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     A business bankruptcy is a case filed by a debtor who is engaged in business, or whose debts are primarily business, as opposed, to consumer, in nature. The case can be filed under Chapter 7, 11, 12 or 13. The debtor can be any of the following entities: an individual acting as a sole proprietor; a partnership; or a corporation. There are several different kinds of partnerships, including: General Partnership; Limited Partnership; and Limited Liability Partnership. Corporations can include: S-Corporations; C-Corporations; and Limited Liability Companies. The corporations are often described by their state of incorporation, e.g., Delaware Corporation; Nevada Corporation; or Massachusetts Business Trust, among others.

Popular Business Filings

     Some of the more popular business filings involve real estate, mortgages, construction, franchises and dealerships, and professionals like physicians, dentists and even law firms.

What is a Small Business Bankruptcy?

     A "small business bankruptcy" is a type of Chapter 11 bankruptcy. It is defined in Bankruptcy Code Section 101(51C) & (51D) as a case filed by a person engaged in small business or commercial activities whose aggregate non-contingent, non-insider, liquidated secured and unsecured debts on the bankruptcy petition date total no more than $ 2,343,300. "Person" can include individual, partnership, or corporation. There are special rules for this type of case, designed to make them cheaper and quicker.

 

Provisions Relating to Small Business Cases

     A small business case usually operates without a creditors committee being appointed. This is to save money, because the debtor is normally liable for the cost of the committee's lawyers, accountants and other advisers, and these fees can be substantial. The law provides the small business debtor with a 180-day exclusivity period during which only the debtor can file a plan. It requires that a plan be filed by no later than 300 days after the filing. This is to provide the small debtor with a respite from creditor pressure and allow him sufficient time to formulate a plan. Small business cases also have expedited procedures for plan confirmation, including conditional approval of a disclosure statement and the use of standardized forms.

Relevant Articles

"Alter-Ego" and "Piercing the Corporate Veil"

     Sometimes, creditors claim that the insiders of a corporation, including the shareholders, officers and directors, should be held liable for the company debts under the so-called "alter-ego" or "piercing the corporate veil" theories. Alter-Ego and and Piercing the Corporate VeilThe normal rule of corporate law is that only the corporation is liable for its debts. One of the whole reasons behind incorporating a business is to obtain this protection from personal liability in the event of corporate failure. However, in some instances, the court will look behind the corporate "veil" and impose personal liability on one or more of the insiders, and treat the corporation as simply an "alter ego" of the insider. This is done to prevent injustice, and usually occurs when the following facts, or at least some of them, are present: the company was undercapitalized; the insiders have misled creditors about the corporation's solvency; the insiders have disregarded the corporate formalities, such as holding shareholder and board meetings; the affairs of the corporation and the insider have been hopelessly commingled; the insiders have used corporate property for personal gain, at the expense of creditors. Some courts hold that "alter ego" claims actually belong to the corporation itself, and cannot be brought by creditors individually. Other courts hold that creditors have an independent and direct claim against the insiders based on these legal theories. An expert should be consulted if this issue is raised, as the law may vary from state to state, and from one federal circuit to another.

The Court and Distressed Businesses

     Bankruptcy Court can be a place where a distressed business can continue to operate and try to restructure its debts under the protective cloak of the federal government. Debtors can continue to operate their businesses in Chapters 11, 12 and 13, whereas in Chapter 7 it is generally shut down. Congress believes it is sound public policy to encourage those businesses with viability to file Chapter 11, rather than simply shutting the doors and ceasing operations. This saves jobs, potentially increases the return to creditors, and gives the owners something to build on and keep for the future. Of course not all businesses are salvageable, and a keen look should be taken by the debtor's attorney and accountant before the filing to assess the debtor's chance of success in Chapter 11.

 

Special Provisions / Chapter 11 Cases

     Special provisions relate to "small business" Chapter 11 bankruptcy cases, designed to make the reorganization process quicker and cheaper. In some business cases, the creditors may seek to impose personal liability on the insiders of the company, under the "alter ego" and "piercing the corporate veil" theories. These are complex, fact-intensive cases, and outcomes can vary from jurisdiction to jurisdiction. If successful, the creditors can force the insiders to pay the company's bills.

Written by Henry Rendler





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