Publication Type
Journal Article
Version
publishedVersion
Publication Date
11-2024
Abstract
The ability of viable but financially distressed firms to obtain new financing to keep operating and pursuing value-creating projects is one of the most critical aspects for a successful reorganisation. Unfortunately, when a company becomes insolvent, lenders are rationally skeptical to extend credit. To address this problem, the United States Bankruptcy Code adopted a system, known as debtor-in-possession (‘DIP’) financing, that seeks to encourage lenders to extend credit to financially distressed firms.[1] This is done by providing DIP lenders with different forms of priority that may include a new lien, a junior lien, a senior lien, an administrative expense priority, or an administrative expense priority to be paid ahead of other administrative expenses.[2] Thus, the United States has created a system that can make bankruptcy proceedings serve as liquidity providers for viable but financially distressed firms.[3]As a result of the successful experience of the United States, many countries around the world have adopted (or considered the adoption of) some forms of DIP financing provisions. By analysing the features and evolution of debtor-in-possession financing in the United States, this article seeks to highlight certain risks and challenges associated with a system of DIP financing. It concludes by suggesting various policy recommendations for countries considering the adoption or amendment of DIP financing provisions
Discipline
Banking and Finance Law | Organizations Law
Research Areas
Corporate, Finance and Securities Law
Publication
International Corporate Rescue
First Page
309
Last Page
312
ISSN
1572-4638
Publisher
Chase Cambria
Citation
AYOTTE, Kenneth and Aurelio GURREA-MARTINEZ.
The promise and perils of debtor-in-possession financing: Lessons from the United States. (2024). International Corporate Rescue. 309-312.
Available at: https://ink.library.smu.edu.sg/sol_research/4605
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
