New Laws That May Help Save Businesses From COVID Impacts

The Small Business Reorganization Act of 2019 (the “SBRA”), appearing in Subchapter V of Chapter 11 of the Bankruptcy Code, went into effect on February 19, 2020. The SBRA was intended to provide small businesses with a more streamlined and cost-effective restructuring process than the traditional Chapter 11 process. When the SBRA went into effect, most people could not have foreseen that, just a month later, the U.S. economy would grind to a halt as a result of a global pandemic. The financial consequences of the coronavirus (COVID-19) have hit small to mid-sized businesses especially hard.

Even before the pandemic, the SBRA was meant to provide a much-needed lifeline to small businesses struggling to survive. As the COVID-19 pandemic forced more businesses to close and caused more economic distress, Congress passed the Coronavirus Aid, Recovery, and Economic Security Act (the “CARES Act”) to address the economic impacts of COVID-19. The CARES Act addresses this by making a temporary, but significant, amendment to the SBRA. These amendments are subject to a sunset provision and will last for only one year after the enactment of the CARES Act, so it is important for businesses to act quickly if they want to take advantage of those new laws to save their businesses.

When it was passed, the SBRA defined small businesses as those with non-contingent liquidated secured and unsecured debts not exceeding $2,725,625. The CARES Act expands access to the SBRA by raising the $2,725,625 “debt ceiling” to those businesses with up to $7,500,000 in debt service. This will allow many more small businesses access to the more streamlined and cost-effective reorganization process available under the SBRA. The increased debt ceiling is only a temporary measure, and the ceiling will return to $2,725,625 after one year from the enactment of the CARES Act; however, this temporary change will make the bankruptcy process quicker and more efficient for small businesses who are impacted by the COVID-19 pandemic and will allow them to return to normal business operations more rapidly.

The CARES Act also includes funding for a federal small business loan program called the Paycheck Protection Program (the “PPP”). Another $310 Billion in PPP loans were just approved by Congress and is expected to be signed into law this week, but small business owners must act fast if they want to get their share of the available money. The PPP is designed to get cash in the hands of small businesses quickly with less red tape than the SBA’s existing loan programs, and to incentivize business owners to keep employees on payroll by offering them loan forgiveness. The use of PPP loans could potentially be used in conjunction with the SBRA as part of a comprehensive restructuring plan. For example, under the SBRA, business owners no longer must provide their own capital (also referred to as “new value”) in order to reorganize over the objections of their creditors. So theoretically, if the owner can get a “bridge loan” through the PPP to make it over the current “rough spots,” they may be able to successfully restructure debt service with little to no out of pocket expenditures.

The combined use of the PPP and the SBRA are critical tools to save distressed businesses over the next year (or more, if the CARES Act is extended). Indeed, expanding access to the SBRA’s streamlined reorganization process will facilitate the recapitalization of these otherwise viable businesses and help them to “bounce back” from the economic effects of the pandemic more quickly, easily and cheaper than the traditional Chapter 11 process.

Other amendments to the Bankruptcy Code by the CAREs Act specifically exclude coronavirus-related payments from the federal government from the definition of “income” under Chapters 7 and 13. The Act also allows individual debtors who are currently in Chapter 13 bankruptcies to seek plan modification if they are experiencing a “material financial hardship” directly or indirectly related to the COVID-19 pandemic. These amendments seek to soften the financial blow dealt by the pandemic and helps maintain access to the bankruptcy system for debtors who receive financial assistance during the pandemic.

As we continue to monitor the pandemic, the lawyers at Shapiro, Blasi, Wasserman & Hermann are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors.

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