Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress, typically during restructuring under corporate bankruptcy law (such as Chapter 11 bankruptcy in the US or CCAA in Canada[1]). Usually, this debt is considered senior to all other debt, equity, and any other securities issued by a company[2] — violating any absolute priority rule by placing the new financing ahead of a company's existing debts for payment.[3]

DIP financing may be used to keep a business operating until it can be sold as a going concern,[4] if this is likely to provide a greater return to creditors than the firm's closure and a liquidation of assets. It may also give a troubled company a new start, albeit under strict conditions. In this case, "debtor in possession" financing refers to debt incurred while in bankruptcy, and "exit financing" is debt incurred upon emerging from reorganisation under bankruptcy law.[5]

Examples

Two notable examples are the government financing of Chrysler[6] and General Motors[7] during their respective 2009 bankruptcies.

American law vs. French law

The willingness of governments to allow lenders to place debtor-in-possession financing claims ahead of an insolvent company's existing debt varies; US bankruptcy law expressly allows this[8] while French law had long treated the practice as soutien abusif, requiring employees and state interests be paid first even if the end result was liquidation instead of corporate restructuring.[9]

See also

References

  1. ^ Lyndon Maither, B.C. (2013). The Canada Income Tax Act: Enforcement, Collection, Prosecution, 4th Ed. Lyndon Maither. p. 319. ISBN 9781300772286.
  2. ^ Stuhl, S.A.; Vault (Firm) (2003). Vault Guide to Bankruptcy Law Careers. Vault Incorporated. p. 147. ISBN 9781581312577.
  3. ^ Liu, L. (2008). Subnational Insolvency: Cross-Country Experiences and Lessons. World Bank. p. 20.
  4. ^ Lyndon Maither, B.C. The Canada Income Tax Act: Enforcement, Collection, Prosecution, 6th Edition.
  5. ^ Hecker, J.E.Z. (2006). Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues. DIANE Publishing Company. p. 10. ISBN 9781422304327.
  6. ^ Engel, G.T. (2010). Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial Statements. DIANE Publishing Company. p. 61. ISBN 9781437926811.
  7. ^ Barofsky, N. (2011). Troubled Asset Relief Program (SIGTARP): Quarterly Report to Congress by the Office of the Special Inspector General (SIGTARP)(October 26, 2010). DIANE Publishing Company. p. 145. ISBN 9781437942019.
  8. ^ Warren, E. (2010). Use of TARP Funds in the Support and Reorganization of the Domestic Automotive Industry. DIANE Publishing Company. p. 44. ISBN 9781437923698.
  9. ^ Pomerleano, M.; Shaw, W.; Bank, W. (2005). Corporate Restructuring: Lessons from Experience. World Bank. p. 130. ISBN 9780821359280.

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