Authority of Debtor in Possession to Use Business Assets - Explained
The Bankruptcy Debtor Can Continue to Use Assets of the Business
Written by J. Mance Gordon
Updated at April 19th, 2024
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What is the authority of the debtor in possession?
Use of Business Assets - The DIP may use assets of the business in on-going operations. This includes the use of business cash in the ordinary course of business. This authority also includes using, selling, or leasing the business's assets. If an asset will be permanently impaired or the use of assets is challenged by a creditor of the estate, the court must specifically approve its use. Special issues arise when the DIP seeks to lease or sell business assets in the course of business. Physical assets of the business generally serve as collateral for one or more classes of secured creditor. In this situation, the secured creditors may demand adequate protection of their interests from the DIP. This means the DIP may have to take measures to ensure that the bankruptcy estates use of the assets in on-going operations does not prejudice the secured status of the creditors. Adequate protection may be provided by:
Payments - The DIP may make payments to the secured creditor for any decrease in the value of collateral securing the debt.
Second Lien - The DIP may authorize an additional or replacement lien to the extent of any decrease in the value of collateral securing the debt.
Other Relief - The DIP may provide other relief that provides the creditor with assurance of payment of the equivalent value of the collateral.
Also, to the extent of any surplus value in the collateral, the secured creditor is entitled to interest and reimbursement of attorneys' fees and expenses as part of its claim against the bankruptcy estate.
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