What is a Debtor in Possession?
One of the benefits of Chapter 11 bankruptcy is the ability of a company to file for bankruptcy, yet emerge from that bankruptcy intact – that is, still in business. But that means that during the bankruptcy, the business still has to be managed, run, and operated. How does it do that? With the Debtor in Possession (DIP).
What is a DIP?
A unique aspect of a Chapter 11 bankruptcy is that in most cases, the debtor gets to continue to operate the business, even through the bankruptcy. The property of the business technically becomes property of the bankruptcy court, but at the same time, those assets are needed to run the business, and someone has to manage those assets. And who better to run the business than the person or people who were running it before the bankruptcy was filed?
But running the business after the bankruptcy is not the same as running it beforehand. The DIP doesn’t just have the business’s interests at heart, as it would normally. Rather, the DIP also now has to account or and protect the business’s creditors.
The DIP can hire needed professionals, such as accountants or lawyers, or hire appraisers that may be needed to facilitate the bankruptcy itself.
A DIP can also seek financing. It may seem odd for a company that is in bankruptcy to then take on more credit, but financing in a Chapter 11 is quite common to help the business pay its expenses related to the bankruptcy. Usually, a business’s creditors from before the bankruptcy will have to approve of the financing for the bankruptcy itself.
The DIP will use the financing to pay the business’s expenses—payroll, utilities, and other operating expenses, as well as attorneys fees or costs associated with the bankruptcy itself.
Getting Court Approval
The DIP also will have to seek court approval to take certain actions that it would normally be able to do outside of bankruptcy. These include things like signing new leases, getting mortgages, drastically expanding business operations, or selling significant assets that are outside the formal course and scope of business.
Creditors may oppose actions taken by the DIP, and it is up to the court to determine whether to approve of the DIP’s proposals or not.
Removal of the DIP
The Code contains guidelines about what a DIP can and cannot do. A DIP can be removed for ignoring those guidelines, failing to get court approval for certain actions, or for not getting approval from creditors where it is required. The Court can appoint a trustee after notice and hearing who will oversee DIP to ensure that he or she is doing what is supposed to be done.