of the COVID-19 virus?

Hopefully, further government funding and continued cooperativeness among debtors, lenders, landlords, vendors, employees and customers will form the basis for the revival of small businesses. Debtors should carefully prioritize debt repayment, prepare 13 week cash flow projections detailing short term revenues and expenses, revise (and revise again) these projections to account for actual events and circumstances, re-negotiate payment schedules, eliminate unnecessary expenditures, retain professional financial management advice and apply for each and every loan and grant made available. Another significant tool that is available to small businesses and their owners as a means of maximizing their business reopening goals is the recently enacted Small Business Reorganization Act (SBRA) which, by sheer coincidence, went into effect on February 19, 2020.

The expectation in the restructuring community is that insolvencies and bankruptcies will soon begin to increase rapidly. An executive director of the American Bankruptcy Institute was recently quoted as saying that we are currently experiencing the "calm before the storm of the financial distress caused by the COVID-19 pandemic". No sector of small business will avoid the effects of this financial distress. No matter what side of a transaction or debtor/creditor relationship, every party will be impacted by the financial fall-out arising from this pandemic. For these reasons, all constituencies should become aware of the SBRA and its likely presence in the future business environment.

The SBRA was enacted by Congress in order to provide a more streamlined and more affordable form of the Chapter 11 reorganization process for small businesses. Under the SBRA, the playing field between small business debtors and creditors favors the debtor side and presents challenges to creditors in protecting their interests in the reorganization of a small business. 

Notably, Congress anticipated the importance of the SBRA in the post-COVID-19 revival of small businesses, when it tripled the debt limit for small businesses as part of the CARES Act signed into law on March 27, 2020—just 5 weeks after the SBRA went into effect. The new debt ceiling for a debtor under the SBRA is now $7,500,000 until March 27, 2021, at which point it will revert to $2,725,625. This major adjustment will make the relief afforded under the SBRA available to substantially more debtors than was originally intended. Clearly, Congress (as well as insolvency lawyers and financial advisors) see the SBRA as an effective strategy to implement the reopening of the American economy and facilitate the recovery of certain small businesses on the other side of the COVID-19 pandemic.

The following are just a few of the advantages to a small business debtor filing a Chapter 11 case under the SBRA.

• Business owners will continue to operate their businesses while negotiating with creditors over a consensual reorganization or sale.
• A "standing" trustee is automatically appointed to supervise and facilitate plan negotiations. The standing trustee does not operate the business or liquidate any assets.
• No creditors' committee will be formed and the extensive costs associated with a committee will thereby be avoided.
• A plan of reorganization (or liquidation) is due in 90 days from the filing of the Chapter 11 case and may only be filed by the debtor. No creditor or other party in interest can file a competing plan.
• No disclosure statement is required (thereby dispensing with a significant expense) although the plan must include a history of the debtor's business operations, a liquidation analysis and cash flow projections establishing the debtor's ability to make plan payments.
• Administrative claims may be paid over the life of the plan (which will be 3 to 5 years). This eliminates a common obstacle to confirmation that requires the payment of administrative claims in full in cash at the time of plan confirmation.
• No need to have impaired creditors vote on the plan. The absolute priority rule and new value exception to the absolute priority rule are eliminated, thereby removing a common obstacle to plan confirmation.
• Mortgage loans on residences may be modified so long as the mortgage proceeds were not primarily used to purchase the residence and were used in furtherance of the business.
• Professionals retained by the debtor may have a pre-petition claim of $10,000 or less and still be authorized to represent the debtor. 
• Importantly, other provisions of the bankruptcy code will also remain applicable under the SBRA. These provisions, among others, include the imposition of the automatic stay, the right to assume/reject executory contracts and the creation of a scheme of priority for treatment of certain claims (i.e. tax claims).

The above bullet points are merely some of the highlights under the SBRA from a debtor's perspective. Several other provisions exist and may have varying importance depending upon the issues facing a particular business. Clearly, the SBRA will be a useful tool for small business that is attempting to emerge from the unprecedented stall being experienced from COVID-19. Similarly, parties on the other side of a small business debtor should be prepared to understand and meet the challenges presented by SBRA.