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March 1, 2011Robin Phelan, Ocean Tama
The Use of DIP Financing as a Mechanism to Control the Corporate Restructuring Process
Lenders routinely use debtor-in-possession (“DIP”) financing agreements to gain substantial control over debtors in Chapter 11 and the bankruptcy reorganization process. However, the currently accepted degree of lender control over the Chapter 11 process has evolved into a major de facto change in the bankruptcy process that inhibits rehabilitation of distressed companies. This evolution has been accelerated by the overleveraging of debtors, the proliferation of secured financing, restrictions on the time for debtors to assume or reject leases, the exorbitant cost of DIP financing, and the availability of forms of DIP financing documents on the Internet. Whether this change is bad policy, or merely an economically efficient reallocation of capital, is an issue that courts, scholars, and practitioners are struggling to address.