Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

Restructuring & Insolvency (2nd Edition)

Hungary Small Flag Hungary

While senior secured claims are not supported by Hungarian law, in practice parties can conclude an agreement on injecting new money into the debtor company. In such contracts, the claims of a senior creditor have priority over the other creditors. Such an agreement involves substantial risks, since the intercreditors – who are not parties to the agreement – have the right to challenge a senior agreement. Consequently, legal protection is not guaranteed for these agreements.

Indonesia Small Flag Indonesia

Yes, a debtor in both restructuring proceedings can obtain new financing.

The receiver in Bankruptcy Proceedings or the debtor with prior approval from the administrator in PKPU Proceedings, PKPU may obtain loan from a third party only in the framework of increasing the value of the bankruptcy / debtor’s estate. However, if the loan requires in rem security rights to be imposed on the bankruptcy / the debtor’s estate, the loan should be previously approved by the supervisory judge. The in rem security rights can only be encumbered on the bankruptcy / debtor’s asset which has not yet been used as debt collateral / encumbered with any security rights. PKPU

Although in theory (based on the statutory limited purpose of increasing the value of the bankruptcy / debtor’s estate), the claim arising from the new financing in the restructuring proceedings should rank as the bankruptcy estate claim, Law No. 37/2014 does not explicitly confirm that it is the case.

Canada Small Flag Canada

In both BIA and CCAA restructurings, the Court may order that all or part of the debtor’s property be subject to a security interest or charge, in favour of a lender, that ranks ahead of the debtor’s secured creditors.

The Court will grant a prior-ranking charge for interim debtor-in-possession financing (“DIP Financing”) after considering (i) the progress the debtor has made in respect of a Proposal or Plan; (ii) the opposition (or absence) of secured creditors; (iii) the nature and value of the debtor’s property; (iv) whether the loan would enhance the prospect of a viable Proposal or plan; and (v) the Trustee’s/Monitor’s report and opinion as to the necessity and reasonableness of the proposed DIP Financing and corresponding DIP Financing priority charge. The security or charge is to secure obligations that are incurred after the making of the Initial Order, or filing of the NOI. It is not uncommon in a CCAA restructuring that the DIP Financing charge be created at the time that the Initial Order is granted.

Germany Small Flag Germany

An insolvency plan may provide a lower ranking status for existing insolvency creditors compared to creditors with entitlements deriving from loans or other credits entered into by the debtor or the takeover company during the period of a monitored insolvency plan. The German Insolvency Code does not provide for any other special priority rights for new financing. Without limitation, German law does not allow for subordination of secured creditors vis-à-vis fresh money providers regarding existing collaterals.

During the preliminary insolvency proceedings, the operations of the debtor are typically financed out of the available funds. This is further facilitated by the fact that the debtor can avoid paying salaries for up to three months preceding the opening of insolvency proceedings as those salaries are funded (up to a certain ceiling) by the Federal Employment Agency (Bundesagentur für Arbeit).

After the insolvency proceedings have been opened, repayment claims pursuant to loan agreements entered into by the DIP or the insolvency administrator constitute debts of the estate (Masseverbindlichkeiten), which rank higher than regular insolvency claims (see Question 5) during the insolvency proceedings.

South Africa Small Flag South Africa

Yes. To enable a debtor to continue to trade after the institution of rescue proceedings, provision is made for post-commencement finance and for an order of preference to such financiers (only ranking behind costs of business rescue and post-commencement employees, but before pre-commencement secured creditors, employees and unsecured creditors).

Brazil Small Flag Brazil

The debtor in a restructuring proceeding may obtain new financing and all new money injected or lent to the debtor during the judicial reorganization procedure is considered post-petition claim and have priority over the credits subject to the Judicial Reorganization in an event of insolvency.

Czech Republic Small Flag Czech Republic

In liquidation bankruptcy proceedings, the company finances the costs of the proceedings out of its remaining assets. In theory, the insolvency trustee may enter into new loan agreements, but in practice this will be realistic only if there is a chance to sell the debtor’s business as a going concern.

Within reorganization proceedings the debtor in possession may conclude loan agreements which provide fresh financing, subject to the approval of the Creditors’ committee. Those transactions automatically have “super-priority”, i.e., a lien on encumbered property that is equal to existing liens, and a high priority over other unsecured creditors. The original secured creditors have the right of first refusal to provide “super-prioritized” financing.

Securities issued under a confirmed reorganization plan are exempt from the securities law regulations on public offerings.

Cayman Islands Small Flag Cayman Islands

Both official liquidators and provisional liquidators may obtain third party financing and grant security over the company's assets, subject to obtaining the prior approval of the Cayman Court.

In the absence of any security interest being granted to a lender, such lending will rank as an expense of the liquidation, with the lender enjoying a statutory priority over the company's unsecured creditors.

