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

Restructuring & Insolvency (3rd edition)

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.

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.

Cayman Islands Small Flag Cayman Islands

Subject to obtaining the approval of the Cayman Court, official liquidators and provisional liquidators can raise new finance and grant security over the company's assets. If no security is granted, the borrowing will rank as an expense of the liquidation and be payable in priority to the unsecured claims of the liquidation and even the liquidators' own fees.

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.

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.

France Small Flag France

When a conciliation agreement is approved (homologue) 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.

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.

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. In particular, 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.

Bermuda Small Flag Bermuda

Yes. In liquidation, the liquidator or provisional liquidator of a company can raise finance to the extent that this is necessary for the beneficial winding-up of the company.

Repayment of this finance depends on its terms, but would usually take priority over existing creditors.

Guernsey Small Flag Guernsey

The Companies Law does not expressly preclude a company subject to insolvency proceedings from obtaining additional finance.

Administration

Administrators have a specific power to raise or borrow money to assist in achieving the purpose for which the administration order was made under section 379(2) of the Companies Law. Such borrowing is likely to be classified as an expense of the administration and afforded priority accordingly.

Liquidation

In a compulsory or voluntary liquidation a liquidator can only carry on the company's business, which may include obtaining additional finance, to the extent it is beneficial for winding up the company (which would only be the case in a limited set of circumstances). While it is strictly possible to obtain additional finance in liquidation, in practice it is rare.

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.

Jersey Small Flag Jersey

  1. There are no restrictions on companies in liquidation obtaining credit.
  2. Individuals are prevented from obtaining credit in excess of £250 during the course of their désastre without disclosing the order to the proposed creditor. (Désastre Law Art.25)

Mexico Small Flag Mexico

In its voluntary petition, a debtor may petition the judge to authorize interim financing (including the posting of collateral) to maintain the ordinary course of business and provide necessary liquidity during the insolvency proceedings. Any such financing would be recognized super-priority and be treated as administrative expenses.

After the declaration of concurso, DIP financing is subject to conciliator’s authorization.

Peru Small Flag Peru

A debtor can obtain new financing whether or not on secured assets, if so approved by the Creditors’ Meeting or by a Restructuring Plan. However, the Insolvency Act does not afford any special priority to creditors granting financing to a debtor under restructuring.

Poland Small Flag Poland

Such possibility exists, and up to certain limit, new financing enjoys preferential treatment, especially in the event of unsuccessful restructuring when case leads to the bankruptcy. In such situation financing is satisfied within the first category of claims in bankruptcy proceedings.

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.

Sweden Small Flag Sweden

Yes, in practice that is possible. However, there are no express provisions on financing in restructuring proceedings, nor any regime similar to the DIP financing under the US Bankruptcy Code. And, it should be noted (as indicated above in Question 8) that the appointed administrator must approve of any new debt being incurred during the on-going reorganization.

That said, any new obligation incurred during the reorganization proceeding, for example a new financing or loan agreement, which is approved by the administrator, will automatically get special priority, often referred to as “super-priority rights”. In a subsequent bankruptcy, such “super-priority” claims will rank ahead of all non-preferential debt, and even ahead of a floating charge secured claim if there are insufficient funds to settle both (refer to Question 5 above).

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.

Spain Small Flag Spain

N/A

United States Small Flag United States

The Code permits a debtor or trustee to obtain DIP financing. The financing must be approved by the bankruptcy court. To facilitate the debtor’s ability to obtain DIP financing, the Code authorizes the bankruptcy court to grants a lender providing DIP financing security in the form of “priming liens” which may be senior to other prior perfected liens, thereby granting the DIP lender the highest priority of repayment (i.e., this type of claim has priority over all other claims in a bankruptcy case).

The Code also grants administrative expense status to the claims held by creditors doing business with a debtor after the commencement of the debtor’s bankruptcy estate so long as the post-petition transaction was beneficial to the debtor’s estate.

United Kingdom Small Flag United Kingdom

There is no express provision for super-priority rescue financing in an insolvency process, such as the DIP financing regime available under the U.S. Bankruptcy Code. However, credit extended to a company in administration may be given priority over unsecured claims by virtue of classification as an administration expense.

To grant new financing super-priority, 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 on a dissenting minority; this could include an offer of new financing to the debtor on a super-priority basis.

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.

Belgium Small Flag Belgium

A debtor in judicial reorganization can obtain new financing and, to the extent that this new financing covers activity performed during the procedure of judicial reorganization, they can be considered as direct debts of the bankrupt estate in a subsequent liquidation or bankruptcy insofar as there is a close link between the termination of the judicial reorganization procedure and the subsequent bankruptcy procedure. The lender may in such case enjoy a super privileged character in a subsequent bankruptcy.

Updated: May 17, 2019