LEXIS-NEXIS® Congressional Universe-Document
LEXIS-NEXIS® Congressional
Copyright 1999
Federal News Service, Inc.
Federal News Service
MARCH 18, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH: 3746 words
HEADLINE: PREPARED TESTIMONY OF
JERE W. GLOVER
CHIEF COUNSEL FOR ADVOCACY
U.S. SMALL BUSINESSS ADMINISTRATION
BEFORE THE
HOUSE COMMITTEE ON THE JUDICIARY
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
SUBJECT - THE
BANKRUPTCY REFORM ACT OF 1999, H.R. 833
BODY:
The United States has a strong and vital economy envied by the world. We
encourage entrepreneurship and the creation of businesses in order to drive our
free market system. Currently, there are 23.3 million small businesses in the
United States, the vast majority of which are very small, but all of which have
aspirations to grow. Our small business community continues to maintain and
sustain our economy.
A number of small business trends are affecting our economy: 1) Since 1992,
more than three-fourths of all net new jobs has been created by small
businesses. While the Fortune 500's share of U.S. employment has declined
steadily since 1968, small business entrepreneurs have filled the gap. 2) It is
estimated that the fastest growing segment of the small business community,
called
"gazelles," numbers 355,846 businesses. 3) Our country is experiencing a major
"information revolution" similar to the
earlier industrial revolution--propelled, at least initially, by small
businesses. Our service-based industries are booming, with the information and
technology sectors growing at an accelerated rate. 4) Small businesses are
taking advantage of the global marketplace. A recent study completed for the
Office of Advocacy shows that small businesses are exporting at a much higher
rate than ever before.
The number of business-related
bankruptcies is at a historic low. Last year, of the 1.4 million
bankruptcy filings, the number filed by businesses was 44, 367, the lowest number since
1981. Of that number, only 7,524 were business filings under Chapter 11.
According to the American
Bankruptcy Institute,
"business
bankruptcies have decreased by 31.6 percent since 1990, when they totaled 64,853." If you assume that 90% of all business
bankruptcy filings are filed by small businesses, then statistically, small business
bankruptcy filings in Chapter 11 accounted for less than one-half of 1 percent (0.48%) of
the 1.4 million
bankruptcy filings in 1998.
Experience and our research have shown that many entrepreneurs do indeed fail
at their first attempts at business, but it is through their experience of
failure that they find the right formula for success.
A recent study funded by the Office of Advocacy confirmed this and showed that
24 percent of entrepreneurs in
bankruptcy have either started another business or plan to start another business. Unlike
some European and Asian countries where business failure is a stigma for those
who do not succeed on the first try, the United States has built its free
market on competitive principles and entrepreneurs' ability to try again.
Failure should not be a hindrance to future success.
Even though business
bankruptcies are at a historic low, I am not advocating that the
bankruptcy system is perfect. As of this date, I believe that the proposals in H.R. 833
go too far in addressing the relatively small number of problem cases. Under
the proposals, small business owners who are legitimately using Chapter 11
proceedings to reorganize their businesses
may be forced into a premature dismissal or conversion or may have to expend
vital resources to fend off challenges by any creditor for relatively minor
procedural infractions. I recommend the following with respect to H.R. 833: 1)
Maintain the current definition of small business ($2 million in debt); 2) Put
aside the provisions requiring mandatory use of the small business provisions;
3) Adopt standardized financial disclosure and confirmation forms with input
from SBA to ensure that the documents do not discriminate against service-based
industries; 4) Encourage voluntary education and debtor classes for the
smallest of Chapter 11 debtors; 5) Do not codify additional duties of small
business debtors; and 6) If additional grounds for dismissal or conversion are
to be added then only the court or the U.S. Trustees should be able to use
those provisions.
*******************
Good Morning, Mr.
Chairman and members of the Subcommittee. Thank you for inviting me to testify
today before the Subcommittee concerning the
Bankruptcy Reform Act of 1999, H.R. 833.
My name is Jere W. Glover and I am Chief Counsel for the Office of Advocacy at
the U.S. Small Business Administration. Congress established the Office of
Advocacy in 1976, and its statutory mission is to represent the views of small
business before federal agencies and Congress.(1) As Chief Counsel for Advocacy
I am also charged with monitoring federal agencies' compliance with the
Regulatory Flexibility Act (RFA)(2) as amended by the Small Business Regulatory
Enforcement Fairness Act of 1996 (SBREFA).(3)
In addition, I am charged by Congress to monitor and report on the availability
of capital and credit for small businesses. To fulfill this mandate, the Office
of Advocacy has undertaken a
series of studies analyzing bank lending to small businesses. The studies are
titled,
"Small Business Lending in the United States,"
"The Bank Holding Company Study," and the
"Micro-Business-Friendly Banks in the United States" study. This year we have added the study,
"Small Farm Lending in the United States."(4) In addition, we have funded with the Federal Reserve Board two surveys
entitled,
"The National Survey of Small Business Finances." As business
bankruptcies and failures are also part of the access to capital equation, we have also
funded research on how
bankruptcies affect small businesses.
