Meaning
A legal status allows a bankrupt company to retain control of its assets and continue business operations while undergoing financial restructuring. Operating as a debtor in possession, the existing management team avoids the immediate appointment of a trustee to run the daily affairs of the firm. This continuity helps preserve the value of the enterprise during the reorganising phase.
Operational Authority
The retained management team exercises the powers of a trustee to run the business and manage the corporate estate under court supervision. In the role of debtor in possession, the company can reject unfavorable contracts and lease agreements to reduce operating costs. These decisions must be justified as sound business judgments and require explicit approval from the bankruptcy court.
Financing Facility
Specialised funding arrangements provide the liquidity necessary to keep the business running during the restructuring process. This funding, known as debtor in possession financing, receives super-priority status, meaning these new lenders are repaid before existing unsecured creditors. The availability of this capital allows the company to pay suppliers and meet payroll, preventing a premature liquidation.
Fiduciary Duty
The officers of the reorganising company must act as fiduciaries for the entire estate, balancing the interests of both the equity holders and the creditors. While a debtor in possession operates the business, the management must put the interests of the creditors first, since the company is insolvent and the creditors are the primary risk-bearers. Failure to uphold this obligation, such as by hiding assets or engaging in self-dealing, results in the court appointing an independent trustee to take over the business.
This shift removes the current executives and increases the administrative expenses of the bankruptcy process, reducing the ultimate recovery for all parties involved.
