What are the Key Differences Between a “Small Business” Debtor and a “Regular” Chapter 11 Debtor?
In some smaller cases, the U.S. trustee may be unable to find creditors willing to serve on a creditors’ committee, or the committee may not be actively involved in the case. The Bankruptcy Code addresses this issue by treating a “small business case” somewhat differently than a regular bankruptcy case. A small business case is defined as a case with a “small business debtor.” 11 U.S.C. ‘ 101(51C). Determination of whether a debtor is a “small business debtor” requires application of a two-part test. First, the debtor must be engaged in commercial or business activities (other than primarily owning or operating real property) with total non-contingent liquidated secured and unsecured debts of $2,566,050[1] or less. Second, the debtor’s case must be one in which the U.S. trustee has not appointed a creditors’ committee, or the court has determined the creditors’ committee is insufficiently active and representative to provide oversight of the debtor.[2] Mainly, the provisions applicable to the small business case are designed to streamline the process and make a Chapter 11 less expensive. These include:
- US Trustee Oversight Rather Than a Creditors Committee:In contrast to other chapter 11 debtors, the small business debtor is subject to additional oversight by the U.S. Trustee (“UST”). Because there is no creditors committee to provide oversight of the debtor, the role of the committee is fulfilled by the UST. Near the beginning of the case, the debtor must attend an “initial interview” at which the UST will evaluate the debtor’s viability, inquire about its business plan, and go over the debtor’s obligations while in Chapter 11. These obligations include filing detailed reports, usually on a monthly basis, of the Debtor’s financial activity, including income and outgo. The UST uses these reports to spot trends and difficulties that would make a successful outcome questionable. The U.S. trustee will also monitor the activities of the small business debtor during the case to identify as promptly as possible whether the debtor will be unable to confirm a plan.
- More “Exclusive” Time to File a Plan of Reorganization:In a small business case, the debtor-in-possession does not have to worry so much about creditors interfering with the operation of the business, particularly as it pertains to the proposed reorganization plan. The goal of most Chapter 11 cases is the successful implementation of a reorganization plan. In an ordinary Chapter 11 case, creditors can propose plans just like the debtor can. In a small business case, the debtor has some breathing room before the creditors can descend. That “exclusivity period” lasts for 180 days and can be extended to 300 days if certain factors are met which enables a debtor to demonstrate by a preponderance of the evidence that the court will confirm a plan within a reasonable period of time. This also helps to move the case along more quickly than often happens in a larger Chapter 11 case. A more expeditious case usually translates to a less expensive case.
- No Disclosure Statement (With Court Approval): In a small business case, the bankruptcy court can also waive the requirement that the debtor file a disclosure statement and have it approved before the court takes up the reorganization plan. The disclosure statement is similar to a stock prospectus and includes all the information a creditor might need to make an informed decision on voting for or against the debtor’s proposed reorganization plan. Disclosure statements have to be approved by the court, and often lead to huge expensive fights among creditors and other parties and the debtor.
- Additional Filings. In a small business case, the Bankruptcy Code requires that a debtor-in-possession must, among other things, attach the most recently prepared balance sheet, statement of operations, cash-flow statement and most recently filed tax return to the petition or provide a statement under oath explaining the absence of such documents. In addition the initial filing must include a schedule of executory contracts and leases and well as a statement of financial affairs. Where practical, the company should employ an Accountant to help comply with required schedules and the accountant has to be paid immediately. Likewise if appraisals will be needed it is best obtain such before filing.
- While a small business debtor-in-possession has the opportunity for a streamlined and, hopefully, cost-effective reorganization, there are some similarities to a traditional Chapter 11 filing. For example, the debtor-in-possession must attend court and the U.S. trustee meeting through senior management personnel and counsel. Though the forms are simplified, the small business debtor must file ongoing financial reports with the court concerning its profitability and projected cash receipts and disbursements, and must report whether it is in compliance with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, including whether it has paid its taxes and filed its tax returns. Regardless of the Bankruptcy Chapter chosen, a debtor-in-possession maintains the right to hire lawyers, accountants, appraisers and other professional, provided such retention is first approved by the Bankruptcy Court.
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