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The 2005 Act's Top Nine Changes for Small Business Cases
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into law on April 20, 2005, and most of the provisions became effective on October 17, 2005. The legislation represents the largest overhaul of the Bankruptcy Code since its enactment in 1978. Though the 2005 Act was designed largely to create greater accountability in consumer bankruptcies under Chapters 7 and 13, the legislation also affects Chapter 11 business cases, particularly those involving small businesses. The following is a summary of the major changes affecting small business debtors:
Automatic Classification as a "Small Business Debtor" (§101(51D)). A debtor no longer makes an election to be treated as a small business. Rather, the designation of "small business debtor" is automatic if the debtor meets the definition in §101(51D). Under that provision, a small business debtor is one with no more than $2,000,000 in non-contingent, liquidated secured and unsecured debt, and as to which either no creditors' committee exists, or the court has determined that the committee is not sufficiently active and representative to provide oversight. The definition excludes those whose primary activity is the business of owning or operating real property, or a member of an affiliated group of debtors with debts in excess of $2,000,000. Automatically classifying particular debtors as small business debtors allows for more sweeping application of the new rules for small business cases.
Reduced Applicability of the Automatic Stay (§362(n)). New Bankruptcy Code §362(n) provides that the automatic stay does not apply if the debtor is a debtor in a concurrent small business case, was a debtor in a small business case that was dismissed within the past two years, or was a debtor in a small business case in which a plan was confirmed within the past two years. This restriction on the protection of the automatic stay also extends to purchasers of substantially all assets of a small business debtor.
More Onerous Reporting Duties (§308). Small business debtors have additional reporting burdens that their counterparts with greater than $2,000,000 in debt do not bear. Small business debtors must now file periodic financial reports containing information regarding profitability, projected cash receipts and disbursements along with comparisons to actual receipts and disbursements, statements regarding compliance with post-petition requirements, timeliness of filing tax returns, reporting failures and any other matters of interest to the public. Such requirements will make the Chapter 11 process more costly for small business debtors.
Increased Administrative Duties (§1116). In addition to the administrative duties imposed on all Chapter 11 debtors, new §1116 creates a list of additional responsibilities for small business debtors. These include filing financial statements and tax returns with the court, and allowing the U.S. Trustee to inspect the debtor's business.
Increased Supervision by the United States Trustee (28 U.S.C. §586(7)). The new law vests the U.S. Trustee with greater oversight of small business cases to determine as quickly as possible whether the debtor will be able to confirm a plan. The U.S. Trustee is required to conduct an initial debtor interview as soon as possible after the filing to investigate the debtor's viability, inquire about the debtor's business plan, explain the duties of a debtor in possession, and attempt to obtain an agreed scheduling order.
Exclusivity Period Extensions Limited (§1121(e)). The exclusivity period – the period of time in which only the debtor may file a plan of reorganization – has been lengthened from 100 to 180 days. And, the deadline by which all plans and disclosure statements must be filed has been extended from 160 to 300 days. But, the availability of extensions on those time periods has been significantly reduced. Moreover, the deadlines will apply to many more debtors as a result of the automatic designation for small business debtors. Formerly, the above deadlines could be extended if the need for an increase in time was caused by circumstances for which the debtor should not be held accountable. But now, the time periods may be extended only if the debtor "demonstrates by a preponderance of the evidence that it is more likely than not that the court will confirm a plan within a reasonable period of time."
May Avoid Filing of Disclosure Statement (§ 1125(f)). Section 1125(f) now provides that the court may determine that a disclosure statement separate from the plan is not necessary if the plan provides adequate information. Alternatively, the court may approve a disclosure statement submitted on standard forms approved by the court.
Expedited Plan Confirmation (§1129(e)). In a small business case, plan confirmation must occur no later than 45 days after the plan is filed (assuming an extension has not been granted pursuant to §1121(e)). The practical implication of this provision may be that a small business debtor must avoid a separate disclosure statement and its related hearing (as permitted by §1125(f) discussed above); otherwise, it may be impracticable for a debtor to accomplish all that is necessary to obtain plan confirmation within 45 days.
Pre-filing Solicitation Permissible (§1125(g)). Acceptance or rejection of a plan may now be solicited from creditors prior to the filing of the case. This provision may encourage "pre-packaged" Chapter 11 plans – where a company and its creditors agree to a plan of reorganization before the company files its bankruptcy petition. If a pre-packaged case is filed, §341(e) provides that the meeting of creditors may be dispensed with if a motion is filed and cause is shown.
Many essential components of a small business Chapter 11 case remain in tact under the new law. However, the nine changes discussed above must be observed and understood to maximize the chances of a successful small business reorganization.
For more information about this topic, please contact Tara L. Kraemer (tlk@mglaw.net) or one of our other Insolvency attorneys. |
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