Temporary Changes to the Debt Threshold and its Potential Effect on the Oil and Gas Industry

What is Sub-Chapter V?

On August 23, 2019 President Trump signed into law the Small Business Reorganization Act of 2019 (“SBRA”), which took effect on February 19, 2020. The SBRA was drafted to address  small business debtors’ complaints regarding the cost and complexity of Chapter 11 filings under the Bankruptcy Code.

Prior to the SBRA, many indebted small businesses struggled with the Chapter 11 plan confirmation determination and either elected to file under Chapter 7 or did not file at all.  Even so, before the enrollment and implementation of the SBRA, small businesses accounted for most Chapter 11 filings; however, they were the least likely entity type to achieve a successful reorganization.

The SBRA added Subchapter V to Chapter 11 of the Bankruptcy Code to address these noted issues.  In order to be considered as a small business debtor, a business must have aggregate noncontingent liquidated debts that do not exceed $2,725,625.00, and at least 50% of that debt must come from commercial or business activities. Furthermore, single asset real-estate owners are ineligible for relief under Subchapter V.

In addition, those small businesses that qualify under Subchapter V enjoy the following protections:

  • the “absolute priority rule”, which burdens Chapter 11 filings, is inapplicable. This rule previously provided that a dissenting class of unsecured creditors must be fully provided for before any junior class can receive or retain property;
  • there are no creditor’s committees that investigates the debtor’s business operations (unless by court order), which should allow the debtor more control over the plan and eliminate procedural delays, which likewise should reduce associated attorney fees;
  • there are no quarterly U.S. Trustee fees;
  • creditors cannot file competing plans;
  • the requirement to have at least one impaired consenting class is waived; and
  • a debtor may extend payment of post-petition expenses over three to five years.

Furthermore, Subchapter V to Chapter 11 of the Bankruptcy Code appears to provide cumulative relief as allowed under the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), passed on March 27, 2020.

What is the CARES Act Impact on Sub-chapter V?

The CARES Act, as passed on March 27, 2020, created a temporary increase in the debt limit, from $2,725,625.00 to $7,500,000.00, for filings between March 28, 2020 and March 23, 2021.

Impact on the Oil and Gas Industry:

Small and medium sized operators whose debts do not exceed the temporary debt threshold of $7,500,000.00 are now eligible for relief under Subchapter V to Chapter 11 of the Bankruptcy Code, under the temporary relief in the CARES Act. Many of these operators have been historically excluded from these options by their debt load and this is a unique opportunity for restructuring and reorganization.

If you have any questions regarding this article, or its potential application to your restructuring or reorganization, please call our office at (832) 626-0215.

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