How Much Control Does a Chapter 11 Debtor Retain Over the Business?
Under Chapter 11 of the Bankruptcy Code, company owners, referred to as debtors in possession (DIP), are allowed to continue business operations, but the bankruptcy court retains control over significant business decisions. This balance allows the business to maintain some autonomy while ensuring that creditors’ interests are protected.
The following aspects of the business are generally under the control of the debtor in possession:
- Day-to-day operations — The DIP retains the authority to manage the day-to-day operations of the business without needing court approval. This includes activities such as paying employees, purchasing inventory and selling products. The purpose of allowing the DIP to maintain control over daily operations is to ensure that the business continues to function smoothly and to preserve its value during the bankruptcy process.
- Hiring professionals — The complexities of the bankruptcy process requires the assistance of professionals such as attorneys, accountants and financial advisors. While the hiring itself does not require court approval, the terms of employment, including compensation, must be approved by the court. This ensures that the expenses are reasonable and necessary for the successful reorganization of the business.
- Routine transactions — The DIP can also enter into routine transactions that are considered part of the ordinary course of business, without needing court approval. These transactions might include regular purchases, sales or contracts that are necessary for the ongoing operations of the business. The goal is to allow the business to continue operating as normally as possible.
However, the following types of actions and decisions require court approval:
- Asset sales — This includes any significant sale of property or assets that are not part of the usual business operations. Court oversight is necessary to ensure that such sales are in the best interest of the creditors and the bankruptcy estate and that they are conducted fairly and transparently.
- Financing — Obtaining new financing or loans, particularly those that grant the lender a priority claim, also requires court approval. This type of financing, often referred to as debtor-in-possession financing, provides the business with the liquidity it needs to continue operations during reorganization. The court reviews and approves such financing to ensure that it is necessary and that the terms are fair to all parties involved.
- Leases and contracts — Entering into or breaking significant leases and contracts can have substantial impacts on the business’s financial obligations and overall reorganization strategy. The court’s oversight ensures that such decisions are made in the best interest of the creditors and do not jeopardize the reorganization plan.
- Compensation changes — These includes salary increases, bonuses and other forms of compensation, including payments to the business owners. The court ensures that these changes are justified and necessary and that they do not unfairly disadvantage the creditors or the bankruptcy estate.
The court retains overall supervision of the Chapter 11 reorganization plan and can intervene if creditors complain that the DIP is not operating the company in the best interest of the creditors and the company. An experienced Chapter 11 attorney can advise the DIP on how to manage the business reorganization in a way that avoids such contests.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your company is struggling with debt, contact us online or call 310-271-6223 to schedule a consultation.
