Legal Definitions - debtor in possession

Debtor in Possession (DIP)

A Debtor in Possession (DIP) refers to an individual or, more commonly, a corporation that has filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code but is allowed by the court to retain control over its business operations and assets. Instead of an independent trustee immediately taking over the company's management, the existing management team continues to run the business. However, they do so with a critical difference: they are now acting as fiduciaries, essentially managing the company's assets and operations on behalf of its creditors and under the supervision of the bankruptcy court.

The primary goal of a DIP is to reorganize the business, stabilize its finances, and propose a plan to repay its debts while continuing to operate. This arrangement allows the business to maintain its value, preserve jobs, and potentially emerge from bankruptcy as a viable entity. The DIP's activities are closely monitored, often by a committee of unsecured creditors, and major decisions outside the ordinary course of business typically require court approval. The DIP is also responsible for maintaining accurate financial records, filing tax returns, and insuring its assets.

• Scenario 1: A Regional Restaurant Chain
  

  "The Gourmet Bistro," a popular regional chain of upscale restaurants, files for Chapter 11 bankruptcy due to a combination of rising food costs and declining customer traffic. Instead of the court appointing an independent trustee to liquidate the restaurants, the existing CEO and management team are designated as the Debtor in Possession. They continue to manage daily operations, such as ordering supplies, paying staff, and serving customers. Simultaneously, they work on a reorganization plan, which might involve renegotiating leases with landlords, seeking better terms from food suppliers, and closing underperforming locations, all while reporting their progress and significant decisions to the bankruptcy court and a committee representing their creditors.

• Scenario 2: A Specialized Tech Manufacturer
  

  "Innovate Devices Inc.," a company that designs and manufactures custom electronic components, faces severe financial distress after a major client cancels a large order and a new product launch fails to meet expectations. The company files for Chapter 11, and its board of directors and executive team become the Debtor in Possession. They continue to oversee the manufacturing facility, manage their remaining inventory, fulfill existing contracts, and maintain their relationships with other clients and suppliers. Their primary task as DIP is to develop a restructuring plan that could involve securing new financing, selling off non-essential assets, or streamlining their product lines to become profitable again, all under the strict oversight of the court and their creditors.

• Scenario 3: A Commercial Real Estate Developer
  

  "Urban Horizons Development," a firm with several large commercial property projects underway, encounters significant financial difficulties when interest rates surge and a key investor pulls out. When Urban Horizons files for Chapter 11, its founder and project managers are allowed to continue managing the ongoing construction sites, negotiating with contractors, and seeking new tenants for completed properties. As the Debtor in Possession, they must obtain court approval for major financial decisions, such as selling one of their partially completed buildings or taking on new debt. Their ultimate goal is to reorganize their project financing and debt structure to complete their developments and repay their lenders and contractors.