By: Donald L Swanson
It happens. There are businesses in financial stress who, for a variety of reasons, can’t qualify for Subchapter V. Owners want to save the business, but Subchapter V is not available.
Reasons why Subchapter V might be unavailable include:
- Debtor has more than $7.5 million of qualifying debt and can’t get enough cash (e.g., from sale of assets or from owners) to get under the limit; or
- Debtor is “an affiliate of an issuer” (11 U.S.C. § 101(51D)(B)(iii)) (see, e.g., In re Serendipity Labs, Inc., Case No. 20-68124 in Northern Georgia Bankruptcy Court (issued 10/19/2020, Doc. 168)).
Subchapter V exists for a reason. And the reason is this: it’s hard for a closely-held business to get effective relief in regular Chapter 11. Here are two reasons why:
- Regular Chapter 11 has the absolute priority rule; and
- Regular Chapter 11 is expensive—professional with expertise in regular Chapter 11 are, frequently, priced out of the closely-held business’s capacity to pay.
So, what’s needed for a closely-held business, outside of Subchapter V, is a strategy for addressing these two reasons. Moreover, if a debtor files Subchapter V, knowing that eligibility might be contested, the debtor had better have a strategy for proceeding in a regular Chapter 11, just in case the ruling goes the wrong way.
Notably, there are plenty of strategies for liquidating a business or selling it as a going concern: receiverships, assignments for benefit of creditors, etc.
But there are precious few strategies (in most circuits) for reorganizing such a debtor, with current ownership and management remaining in place.
Although few, strategies do exist that can work: they satisfy the absolute priority rule, keep owners and managers in place, and cost a manageable amount of money.
But such strategies are highly-specific for each business that might use them.
If anyone (especially business owners and their attorneys) would like to discuss how such strategies might apply to a particular business, please contact me.