Before discussing the
Bankruptcy Reform Act of 1999, I would like to give a brief overview of how entrepreneurism is
vital to the U.S. economy.
Entrepreneurism and the U.S. Economy
As I stated in testimony last year before the Senate, the United States has a
strong and vital economy
envied by the world. We encourage entrepreneurship and the creation of
businesses in order to drive our free market system. Currently, there are 23.3
million small businesses in the United States, the vast majority of which are
very small, but all of which have aspirations to grow. Our small business
community continues to maintain and sustain our economy.
A number of small business trends are affecting our economy:
Since 1992, more than three-fourths of all net new jobs has been created by
small businesses.(5) While the Fortune 500's share of U.S. employment has
declined steadily since 1968, small business entrepreneurs have filled the
gap.(6)
- It is estimated that the fastest growing segment of the small business
community, called
"gazelles," numbers 355,846 businesses.(7)
- Our country is experiencing a major
"information revolution" similar to the earlier industrial revolution--propelled, at least
initially, by small businesses. Our service-based industries are booming, with
the information and technology sectors growing at an accelerated rate.(8)
- Small businesses are taking advantage of the global marketplace. A recent
study completed for the Office of Advocacy shows that small businesses are
exporting at a much higher rate than ever before.(9)
As businesses and our economy diversify we must also have an economy that is
flexible enough to accommodate the new problems and issues faced by businesses
as they start up, expand, contract, and close.
Last year, the U.S. economy set another record - 898,453 new firms with
employees were created -- an increase from the record set in 1997.(10) The
strength of our economy lies in part from the technology boom sparked by the
tens of thousands of middle managers taking up entrepreneurism after being
downsized by
large corporations in the early and mid-1990's.
In contrast, the number of business-related
bankruptcies is at a historic low. Last year, of the 1.4 million
bankruptcy filings, the number filed by businesses was 44, 367, the lowest number since
1981. Of that number, only 7,524 were business filings under Chapter 11.
According to the American
Bankruptcy Institute,
"business
bankruptcies have decreased by 31.6 percent since 1990, when they totaled 64,853."(11) If you assume that 90% of all business
bankruptcy filings are filed by small businesses, then statistically, small business
bankruptcy filings in Chapter 11 accounted for less than one-half of 1 percent (0.48%) of
the 1.4 million
bankruptcy filings in 1998.
A high rate of business formation and dissolution is characteristic of a
dynamic economy.
Our nation's economy is
characterized by this dynamic and by the special role played by small business
entrepreneurs in sustaining overall growth.
Experience and our research have shown that many entrepreneurs do indeed fail
at their first attempts at business, but it is through their experience of
failure that they find the right formula for success.(12) A recent study funded
by the Office of Advocacy confirmed this and showed that 24 percent of
entrepreneurs in
bankruptcy have either started another business or plan to start another business.(13)
Unlike some European and Asian countries where business failure is a stigma for
those who do not succeed on the first try, the United States has built its free
market on competitive principles and entrepreneurs' ability to try again.
Failure should not be a hindrance to future success.
Recently, studies have been undertaken in Europe and
in Japan to understand the United States entrepreneurship system - in essence
to find out what we are doing right. A study commissioned by EIM International
of the Netherlands sought to understand the link between business failures and
the ability of entrepreneurs to start again.(14) Recent research in Japan
compares the financing systems in Japan with those in the United States.(15)
The attached chart clearly shows the quick birth and growth rates of small
companies in the United States in comparison with the much longer Japanese
birth and growth rate. But it is also clear that
bankruptcies and business failures are not an accepted part of the Japanese system.
Business men and women who fail are stigmatized and are usually unable to
continue in the business world.
The competitive fundamentals of our free market system allow not only for
innovation and creativity
but also for forgiveness that allows entrepreneurs a fresh start. As businesses
are being driven toward technology and service-based industries and
globalization our economy is diversifying. This poses new challenges, and
perhaps unfamiliar problems for our business community. We need a
bankruptcy system that is flexible enough to accommodate and work with these concerns and
to recognize the changing nature of our economy.
