By: Donald L Swanson
On April 23, 2024, the American Bankruptcy Institute’s Subchapter V Task Force issued its Final Report.
This article is the first in a series that summarizes and condenses the Task Force’s Final Report into “a nutshell.” This article:
- provides background information and data on Subchapter V.[Fn. 1]
Overall
The Task Force undertook an in-depth study of Subchapter V statutes and case law, analyzed empirical data, and heard from major bankruptcy constituents.
Overall, the Task Force finds that:
- Subchapter V is working as Congress intended, allowing smaller companies to reorganize and pay creditors; and
- Subchapter V statutes and practices could benefit from refinement or statutory amendment.
Background
Smaller businesses are the core of the U.S. economy:
- U.S. has 33.2 million small businesses, employing over 61 million people and 46% of all private sector employees; but
- 50% of small businesses fail in the first 5 years and 70% fail in the first 10 years.
Standard Chapter 11 is ineffective for smaller business reorganizations: prior to Subchapter V, smaller businesses simply liquidated and closed.
Research began in the 1980s toward improving Chapter 11 for smaller businesses, ultimately resulting in the enactment of Subchapter V—with its goal of providing a quick, low-cost, and feasible path to reorganization.
Since enactment of Subchapter V, 7,500 Subchapter V cases have been filed, and 44% of all Chapter 11 filings in 2023 were Subchapter V.
The ABI created its Subchapter V Task Force in April of 2023 to review how Subchapter V is working and to make recommendations for improvement.
The Task Force heard from fifty witnesses over seven public hearings, held roundtable discussions with trade groups, and used surveys—in addition to consulting relevant case law and commentary.
The Task Force worked under these core concepts. Subchapter V:
- is in its infancy, with many issues undeveloped or yet to be revealed;
- is flexible by design;
- is beneficial for creditors, especially when reorganization produces better results for creditors than liquidation; and
- has been very effective, with some areas for improvement remaining.
The overwhelming consensus is that Subchapter V is functioning as Congress intended.
Success Comparisons
Compared to standard Chapter 11, in Subchapter V cases:
- plan confirmations occur more often, more quickly, and at lower cost; and
- creditors are receiving more money.
Here are further comparisons from one bankruptcy district:
- of 110 Subchapter V cases, 61 (55%) resulted in confirmed plans, but
- of 295 standard Chapter 11 cases, 99 (34%) resulted in confirmed plans;
- average duration of Subchapter V cases is 407 days, but
- average duration of standard Chapter 11 cases is 470 days—a 63 days difference;
- average professional fees in Subchapter V cases is $145,790; but
- average professional fees in standard Chapter 11 cases is $679,387—a staggering $533,597 difference.
By further comparison:
- 50% of all Subchapter V cases achieve confirmed plans, of which 69% were consented to by all creditor classes; but
- before Subchapter V, only 25% of debtors with assets or liabilities <$10 million were able to confirm a Chapter 11 plan; and
- Subchapter V more than doubles the probability of reorganization for businesses near the $7.5 million debt cap.
Need for Improvements
Notwithstanding the successes of Subchapter V, aspects of Subchapter V need more clarity and consistency. So, the Final Report offers both statutory changes and best practices.
Conclusion
The Task Force voted unanimously to approve each of the recommendations and principles set forth in its Final Report.
————————–
Footnote 1. Discussion of this subject is on pages 1 to 9 of the Final Report.
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
Feed Original Url