Page 47 - Bankruptcy Volume 1

Chapter 7

Operating a Business During Bankruptcy

An accountant’s role in assisting a debtor-in-possession is as a business adviser, financial consultant,
and corporate strategist. An accountant is expected to do more than just interpret and apply certain ac-
counting and tax consequences in financial restructuring. Rather, an accountant’s role in assisting a
debtor-in-possession often begins well before a bankruptcy petition is ever filed. Frequently, an ac-
countant identifies many of the signals of a financially distressed company and provides assistance with
turnaround efforts. A company’s turnaround plan may include a bankruptcy filing. Although many anal-
yses and strategies developed during a company’s workout phase continue when the company enters
Chapter 11, the accountant’s role as adviser to a debtor changes to reflect new challenges specific to the
Chapter 11 process. In most cases, the debtor will continue to operate as a debtor-in-possession and is
afforded the authority to obtain financing; the right to use, sell, or lease property of the estate; and the
power to assume or reject executory contracts and leases.

Debtor-in-Possession Financing

Debtor-in-possession financing (DIP financing) is a loan to a company that is a debtor in a bankruptcy
case. Though the loan may be secured or unsecured, it is almost always secured. Secured DIP financing
may rank above the payment rights of existing secured lenders. For many debtors, obtaining DIP financ-
ing is critical to sustaining the operating needs of the enterprise during bankruptcy. Any debtor seeking
to restructure or liquidate its business through a bankruptcy filing that cannot meet its business needs
from cash on hand or cash from operations will likely need DIP financing to continue operating.

There are a number of reasons a debtor-in-possession may seek DIP financing:

 The debtor may need a bridge loan to cover operating needs until it sells the company’s assets or
until confirmation of a pre-negotiated or prearranged plan.

 A debtor many need additional financing during bankruptcy because it wants more time to suc-
cessfully restructure and stabilize its business or sell assets in an orderly fashion.

 A debtor may also seek DIP financing to provide comfort to trade vendors and customers who
would otherwise refuse to continue doing business with the debtor absent adequate liquidity.

In short, DIP financing provides the debtor with liquidity to fund its ongoing working capital needs and
serves as an important signal to the marketplace that the debtor will have the ability to fund its ongoing
operations during its Chapter 11 case.

Process for Obtaining DIP Financing

There are many means of obtaining DIP financing under Section 364 of the Bankruptcy Code. Debtors
may obtain

 unsecured credit in the ordinary course of business;

 unsecured credit outside of the ordinary course of business;

© 2020 Association of International Certified Professional Accountants 45