New bankruptcy subchapter offers relief to small businesses.

Byline: Pat Murphy

Financially troubled small businesses will have a better shot at avoiding liquidation and achieving reorganization under a new addition to the Bankruptcy Code that goes into effect early next year.

President Trump in August signed the "Small Business Reorganization Act of 2019," which adds new Subchapter V to Chapter 11. The SBRA, which goes into effect Feb. 19, provides streamlined procedures for the expedited reorganization of "small business debtors," defined as those in commercial or business activity with aggregate or noncontingent liquidated secured and unsecured debts of not more than $2,725,625.

The reform will provide "a better path for small businesses to successfully restructure, reduce liquidations, save jobs and increase recoveries to creditors while recognizing the value provided by the entrepreneur," according to the American Bankruptcy Institute, which pushed for passage of the Bankruptcy Code amendment.

The ABI estimated that approximately half of the country's Chapter 11 cases could qualify for reorganization under new Subchapter V.

Boston attorney Alex F. Mattera called the new law "very exciting" for bankruptcy professionals.

"This act sets a [Chapter 11 reorganization] standard for small businesses that is much, much easier to achieve," he said.

Providence bankruptcy practitioner Matthew J. McGowan said he saw the SBRA as an appropriate response to a recognition of certain deficiencies in the existing Chapter 11 process.

"There's been a growing consensus that Chapter 11 is too expensive and too heavily laden with rules, code provisions and procedure requirements that are sometimes out of proportion to the business that's being reorganized," McGowan said. "It shouldn't be that you have the same Chapter 11 requirements in a case involving Exxon as you would in a case involving some small business that's owned by a husband and wife."

Steven J. Boyajian of Providence said he too saw the SBRA as a positive development in the sense that the majority of businesses that file for bankruptcy are not large enterprises and the new law essentially writes out of the statute the "absolute priority rule," which often proves to be an insurmountable hurdle for small businesses.

But Boyajian retained a measure of skepticism, saying the success of the SBRA ultimately hinges on whether it actually changes creditor behavior.

"What you have right now in a lot of Chapter 11 cases is that an unsecured creditor can sit back...