Subchapter V Plan Confirmation: 5 Requirements When Creditors Vote No

When the creditors of a small business vote down its Subchapter V plan, the ballot settles less than they suppose. A class accepts under section 1126(c) when holders of at least two thirds in amount and more than half in number of the claims actually voting say yes; a class that falls short has rejected. In ordinary Chapter 11 that rejection sends the plan toward cramdown and the absolute priority rule. In this subchapter it sends the plan to 11 U.S.C. 1191(b), where the court, on the debtor's request, must confirm if five requirements are met.

Before Congress added the subchapter in August 2019, a small company whose unsecured creditors rejected its plan faced the full weight of section 1129(b), and its owners either paid the dissenters in full or surrendered their equity. The five requirements below replaced that choice with something closer to an audit. The court no longer asks what the creditors wanted. It asks what the plan does.

1. Every Other Confirmation Test Still Applies

Section 1191(b) confirms a plan notwithstanding paragraphs (8), (10), and (15) of section 1129(a). Paragraph (8) requires every class to accept or be unimpaired, paragraph (10) requires an accepting impaired class without insider votes, and paragraph (15) is the individual debtor's disposable income rule. Everything else in section 1129(a) remains, and it is a long list.

The plan must comply with the Code, and so must its proponent. It must be proposed in good faith and by no means forbidden by law. Payments for services and expenses in connection with the case must be approved by the court, or subject to its approval, as reasonable. Priority tax claims must be paid in regular cash installments over a period ending no later than five years after the order for relief. The plan must be feasible, meaning confirmation is not likely to be followed by liquidation or a further reorganization.

The requirement that dissenting creditors most often invoke is the best interests test in paragraph (7), which guarantees each holder in an impaired class that has not accepted at least what it would receive if the debtor were liquidated under Chapter 7 on the effective date, and this is why section 1190 requires every Subchapter V plan to carry a liquidation analysis, since without one the court has no floor against which to measure what the plan offers the creditor who voted no, and a creditor who believes the equipment was valued as scrap when it would sell as a going concern will attack the plan at exactly that point.

A hypothetical bakery whose liquidation analysis shows $85,000 available to unsecured creditors in Chapter 7 cannot offer that class less than $85,000 in present value, whatever its disposable income happens to be. The floor holds even when the vote fails.

One requirement is relaxed. Section 1129(a)(9)(A) ordinarily demands cash on the effective date for administrative claims, including the fees of the debtor's professionals, and section 1191(e) lets a nonconsensual plan pay them through the plan instead.

2. No Unfair Discrimination Among Classes

The plan must not discriminate unfairly against any impaired class that has rejected it. Section 1191 goes on to define what fair and equitable includes; it offers no parallel definition of unfair discrimination, and the phrase is left to the court.

A plan that pays trade creditors in full while offering merchant cash advance funders a fraction invites exactly this objection. The debtor will need a reason the court accepts, and a preference for the creditors it still buys from is a reason that has to be argued.

3. Secured Classes Receive Ordinary Cramdown Treatment

For a class of secured claims, section 1191(c)(1) imports section 1129(b)(2)(A) without change. The secured creditor keeps its lien and receives deferred cash payments totaling at least the allowed claim, with a present value at least equal to the value of its collateral; or the collateral is sold free of the lien, with the lien attaching to the proceeds; or the creditor receives the indubitable equivalent of its claim.

Under section 506(a), a hypothetical equipment lender owed $140,000 on machinery a court values at $90,000 holds a secured claim of $90,000 and an unsecured claim for the rest, and the $50,000 balance joins the unsecured class, where it is paid alongside everyone else. That lender has a stake in two classes at once.

4. Disposable Income for Three to Five Years, or Its Value

Section 1191(c)(2) requires the plan to apply all of the debtor's projected disposable income over three years, or a longer period of up to five that the court may fix, to plan payments, or to distribute property of equal value within that period. Section 1191(d) defines disposable income as what is not reasonably necessary for the support of the debtor and dependents or for expenditures necessary to continue, preserve, or operate the business.

The test resembles an arrangement a county fair board might make with a lemonade concessionaire behind on booth rent: the stand stays open, the lemonade keeps selling, and everything left after sugar, lemons, and the teenager at the register goes to the board, for as many summers as someone else decides. Here that someone is the court, and it may not choose more than five.

Projections carry the weight here. A creditor who doubts them will look at owner compensation, at capital spending labeled as necessary, and at any gap between historical margins and the margins the plan assumes.

5. The Debtor Can Pay, or the Plan Says What Happens If It Cannot

Section 1191(c)(3) requires either that the debtor will be able to make all plan payments, or that there is a reasonable likelihood it will and the plan provides appropriate remedies to protect creditors if payments stop. The statute names one such remedy, the liquidation of nonexempt assets.

And the consequences of a plan confirmed this way run for years. Section 1194(b) makes the trustee the disbursing agent unless the plan or the order says otherwise. Section 1186(a) brings property and earnings the debtor acquires after filing into the estate. Section 1192 withholds the discharge until the payments due in the first three years, or the longer period fixed, are complete. Section 1193(c) permits modification within that period if circumstances warrant and the court approves, and section 1185(a) allows removal of the debtor from possession for failure to perform the plan.

What a Rejecting Vote Still Accomplishes

A no vote is not wasted. It denies the debtor the faster discharge and the early exit of the trustee that come with a consensual plan, it forces the debtor to meet the disposable income and feasibility tests, and a creditor that also files an objection puts projections, valuations, and classification before the judge.

A business with a plan that cannot win votes and a need to bind the creditors who cast them belongs with bankruptcy counsel. Delancey Street plays no part in confirmation and is not a law firm; it negotiates business debt, merchant cash advances above all, by agreement, offers owners an initial review without charge or disclosure to anyone else, and leaves legal questions to independently licensed attorneys. An agreement it reaches binds only those who sign it. A confirmed plan binds the rest, which is the entire reason section 1191(b) exists.

Consent was always cheaper than a hearing. The subchapter made the hearing cheaper too, and the vote became one piece of evidence among several.