debtor-in-possession financing
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{{cite book|title=The Canada Income Tax Act: Enforcement, Collection, Prosecution, 4th Ed.|author=Lyndon Maither, B.C.|year=2013|publisher=Lyndon Maither|isbn=9781300772286|url=https://books.google.com/books?id=mrxbeR2IiXgC|page=319}}). Usually, this debt is considered senior to all other debt, equity, and any other securities issued by a company{{cite book|title=Vault Guide to Bankruptcy Law Careers|author1=Stuhl, S.A.|author2=Vault (Firm)|date=2003|publisher=Vault Incorporated|isbn=9781581312577|url=https://books.google.com/books?id=96kIg4mRZQkC|page=147}} — violating any absolute priority rule by placing the new financing ahead of a company's existing debts for payment.{{cite book|title=Subnational Insolvency: Cross-Country Experiences and Lessons|author=Liu, L.|date=2008|publisher=World Bank|url=https://books.google.com/books?id=FUQRqYb_oj0C|page=20}}
DIP financing may be used to keep a business operating until it can be sold as a going concern,{{cite book|title=The Canada Income Tax Act: Enforcement, Collection, Prosecution, 6th Edition |author=Lyndon Maither, B.C.|url=https://books.google.com/books?id=jZjeAgAAQBAJ}} 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.{{cite book|title=Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues|author=Hecker, J.E.Z.|date=2006|publisher=DIANE Publishing Company|isbn=9781422304327|url=https://books.google.com/books?id=NhDjMtWwvwMC|page=10}}
Examples
Two notable examples are the government financing of Chrysler{{cite book|title=Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial Statements|author=Engel, G.T.|date=2010|publisher=DIANE Publishing Company|isbn=9781437926811|url=https://books.google.com/books?id=D3NU3Ohs0hsC|page=61}} and General Motors{{cite book|title=Troubled Asset Relief Program (SIGTARP): Quarterly Report to Congress by the Office of the Special Inspector General (SIGTARP)(October 26, 2010)|author=Barofsky, N.|date=2011|publisher=DIANE Publishing Company|isbn=9781437942019|url=https://books.google.com/books?id=7tcGqgQvLTYC|page=145}} 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{{cite book|title=Use of TARP Funds in the Support and Reorganization of the Domestic Automotive Industry|author=Warren, E.|date=2010|publisher=DIANE Publishing Company|isbn=9781437923698|url=https://books.google.com/books?id=FODXmeZA6xgC|page=44}} 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.{{cite book|title=Corporate Restructuring: Lessons from Experience|author1=Pomerleano, M.|author2=Shaw, W.|author3=Bank, W.|date=2005|publisher=World Bank|isbn=9780821359280|url=https://books.google.com/books?id=7MbS7-At5XAC|page=130}}
See also
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- Debtor in possession
- Bankruptcy
- Bankruptcy alternatives
- Shareholder loan
- Seniority (financial)
- Bail out (finance)
- Default
- Distressed securities
- Insolvency
- Liquidation
{{div col end}}
References
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External links
- [http://www.marketwatch.com/news/story/calpine-closes-5-billion-dip/story.aspx?guid={DE41D866-D578-4355-99D2-65290DB02DA5}&dist=rss&siteid=mktw Calpine closes $5 billion DIP financing]
- [https://web.archive.org/web/20080611073507/http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter11.html#cash Bankruptcy basics - Operating capital]
- [http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=browse_usc&docid=Cite:+11USC364 11 USC 364 - Obtaining credit]
- [https://www.law.cornell.edu/rules/frbp/rule_4001 Federal Rules of Bankruptcy Procedure - Rule 4001c: Obtaining Credit]
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