FAIRFAX LAWYERS KEEP YOU UPDATED ON DC METRO LAWS

A SERVICE OF GROSS & ROMANICK, PC

Wednesday, June 2, 2010

Financing a Company in Chapter 11

Who would lend money, lease property or extend credit for supplies to a company in bankruptcy? Why would anyone want to do that?! Who would want to provide financing to a company that has already mismanaged itself into bankruptcy? Answer: you may want to.

Inevitably a Chapter 11 debtor will require additional cash flow or extensions of credit. Because companies in bankruptcy need money, leases and supplies, if a creditor is willing to provide funds, offer a lease or extend credit, that creditor stands to obtain very favorable terms. Because few creditors are willing to enter into high risk investments, Congress enacted incentives under Section 364 of the U.S. Bankruptcy Code, which permits priority to such creditors over already existing creditors and administrative costs (the so called "super priority"), as well as providing security in the assets of the debtor.

Extending Credit

The potential creditor should obtain a copy of the company's bankruptcy schedules. The schedules will reveal the company's assets and liabilities. The creditor should also request all financial information that will assist in assessing the company's ability to repay the credit. Ask for balance sheets, income statements and monthly operating reports.

The potential creditor should try to place itself in the most secure position possible. The levels of security available range from unsecured credit that is paid back as an administrative expense prior to pre-existing unsecured creditors, to debt secured by a senior lien on property of the estate.

A creditor is most secure if it holds a senior lien on property of the bankrupt company. Be creative! You can hold a lien not only on real property, but also accounts receivable, equipment, inventory, etc. If the bankrupt company has real property with sufficient equity, a lender can get a lien senior to a pre-existing security interest. This is a unique opportunity for a lender to bypass perfected liens and Deeds of Trust, and to move directly into a first position. Of course, existing creditors may object to their loss of position at a hearing but the judge ultimately decides based upon the best interest of all the creditors.

At a minimum the creditor should demand a "super priority". A "super priority" will allow the creditor to be paid back prior to administrative claims such as fees charged by lawyers, accountants and other expenses incurred by the company to preserve the estate.

Conclusion

Opportunities for profit are available for those creditors who take advantage of the protection available. Furthermore, an infusion of credit or cash may preserve the bankrupt company to your long-term benefit.

For more information speak to one of Gross & Romanick's lawyers by calling 703-273-1400 or by filling out one of their online Information Request forms.