Small Company Bankruptcy Reform On the Horizon?

March 9, 2018 - As reported by WSJ Bankruptcy Pro, earlier this week the Senate Committee on the Judiciary’s subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts held a hearing on small company bankruptcy.  Senator Ben Sasse (R. Nebraska) opened the hearing by noting that Chapter 11 is far too costly and complex for small family businesses and is in need of reform, a sentiment shared by all of the panelists.  Why is this important to participants in the middle market or the broadly syndicated loan markets?  Two bankruptcy-focused organizations,  the National Bankruptcy Conference (NBC) and the American Bankruptcy Institute (ABI), have published recommendations for reforming Chapter 11 for small companies, one of which could have very significant and negative implications for secured lenders to middle market and even larger companies.  The NBC’s proposal is very simple and targeted and is based on the principles of Chapter 12, which apply to small family farm businesses.  In a nutshell, it would be limited to small family companies and allow those debtors to retain ownership of their companies so long as they pay their creditors over time.  There would be no creditors committees and a trustee to facilitate the plan.  The reach of the ABI proposal, in contrast, could be much greater because it could apply to small and medium sized entities (SMEs) with up to $50 million in either assets or liabilities.  More troubling is the fact that it would completely upend the “absolute priority rule” (which requires that senior creditors be paid before junior creditors who, in turn, are paid before equity) for SMEs.  Under the ABI’s plan, equity holders could be paid out under a plan of reorganization even where senior creditors have not been paid in full.  Finally, the ABI’s plan for SMEs would be far more complex and costly than the NBC’s proposal.  The LSTA has previously addressed the shortcomings of the ABI’s proposal in its responsive report (beginning on page 71).  The LSTA will continue to monitor whether or not small business bankruptcy reform legislation is on the horizon and will engage as appropriate in the interests of its members and continuing robust credit markets.

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