The U.S. DIP Financing Priority Setting

Adequate third party’s post-petition financing is the lifeblood for most chapter 11 debtors.It is critical to normalize post-petition trade credit and in many instances is necessary to avoid a premature liquidation of the company,which would deprive creditors of the going-concern value of the bankrupt enterprise.“Most successful reorganizations require the debtor in possession to obtain new financing simultaneously with or soon after the commencement of the Chapter 11 case”,said by Judge Howard C.Buschman,See In re Ames Dep’t Stores,Inc;“The fundamental purpose of reorganization is to prevent the debtor from going into liquidation,with an attendant loss of jobs and possible misuse of economic resources”,See NLRB v.Bildisco & Bildisco,465 U.S.513,528(1984);“The paramount policy and goal of Chapter 11,to which all other bankruptcy policies are subordinated,is rehabilitation of the debtor.” See In re Ionosphere Clubs,Inc.,98 B.R.174,176(Bankr.S.D.N.Y.1989).In order to promote this "paramount goal" of reorganization,the Bankruptcy Code provides numerous protections and incentives to encourage lenders to provide post-petition Financing.This article will discuss protections and explores how courts seek to strike a balance among interested parties.This paper is divided into four parts.The first part is the DIP Financing setting during ordinary course.Through describing the legal basis and its detailed contents and approval procedure of DIP Financing in the United States Bankruptcy Code,this section concludes the necessary of DIP Financing setting and other useful advises.The second part is the DIP Financing setting out of extraordinary course,which means some DIP Financing agreements have extraordinary provisions.This kind of DIP Financing should be carefully approved by bankruptcy courts.Extraordinary provisions include:(i)Crosscollateralization;(ii)Roll-ups;(iii)Carve-outs.This section examines each kind of extraordinary provisions and puts forward the specific experience for reference and drawing lessons.The third part is the relationship between DIP Financing agreement and corporate governance.It is possible that DIP Financing agreements with one provision which post-petition lender wants to transfer corporate governance to himself,in this situation bankruptcy courts must be really careful to determine whether to approve that agreement or not.Since the creditors have much greater bargaining power than the debtors,it is important for the debtor and the court to think critically.The forth part is the legal suggestions about how to perfect the bankruptcy legislation and practice in China.This section puts forth the legal advices based on the advanced experiences of foreign countries.