Japan Small Flag Japan

In both civil rehabilitation proceedings and corporate reorganisation proceedings, the debtor’s or the trustee’s right to borrow new money is subject to the court’s permission. The court will grant permission if the debtor shows that new funding is necessary to continue trading and maximise the value of the company’s business. The lender can collect its claim outside these proceedings as a common benefit claim. This places the new lender in a better position than prior unsecured creditors, but the new money funding will not have priority over secured creditors in respect of their secured assets.

Singapore Small Flag Singapore

The 2017 amendments to the Company Act have introduced rescue financing provisions similar to the US chapter 11 debtor-in-possession financing provisions. A company may now apply to Court for an order allowing a debt arising from rescue financing to be granted priority over all other preferential debts, or to permit the creation of a higher security interest over existing secured assets.

However, in order for such rescue financing to be approved by the Court, the company must show that it has made reasonable efforts to obtain less disruptive sources of financing.

British Virgin Islands Small Flag British Virgin Islands

None of the restructuring procedures specifically contemplate post-commencement financing; however, if a scheme or plan of arrangement that provides that the company may incur new borrowing is approved by the court, there is no reason in principle why such funding cannot be obtained. The position is similar in relation to creditors’ arrangements; however, if financing is obtained without the consent of the creditors and/or members, it may be that this would found a claim for relief or other sanction.

Denmark Small Flag Denmark

A debtor in restructuring proceedings is not prevented from obtaining new financing.

A creditor does not automatically become better secured but he may be if a proposal to this effect is made in a restructuring proposal that is approval. The claim may also rank second in the order of priority in subsequent insolvency proceedings if the financing is obtained with the consent of the restructuring administrator officer.

Public loans obtained for the financing of employees’ salaries in the restructuring period will automatically rank second in the order of priority in any subsequent insolvency proceedings.

China Small Flag China

A debtor in restructuring proceedings is allowed to obtain new financing. As the Enterprise Bankruptcy Law provides, where a debtor or its administrator takes out a loan for the purpose of continuing the debtor’s business during the restructuring period, the debtor or the administrator may create a security interest for the loan. In addition, although the law does not expressly categorize loans raised during restructuring as collective debts, some court decisions have treated such loans as collective debts, and this practice is garnering wider acceptance in the judicial sector. New financing that is secured with a debtor’s assets ranks higher than its bankruptcy expenses, collective debts and unsecured claims, while new financing that is not secured and deemed as a collective debt takes precedence over unsecured claims but is subordinate to bankruptcy expenses. On a whole, Chinese legislation on new financing obtained during restructuring is sketchy. No detailed provisions can be found as to the ranking and priority of claims and purposes of new financing, and loan seems to be the only way for a debtor to get new financing.

Australia Small Flag Australia

A debtor can obtain financing and otherwise use its assets as security in a scheme of arrangement and informal voluntary reorganisations. This is solely a matter for agreement between the company and its creditors. There are no special priorities given to new debt as of right and such priorities have to be negotiated and agreed with any existing creditors who already hold some form of priority.

Belgium Small Flag Belgium

Yes. Under certain conditions, these new debts are qualified as debts of the estate, and have (subject to certain limitations) absolute priority if the debtor subsequently goes bankrupt.

The Netherlands Small Flag The Netherlands

There is no DiP-financing framework under Dutch law. Such financing is provided on a case by case basis and requires the cooperation of the trustee or administrator in case of suspension of payments.

United States Small Flag United States

A debtor-in-possession is permitted to obtain new financing. A debtor may obtain post-petition unsecured financing in the ordinary course of business and does not need the approval of the court in order to do so. Such financing will be treated as an administrative expense under 503(b)(1) of the Code. A debtor-in-possession may also obtain secured credit and the court may authorize liens that are junior, senior or equal to existing liens if the debtor can demonstrate that it is unable to obtain credit elsewhere. The debtor must also provide “adequate protection” to any other creditor with an existing lien over the collateral being pledged in order to compensate the creditor for any diminution in value of the collateral.

France Small Flag France

When a conciliation agreement is approved (homologué) by the court, creditors that have provided new money, goods or services during the conciliation proceeding to ensure the continuation of the business will benefit from a “new money” priority (“privilège de conciliation”) which will allow them to enjoy priority of payment over all pre-petition claims (except for certain employee-related liabilities) and post-filing claims (except for post-filing procedural fees) in the event of subsequent insolvency proceedings. Such creditors cannot be subject to rescheduling or waiver provided by a safeguard or reorganisation plan, unless they accept it.

France Small Flag France

In conciliation proceedings, guarantors may claim rescheduling or waiver of debt contained in the agreement against creditors.
In safeguard proceedings, only guarantors who are natural persons benefit from favorable rules: an automatic stay on claims against during the observation period, a halt to interest rates and the possibility to claim rescheduling or waiver of debt contained in the safeguard plan.

Luxembourg Small Flag Luxembourg

Neither in bankruptcy nor in controlled management proceedings is the debtor entitled to borrow money or grant a guarantee or security except with a prior authorization of the court and at the request of the receiver/insolvency practitioner.