Comments on the
Bankruptcy Reform Act of 1999
Even though business
bankruptcies are at a historic low, I am not advocating that the
bankruptcy system is perfect. As our research has shown, the majority of
bankruptcy filings are made by very small businesses. Many of the small business owners
would benefit greatly from additional education and guidance on the
bankruptcy process. Unlike their large business counterparts, small businesses cannot
afford top turnaround teams or management consultants. They may need additional
time and
guidance to become organized and educated about
bankruptcy procedures. We applaud initiatives of some of the U.S. Trustees of the
Department of Justice to help small businesses in this manner.(16)
As of this date, I believe that the proposals in H.R. 833 go too far in
addressing the relatively small number of problem cases. Under the proposals,
small business owners who are legitimately using Chapter 11 proceedings to
reorganize their businesses may be forced into a premature dismissal or
conversion or may have to expend vital resources to fend off challenges by any
creditor for relatively minor procedural infractions.
As I mentioned above, there are many factors that are changing our economy and
will require greater flexibility for small business debtors in
bankruptcy. Two prime examples are the facts that our economy is moving from a
manufacturing to a service and information base and that small
businesses are taking advantage of a global marketplace. Small service business
debtors may not have the real estate or manufacturing equipment assets
typically available to other industries in reorganization efforts. Small
business exporters may encounter international situations that present problems
outside of the debtors' control. These businesses may require unique
reorganization provisions in order to return to profitability. Under H.R. 833,
the time and flexibility needed to address special circumstances will be
severely restricted.
As I stated in my letter to the committee last year on similar legislation, the
proposals would adopt a
"one-size-fits-all" definition for small businesses regardless of the complexity of the
bankruptcy, the industry of the small business, and/or any regional economic factors. I
believe that this is not the correct approach for this situation. As Congress
passed the Regulatory
Flexibility Act to require federal agencies to consider the effects of proposed
regulatory actions upon small entities, we should adopt the same approach here.
I have serious concerns that Congress would adopt, for the first time that I
can remember, more stringent requirements on small businesses than on large
businesses. I believe that this is a dangerous precedent to set. In light of
the historically low number of business
bankruptcy filings and the quicker time that business
bankruptcies are going through the system, the real question is whether these proposals are
really necessary at all.
I believe the following provisions of H.R. 833 would improve the
bankruptcy system for small business filers:
- Flexible Rules for Disclosure Statement and Plan (section 401),
- Standard Form Disclosure Statement and Plan (Section 403),
- Uniform National Reporting Requirements (Section 404), and
- Uniform Reporting Rules and
Forms for Small Business Cases (Section 405).
These sections would greatly benefit both small business debtors and creditors.
They offer flexibility and provide very small business filers with the
essential documents necessary for
bankruptcy reorganization. These combined with the educational courses and materials set
up by the U.S. Trustees, would greatly enhance the ability of small businesses
to focus on the future of their businesses. The only caution I have with
standardized forms is that they may be drafted in a way that might discriminate
against our growing service sector industries. We recommend that the SBA be
consulted in the drafting of these documents.
The following are my recommended changes to H.R. 833 pertaining to small
business debtors:
- Definitions (Section 402): I believe that the current definition of small
business debtor should remain in effect. The definition should be less than $2
million in debt and the provisions should be elected by the
small business. If the provisions are to be mandatory then I strongly recommend
that the $2 million threshold be retained. This threshold would still capture
more than 70 percent of the business filers as opposed to 85 percent that would
be captured under the proposed $4 million threshold.(17) Congress should start
with the smaller amount and then, if successful, the provision can be amended
in the future.
- Deadlines and Prohibition Against Extension of Time (Sections 407, 408, and
409): These sections take away all discretion from the
bankruptcy judge by setting mandatory time limits and curtailing the extensions of time.
Chapter 11 was designed to be flexible, allowing the business to reorganize in
the best possible way. As our economy is diversifying and our small businesses
are pursuing international trade opportunities, there will be many new factors
and challenges for businesses to overcome in order to reorganize effectively
under our
bankruptcy laws. I believe that the
bankruptcy
judge is the best individual to decide the timeline of a particular business
bankruptcy based upon the complexity of the case, the regional economic factors and
resources of the business to achieve reorganization. Based upon the judge's
expertise, he or she would be able to calculate appropriate deadlines and
extensions.
- Expanded Grounds for Dismissal of Conversion and Appointment of Trustee
(Section 413): Under these proposed amendments, small business entrepreneurs
must attempt to comply with all of their additional duties and filing
requirements in a shorter time frame while continuing to run their businesses.
Since any party in interest may file , the slightest infraction or delay may
elicit a creditor to petition the court for dismissal or conversion of the
small business
bankruptcy. As is common in small business
bankruptcies, there are typically one or two secured creditors and many unsecured creditors
(many of them small businesses). Unfortunately,
one unintended result of the proposals is that they would give the creditors
with the most resources the advantage of being able to file for minor
procedural deficiencies. Such provisions may cause the debtor to spend
considerable resources in court. In addition, small business creditors may not
have the resources to actively participate in such proceedings. I strongly
recommend, if the grounds for dismissal or conversion are expanded, that only
the court, own its on motion, or the U.S. Trustee, be able to bring motions on
procedural grounds.
