Since its enactment in February 2020, Subchapter V of Chapter 11 has become a popular vehicle for eligible small businesses that are looking to reorganize or otherwise address operational issues, liquidity issues and excessive debt. Congress enacted Subchapter V to make Chapter 11 more appealing for small businesses that were previously deterred from filing Chapter 11 due to its costs and risks. Subchapter V provides a less expensive and more streamlined process yet gives debtors the ability to reap largely the same benefits as Chapter 11.
From a trade creditor’s perspective, perhaps the biggest difference between Subchapter V and the pre-existing Chapter 11 process is that no official committee of unsecured creditors is appointed in a Subchapter V case. A creditors’ committee plays a critical role as a fiduciary for all the debtor’s unsecured creditors. Among other things, a committee is empowered to investigate and potentially commence litigation to challenge the security interests of a debtor’s prepetition lenders and prosecute prepetition causes of action that a debtor may have against third parties, including the debtor’s lenders and insiders (e.g., owners, affiliates, spouses, and directors and officers). A committee can leverage these powers through negotiations or litigation to potentially increase distributions for unsecured creditors. And the best part? The fees and expenses a committee incurs in fulfilling its duties are paid by the debtor’s estate!
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