Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress, typically during restructuring under corporate bankruptcy law (such as Chapter 11 bankruptcy in the US or CCAA in Canada). Usually, this debt is considered senior to all other debt, equity, and any other securities issued by a company — violating any absolute priority rule by placing the new financing ahead of a company's existing debts for payment.
It may be used to keep a business operating until it can be sold as a going concern, if this is likely to provide a greater return to creditors than the firm's closure and a liquidation of assets. It may also give a troubled company a new start, albeit under strict conditions. In this case, "debtor in possession" financing refers to debt incurred while in bankruptcy, and "exit financing" is debt incurred upon emerging from reorganisation under bankruptcy law.
American law vs. French law
The willingness of governments to allow lenders to place debtor-in-possession financing claims ahead of an insolvent company's existing debt varies; US bankruptcy law expressly allows this while French law had long treated the practice as soutien abusif, requiring employees and state interests be paid first even if the end result was liquidation instead of corporate restructuring.
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