With regard to other provisions of H.R. 833, I believe that Section 206,
regarding Creditors and Equity Security Holders Committees, should be amended
to allow for any small business unsecured creditor that wants to serve on a
creditors committee to be automatically considered by the U.S. Trustee as part
of a creditors committee.
Finally, I believe that this legislation, as
drafted, could have a chilling effect on entrepreneurism in the United States.
Our free- market economy encourages entrepreneurs to take challenges and face
risks in order to succeed. Our strong economy is evidence of our entrepreurial
base. As I have previously stated, more than three- fourths of all net new jobs
created since 1992 were created by small businesses.
Entrepreneurism is the foundation of this nation's economy and small
businesses. As debtors and creditors, entrepreneurs need a
bankruptcy system that is fair, equitable and flexible enough to accommodate the
individual needs of different industries, the complexities of varying
businesses and the regional economies around the country.
Conclusion
While I agree that the
bankruptcy system is not perfect with regard to business
bankruptcies, I believe that these proposals go too far in addressing the problem. It is
clear from the statistics that small business reorganizations have not imposed
a
critical burden on the
bankruptcy system. As stated earlier, only 0.48 percent of all
bankruptcy filings in 1998 can be considered small business-related reorganizations under
Chapter 11. According to the U.S. Trustees, the time businesses spend in
Chapter 11 has also declined significantly since 1992.
From a small business perspective, the system appears to be working in its
intended manner. Before fundamental and irreversible changes to the
bankruptcy system are made we need to quantify the problem. The opportunity is ripe for
developing better statistical data and more comprehensive research on how the
bankruptcy system for reorganizations has been beneficial and/or detrimental to small
business debtors and creditors. H.R. 833 has several provisions that address
the need for more statistical data on
bankruptcies. I support those provisions.
In sum, I recommend the following with respect to
H.R. 833:
- Maintain the current definition of small business ($2 million in debt);
- Put aside the provisions requiring mandatory use of the small business
provisions;
- Adopt standardized financial disclosure and confirmation forms with input
from SBA to ensure that the documents do not discriminate against service-based
industries;
- Encourage voluntary education and debtor classes for the smallest of Chapter
11 debtors;
- Do not codify additional duties of small business debtors; and
- If additional grounds for dismissal or conversion are to be added then only
the court or the U.S. Trustees should be able to use those provisions.
Thank you for the opportunity to appear today. I am happy to answer any
questions that you may have about my testimony.
FOOTNOTES:
1. 0 The Office of Advocacy, established by Public Law 94-305, is an
independent office charged with representing the views and interests of small
businesses
before the Federal government. By law, the Chief Counsel is appointed by the
President from the private sector and confirmed by the Senate. The Chief
Counsel's comments and views are his own and do not necessarily reflect the
views of the Administration or the U.S. Small Business Administration.
2. 0 5 U.S.C. '601 et seq.
3. 0 Public Law 104-121, 110 Stat. 857 (codified at 5 U.S.C. '601 et seq.).
4. 0 The studies are available on SBA's Internet website at
"www.sba.gov/ADVO/stats/".
5. 0 See Appendix A.
6. 0 See Appendix B.
7. 0 Cognetics, Inc., Cambridge, MA, tabulation for the Office of Advocacy,
U.S. Small Business Administration (1998).
8. 0 See Appendix C.
9. 0
"Exporting by Small Firms," Office of Advocacy, U.S. Small Business Administration,
April 1998.
10. 0 Preliminary statistics tabulated by the Office of Advocacy, U.S. Small
Business Administration based upon statistics by the Department of Labor.
11. 0 American
Bankruptcy Institute press release, March 1, 1999.
12. 0 See Fullenbaum and McNeill, The Function of Failure, prepared by M
& R Associates, for the Office of Advocacy, U.S. Small Business Administration
(Springfield, Va.: National Technical Information Service, 1994).
13. 0 See Sullivan, Warren and Westbrook, Financial Difficulties of Small
Businesses and Reasons for Their Failure, prepared for the Office of Advocacy,
U.S. Small Business Administration (September 1998)
14. 0 See Poole, Micronomics, Inc., Business Failure and Entrepreneurship in
the United States (September 20, 1998).
15. 0 Chart compiled by Professor Akio Nishizawa, Faculty of Economics Tohoku
Univeristy,
Kawauchi, Aoba-Ku, Sendai 980-8576, Japan. See Appendix D.
16. 0 The U.S. Trustees in Dallas and San Francisco have established voluntary
debtors' schools to educate and help debtors file their financial statements.
17. 0 Small Business Proposals, National
Bankruptcy Review Commission.
END
LOAD-DATE: March 23, 1999