Alexandria, Va. — Amid the perception by small and medium-sized businesses that chapter 11 is too expensive a vehicle through which to pursue a true reorganization, an article in the December ABI Journal article makes the case for implementing the cost-cutting measures contained in the Final Report of the ABI Commission to Study the Reform of Chapter 11. “If, as the ABI Commission sought to accomplish, time and cost can be removed from the chapter 11 process, many of the perceived hurdles to chapter 11 will fall,” Edward T. Gavin of Gavin/Solmonese LLC (Wilmington, Del.) writes in his article “How to Lessen the Big Costs of Small-Business Bankruptcy.”
“Small and medium-sized businesses, those with asset values of up to $50 billion, comprise the majority of business bankruptcy cases in the U.S.,” Gavin writes. The expenses and duration of the current chapter 11 process can be daunting for a small company struggling for survival, according to Gavin. “Without restructuring under chapter 11, small and medium-sized businesses are faced with few choices: either sell the company's assets in a §363 sale, or liquidate the company.”
Outlining ways to modernize chapter 11 of the Bankruptcy Code, the Final Report of ABI’s Chapter 11 Reform Commission makes specific recommendations to reduce costs and increase access to struggling small or medium-sized businesses. The Commission’s recommendation included defining a small or medium-sized enterprise (SME) debtor as a debtor having no publicly traded shares in its capital structure and less than $10 million in assets or liabilities.
The Commission also recommended the creation and appointment of an "estate neutral" to eliminate the need for creditor committees. “Although an estate neutral may require counsel or a financial advisor’s assistance to fully preform their duties in certain cases, the cost-reduction benefit might be found in the efficiencies gained by eliminating the competing objectives – political, business or otherwise – of individual committee members in liquidating chapter 11 cases,” Gavin writes.
As most small-business debtors are unable to confirm a reorganization plan under the current Code’s timeline of 45 days after filing, Gavin writes that the Commission recommendations provide a practical timetable. “The ABI Commission recommended a multi-stage process that draws from existing small-business and single-asset real estate chapter 11 debtor timelines and adapts them to the SME debtor.”
The fact that businesses qualifying for SME consideration are the majority of business bankruptcy debtors, Gavin thinks that it is reasonable to expect that SME recommendations will be among the first of the Commission's many recommendations to make it before Congress. “While some of the recommendations may seem a bit shocking, a more robust chapter 11 universe with access to bankruptcy for more-troubled companies is a strong remedy to an institutional resistance to change.”
To obtain a copy of “How to Lessen the Big Costs of Small-Business Bankruptcy” from the December edition of the ABI Journal, please click here.
To view the ABI Chapter 11 Reform Commission’s proposed recommendations for small and medium-sized enterprise cases, please click here.
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ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 12,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abi.org/education-events.