Law Offices of Nicholas Gebelt

Do All Owners And Partners Need To Be Named And Agree On A Business Bankruptcy?


All owners and partners generally, if it’s a small business, should be named in the bankruptcy. The bylaws will control how much of a majority of votes is necessary to authorize the bankruptcy filing. Sometimes the bylaws say it has to be unanimous, and other times the requirements differ. The assumption is that they’re all part of the program, although there can be silent partners.

Of course, owners can be stockholders. For example, when General Motors filed its Chapter 11 some years ago, it had millions of shareholders, all of whom were owners. While many of them may own tiny pieces — a few shares — they are all owners. Listing all of them, and giving them all notice when the common stock is going to become worthless once the plan is confirmed, doesn’t make sense. You might ask the court for authority to set up a website, and on that website, you post anything and everything necessary for the shareholders to know.

But suppose it’s a small business. In that case, everybody must be at least aware that the company is going into bankruptcy, and generally speaking, there has to be a vote of the owners per the bylaws.

What Is The Small Business Reorganization Act Of 2020?

The Small Business Reorganization Act is Subchapter V of Chapter 11 of the Bankruptcy Code. It was enacted to provide a streamlined Chapter 11 process for small businesses. The typical Chapter 11 case is quite complicated and cumbersome, and as a result, it’s extremely expensive.

You might wonder what the differences are between a standard Chapter 11 and a Subchapter V Chapter 11, especially because there are many similarities. There are indeed some differences. Here are some of the most important:

  1. Voting
  2. In both a standard Chapter 11 and a Subchapter V, the creditors get to vote on the plan. However, there are some important differences.

    1. The Standard Chapter 11

    A crucial step in the standard Chapter 11 case is propounding a disclosure statement and plan. The disclosure statement is designed to give the creditors sufficient information so that they can intelligently vote on the plan. The plan provides for the treatment of all interests and claims. If the judge rules that the disclosure statement provides adequate information to the creditors, then we send the disclosure statement, plan, and ballots to all the creditors.

    The creditors vote as members of their priority classes. A class is deemed to have voted in favor of the plan if at least two-thirds of the total dollar amount of the class’s claims, and more than 50% of the allowed claims vote in favor of confirmation. In that case it is called a consenting class. Otherwise it is a nonconsenting class. If all the classes consent, the Court can confirm the plan.

    But suppose there is a nonconsenting class. Then if there is at least one consenting class, you can get the plan confirmed. Otherwise it cannot be confirmed.

    1. The Subchapter V Chapter 11

    In a Subchapter V case, there is no disclosure statement requirement. However, you’ll undoubtedly have to include the requisite disclosures in the plan. Otherwise, the judge will not let you send out the plan and ballots.

    The creditors still get to vote in a Subchapter V case, but you can get a nonconsensual plan confirmed. You don’t need even one consenting class. Then what is the point of having the creditors vote?

    Unlike a standard Chapter 11 in which there is no Chapter 11 Trustee — unless something has gone terribly wrong with the case — a Subchapter V case has a Subchapter V Trustee. That Trustee’s main role is to get a plan confirmed. If each class is a consenting class, then the Trustee’s role ends. Otherwise, the Trustee continues with the case, primarily as the disbursing agent of plan payments.

  3. The Absolute Priority Rule
    1. The Standard Chapter 11

    Although you can get the plan confirmed without class unanimity — though you must have at least one consenting class — if you don’t have unanimity, confirmation triggers something called the absolute priority rule. What is this rule?

    You may remember I gave the analogy of the classes as being like a fountain of stacked bowls. The top bowl must be filed before the second bowl gets any water. The second bowl must be filed before the third bowl gets any water, and so forth. The bottom bowl gets no water unless all of the higher bowls have been filed. By analogy, if we think of the bowls as priority classes, no class gets any money unless all the classes that are higher in priority are paid in full. Thus, there is an absolute priority of payment order.

    In the analogy, the business owners are the bottom bowl.

    Suppose all the classes vote in favor of the plan. Then the terms of the plan control, and the owners retain their interest in the business.

    If there are nonconsenting classes, but everybody gets paid in full, then there is also no problem because no one is prejudiced by the owners retaining their interest in the business.

    However, suppose there is a nonconsenting class, and there is a class that doesn’t get paid in full. Then the bottom class gets nothing, meaning that the owner’s interest in the business is turned to ashes. It’s gone. The owner no longer has any ownership interest in the business. The only way that the owner can get any ownership interest in the business is by adding new value to the business. Generally, that is understood to be adding money. In other words, the owner has to buy an interest in the business.

    1. The Subchapter V Chapter 11

    There is no absolute priority rule in a Subchapter V case. The business owner gets to keep the business, even if there are no consenting classes. However, to prevent bad debtor behavior, the Court can confirm a nonconsensual plan only if the plan does not unfairly discriminate against any creditors, and is fair and equitable. Providing the meanings of these terms would require a lot more time than we have here, so I’ll not discuss them further.

  4. Who Can File A Plan
    1. The Standard Chapter 11

    In standard Chapter 11, the debtor is the only one who gets to file a reorganization plan during the 120-day post-petition period called the exclusivity period. (This period can be extended with Court approval.) If the debtor has not filed a plan by the end of the exclusivity period, then anybody can file a plan. Even if the debtor has filed a plan, if the Court has not confirmed the plan within 180 days of the petition date, than anyone who wants to can file a competing plan.

    1. The Subchapter V Chapter 11

    In Subchapter V, only the debtor gets to file a plan. However, the debtor must file the plan within 90 days of the petition date. This deadline can be extended with Court approval.

    Based on this discussion of the benefits of Subchapter V, why would anyone file a standard Chapter 11? Subchapter V has a total debt ceiling of $2,725,625 (with a little bit of qualifying language), which has been temporarily increased to $7. 5 million. Therefore, if the total debt exceeds the ceiling, then Subchapter V is unavailable.

For more information on SBRA & Business Bankruptcy In California, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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