Time to Consider the Second Gift from The CARES Act
The PPP program has been the star of the show for the business community in recent months, and for good reason. It is an amazing program that made a significant difference for many small businesses and their employees. It was not, however, enough to overcome the ravages of COVID-19 for many small businesses. For companies PPP could not save, the CARES Act provides a second thoughtful tool. For many, it is time to consider it.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) extended advantageous bankruptcy protection provisions of the Small Business Reorganization Act (SBRA) to many more businesses. SBRA added a new Subchapter V to the traditional Chapter 11 reorganization provisions of the Bankruptcy Code designed specifically for qualified small businesses. Subchapter V provides a bankruptcy shortcut of sorts; a process that is much more efficient by:
- lowering the overall costs of filing,
- eliminating the role of a creditor’s committee,
- making it easier to get a plan approved,
- and, most importantly to entrepreneurs, enabling a business owner to retain control and ownership of their company at the end of the process.
SBRA and the Unique Modification in the CARES Act
Once a business files for protection, their plan of reorganization must be submitted for approval within 90 days. Compared to the timing of traditional Chapter 11 bankruptcies, this is lightning fast. It also means the filer should have that plan well developed and documented beforehand to comply with the shorter deadline.
Key to a successful bankruptcy of any sort is a well-thought-out-forecast that identifies a reliable cash flow to fund the commitments of the plan. Do not shortcut this planning and forecasting process, as businesses are evaluated against it. Once approved, performance to the plan will be monitored by the Court and a successful exit with ownership intact is dependent on delivering on Court-approved commitments.
In addition to a plan of reorganization, the Court will require a standard set of financial statements – balance sheet, income statement, and cash flow statement, along with a copy of the most recent tax return as supporting documentation.
Vendor Interference Largely Mitigated
There are horror stories about creditor committees in a bankruptcy proceeding and the havoc that they can cause to the development of an acceptable plan of reorganization and the ultimate outcome for the business owner. The biggest advantage to a business owner of a Subchapter V filing is it can only be filed by the business owner/debtor. If the court deems the debtor submitted reorganization plan “fair and equitable”, creditors cannot interfere with approval.
If the court-approved plan is followed and payments are made on time, business owners retain ownership of their business.
SBRA Subchapter V vs. Chapter 11
Do not overlook SBRA Subchapter V as a valuable business tool.
Bankruptcy in the wake of COVID-19 does not mean failure – Subchapter V can mean reprieve, reset, and retention. Subchapter V provides a path to a rapid restructuring, following a plan designed by the business owner, and ultimately, retention of ownership.
In a traditional Chapter 11, business owners only retain interest in their company if their creditors are all fully paid in accordance with the approved plan or if “new value” is contributed to the business. “New value” often means new capital and that in turn dilutes the business owner substantially given the very low valuation at the time of infusion.
Consider the Options and Plan for the Future
Seriously consider SBRA Subchapter V as a critical part of survival planning and move forward while it is still on the table. The deadline for filing for debts up to $7.5 million does have an expiration date of March 27, 2021. vcfo’s experienced financial consultants are available to discuss the specific circumstances and whether Subsection V is a viable path for consideration. Contact us to request your free consultation.
*It is important to note that there are some eligibility exclusions largely around single asset real estate entities.