New Zealand Small Flag New Zealand

A debtor in a receivership or voluntary administration process may agree arrangements (executed through the relevant receiver or administrator as applicable) for new or extended financing for a specific purpose or in connection with a rehabilitation strategy for continued trading (including pursuant to an approved deed of company arrangement (DOCA)), subject to appropriate limitations on the personal liability of the relevant receiver or administrator. Arrangements for additional finance are also possible as part of a Part 14 or 15 compromise/scheme of arrangement, However for the following reasons, the prospects for an insolvent entity to borrow further funds are usually limited.

New Zealand insolvency law does not have a process to provide priority to 'debtor in possession' (DIP) financing (as is the case, for example, under the US Chapter 11 bankruptcy process). DIP financing will not have priority to existing indebtedness unless all creditors agree voluntarily to subordinate their claims or such financing is part of a deed of company arrangement (DOCA) or Part 14 or 15 compromise/scheme of arrangement (which is approved by and binding on creditors).

Romania Small Flag Romania

A company in insolvency may take an emergency credit in the observation period to preserve the assets, with the creditors’ consent or even with the syndic judge’s consent. Afterwards, in the reorganization period financings may be obtained, the condition being that such financings are provided by the reorganization plan. Both forms of financing obtained by the company in the insolvency are returned with priority, the law instituting in fact a super priority in this case.

Switzerland Small Flag Switzerland

Yes, this is possible. The administrator's consent and in case of posting of collateral, court approval will have to be sought and, if granted, the claim for repayment of the financing party is granted a super-priority in the form of an obligation of the estate which will be satisfied ahead of all other claims. Administrators in Switzerland are generally rather cautious to take out new financing, though.

Israel Small Flag Israel

An amendment introduced to the Israeli Companies Law in January 2013, allows the court officer to charge the company's assets in charges that may be in a rank that is inferior, equal or even in priority to existing charges, in order to enable receiving new credit, which is essential for the operation of the company.

The creation of such charges is subject to the court's approval and ensuring "Proper Protection" to the existing secured creditors. Such "Proper Protection" means preserving the value of the debt secured by the charge. Such value of debt relates to the sum that would have been repaid from the sale of the charged asset in liquidation; i.e., the reference point is not the original debt but the value under liquidation.

Repayment of such new credit shall be treated as recovery expenses and therefore as priority creditor, unless otherwise determined by the court.

In spite of the favorable terms allowing the court officer to obtain such credit, we are not aware to any actual usage made in such provision.

A similar provision exists also in the new Insolvency Law.

Bermuda Small Flag Bermuda

In a liquidation, a permanent liquidator or provisional liquidator (unless his powers under section 170(3) of the Companies Act 1981 have been restricted) can raise finance, including finance from existing creditors, to the extent necessary for the beneficial winding-up of the company (section 175(2)(e) of the Companies Act 1981). This is often advisable. Repayment of this finance depends on the negotiated terms which must be approved by the Court and which would usually take priority over existing creditors as a debt in the winding up.

In a scheme of arrangement, the company may obtain additional financing from its existing creditors.

Ireland Small Flag Ireland

Examinership

In an examinership the company can obtain financing where required to ensure the survival of the company during the period of examinership. That financing will be certified by the examiner as having been necessarily incurred to ensure the survival of the business. If the examinership does not succeed and the company is liquidated, the certified debt will rank after the claims of fixed charge holders and the costs of the examinership but ahead of all other claims, including preferential creditors, floating charge holders and unsecured creditors.

Liquidation

A liquidator can raise financing where necessary to fund the activities of the liquidation, and such financing if appropriately incurred will generally rank as a cost and expense of the liquidation and therefore ahead of all other claims.

Receivership

Subject to the terms of the security document pursuant to which he was appointed, a receiver can raise financing to fund the activities of the receivership, and such financing will generally rank as a cost and expense of the receivership and therefore will be paid from the proceeds of the sale of the secured assets ahead of all other claims including those of the secured creditor.

United Kingdom Small Flag United Kingdom

There is no express provision for super-priority rescue financing in an insolvency process, such as the DIP regime available pursuant to the US Bankruptcy Code.

To grant new financing super-priority status, an intercreditor agreement is the simplest option. Where it is not possible to reach agreement with existing creditors, a scheme of arrangement may be used in certain circumstances to ‘cram-down’ a proposal, which could include an offer of new financing to the debtor on a super-priority basis, on a non-consenting minority.

In addition, credit extended to a company in administration may be given priority over unsecured claims by being classified as an administration expense.

Mexico Small Flag Mexico

Yes, DIP Financings are available under Mexican law with the prior approval of the Mediator or the Insolvency Court. DIP Financings are paid on a “super-priority” basis only after labor claims for salaries and severance for the calendar year immediately preceding the Insolvency Judgment, as described in our answer to Question 5 above.

Portugal Small Flag Portugal

In PER proceedings only, whose goal is the recuperation of the company, the debtor can obtain loans and the creditors that grant them are given priority in the list of recognized creditors, being ranked as preferential credits.

Updated: July 9, 2018