[Congressional Record Volume 140, Number 35 (Thursday, March 24, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: March 24, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                GOVERNMENT LOSSES FROM INSOLVENT SBIC'S

                                 ______


                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                        Thursday, March 24, 1994

  Mr. LaFALCE. Mr. Speaker, almost 2 years ago the President signed 
H.R. 4111, the Small Business Credit and Business Opportunity 
Enhancement Act of 1992--Public Law 102-366. Title IV of this bill 
includes major reform provisions to the Small Business Investment Act 
of 1958 under which the Small Business Administration licenses private 
companies to provide venture or equity-type capital to small 
businesses.
  These private companies are designated as small business investment 
companies [SBIC's] or, if they restrict their activities to funding 
socially or economically disadvantaged small firms, as specialized 
small business investment companies [SSBIC's].
  These companies have private capital invested in them, and based on 
the amount of this private money, augment the amount available for 
investment in small firms by obtaining Government guarantees of 
debentures or long-term notes which they sell to private investors.
  The new law addresses cash flow problems of these SBIC's by 
restructuring the program to provide a new type of financing and also 
by requiring more private money to be invested and serve as a buffer 
before any Government money is lost.
  We believe that the new system will be a vast improvement; however, 
it is inevitable that some SBIC's will not succeed. Historically, when 
that has occurred, the SBA liquidates or winds up the affairs of a 
failed or failing company by seeking a receivership under the auspices 
of the Federal courts. Several years ago SBIC's discovered that they 
could thwart this process by seeking the protection of the Bankruptcy 
Act.
  By filing under Chapter 11 as a debtor in possession, an SBIC can 
frustrate SBA's efforts to liquidate the company through a 
receivership. Instead, the bankruptcy court generally will permit the 
owner-operator to continue to run the company and receive a salary well 
in excess of the amount SBA would have approved and to pay significant 
amounts for attorneys, accountants, and other professional personnel.
  Most importantly, by initiating bankruptcy proceeding, the SBIC can 
speculate with Government money. If the SBIC's investments were 
promptly liquidated, the Government might receive most or at least some 
of its money back, but unless it receives full payment, the owner of 
the company would walk away empty-handed.
  On the other hand, if the company can draw out the proceedings for 4 
or 5 years, the SBIC's investments may appreciate in value and provide 
the owner with amounts remaining after the company's creditors are 
paid.
  Thus bankruptcy is a win-win situation for the owners of the SBIC--
they can continue to draw a fat salary while they wait to see if better 
times are ahead; if not, only the Government loses.
  This type of situation exists in other industries in which 
participants are licensed by or are substantially regulated by the 
Government. There is, however, a major difference--the Bankruptcy Code 
does not permit such participants to hide behind it. Section 109 of 
title XI of the United States Code specifically prohibits the filing of 
bankruptcy by institutions such as: insurance companies, banks, savings 
and loans, and credit unions.
  I believe that a similar prohibition should be applied to small 
business investment companies.
  In the late 1980's, a dozen SBIC's with Government indebtedness of 
$120 million have abused the process and have filed bankruptcy. We do 
not know how much of this amount will actually be lost to the 
Government, nor will we ever know for sure how less our losses would be 
if the companies had been liquidated under SBA auspices through a 
receivership. But clearly our losses would have been less as the SBA 
could have controlled the company's expenses and timing on disposition 
of assets.
  Mr. Speaker, the SBIC Program is worthwhile. It provides equity-type 
capital to small businesses which cannot obtain it elsewhere. However, 
participation in the program is a privilege and those who elect to do 
so should be precluded from seeking the protection of the bankruptcy 
courts.
  The SBA is proposing a partial solution to this problem in the 
regulations implementing the new participating securities. It will 
require that SBIC's consent in advance to SBA being appointed as 
receiver upon the occurrence of certain specified events. SBIC's 
seeking financial assistance, or leverage, from SBA would provide such 
consent.
  However, there is over $800 million in SBA financing outstanding 
today. SBA's new regulation will not impact these monies unless the 
SBIC's involved seek and receive new money from SBA. We remain at risk 
until the issuing SBIC's are prohibited from seeking bankruptcy as my 
bill provides.
  I urge the Judiciary Committee to promptly consider this measure.
  The text of the bill follows:

       That section 109(b)(2) of title 11, United States Code, is 
     amended by inserting after ``homestead association'' the 
     following: ``small business investment company licensed by 
     the Small Business Administration under subsection (c) or (d) 
     of section 301 of the Small Business Investment Act of 1958 
     (15 U.S.C. 681),''.

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