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Chapter 11: Guidelines for a Debtor-in-Possession

An individual, partnership or corporation that has filed a petition for reorganization pursuant to Chapter 11 is permitted to continue its business as a “debtor-in-possession” unless the court orders otherwise. 11 U.S.C. Sections 1107–1108. 

A debtor-in-possession acts in a fiduciary as well as managerial role. The debtor-inpossession is authorized only to carry out those functions that are in the “ordinary course of business.” If a proposed transaction (e.g., sale of property) falls outside the ordinary course of business, prior court authorization is required. If you have any doubts regarding whether or not a particular transaction is outside the ordinary course of the debtor’s business, you should consult with us. A debtor-in-possession must do nothing to diminish the value of the estate. Donations, new mortgages, new security interests, large transactions, or salary increases or bonuses, for example, would be subject to close scrutiny by the court and creditors, and should not be done without prior court approval. Preservation and maintenance of assets is critical. Good relations with creditors and creditors’ committee, if one is appointed, are also essential. The following is a list of guidelines that Debtor in Possession should adhere to in carrying out its duties as debtor-in-possession: 
 
  • Do not retain any professional person, independent contractor, or consultant, or agree to compensate any such persons without consulting counsel and obtaining prior court approval. 
  • Do not pay any pre-petition debts. If the company believes that certain debts must be paid, however, inform counsel before making any such payments, so that court approval can be sought. 
  • Maintain a separate account or set aside monies for payment of accruing postpetition taxes.
  • Maintain insurance on all property and change such coverage to insure the interests of the debtor-in-possession. The insurance should afford full protection against loss and include fire, theft, personal injury (including umbrella liability), and natural disaster coverage. 
  • Ensure that adequate security and fire protection are provided for all assets.
  • Make sure than any payments to creditors are being credited on your books and records to postpetition debts and not pre-petition debts. 
  • Maintain books and records in good order and on a current basis. 
  • Set aside postpetition FICA and withholding in a separate account on books and records. 
  • Check with counsel before releasing any information regarding the reorganization case. A favorable press is important to public and creditor relations. 
  • Give notice of the reorganization case to parties who have sued the debtor. 
  • Inform counsel immediately if any governmental agency seeks to conduct an investigation of the debtor’s business. 
  • Insider transactions are ordinarily suspect. Report to counsel any proposed transaction between the company and a former employee, director, officer or shareholder, or any company controlled by them, or between the company and any of its counsel. If a proposed transaction with an insider becomes necessary, the terms and conditions of such a transaction should be disclosed to all interested parties, and prior court approval should be sought. 
  • Change all bank accounts to reflect the debtor’s status as debtor-in possession. 
  • Maintain debtor-in-possession accounts only in authorized depositories and accounts. (Consult counsel as to whether or not a particular bank is an authorized depository.) Transfer all accounts to authorized depositories and accounts, and identify them as debtor-in-possession accounts. 
  • Deposits in banks should not exceed $100,000.00 at any time (maximum amounts of FDIC insurance). Additional deposits in a single account must be secured by the depository bank pledging sufficient securities to the Federal Reserve. 
  • Notify all depository banks of the commencement of the case. 
  • Be prepared to explain and document postpetition withdrawals from accounts.
  • Special accounts that are not authorized by statute must be authorized by the bankruptcy court.
  • Establish a procedure regarding check-signing authority and justification for expenditures.
  • Segregate trust funds such as deposits or taxes from operating funds, and maintain such trust fund in designated accounts. (Under no circumstances mingle taxes or other trustee funds with funds of the debtor-in-possession.) 
  • Do not give any assurances of payment to pre-petition creditors. 
  • Incur no liabilities that cannot be paid; these liabilities are priority administrative expenses.  Prepare a monthly budget of anticipated expenses and receipts. 
  • Establish accounting and bookkeeping procedures to allow for ready access to financial information regarding cash and securities positions. The debtor-inpossession is required to file periodic financial statements summarizing cash transaction and other financial data. 
  • Avoid excessive expenditures, particularly for utilities and unnecessary leased luxury items (cars, special office equipment). 
  • Do not make gifts to charity or to anyone else. 
  • Do not offer, give or accept any payments that could be interpreted as bribes. 
  • Do not make transfers for other than reasonably equivalent value or outside the normal scope of your business. 
  • Do not make advances to employees other than actual, anticipated expenses. 
  • Maintain complete accounting of cash expenditures, including vouchers and receipts. 
  • Do not engage in speculative ventures or activities. 
  • Capital purchases for vehicles, land, furniture, and machinery should be avoided. (Certain capital purchases may be made if reasonably necessary or in the ordinary course of business.) 
  • Provide counsel with complete information regarding any proposed sale of assets. 
  • Assets that are unnecessary to the operation of the business and are depreciating in value may have to be sold at a fair price. Bankruptcy court approval must be obtained for any such sale. 
  • Any proposed sale of real estate requires notice of a hearing. 
  • Legal inquiries from creditors should be referred to counsel.  Extending credit to insiders or employees may subject you to criticism. Extending credit in a sale not in the ordinary course of business requires prior court approval.
  • Special accounts that are not authorized by statute must be authorized by the bankruptcy court. 
  • Establish a procedure regarding check-signing authority and justification for expenditures. 
  • Segregate trust funds such as deposits or taxes from operating funds, and maintain such trust fund in designated accounts. (Under no circumstances mingle taxes or other trustee funds with funds of the debtor-in-possession.) 
  • Do not give any assurances of payment to pre-petition creditors. 
  • Incur no liabilities that cannot be paid; these liabilities are priority administrative expenses. 
  • Prepare a monthly budget of anticipated expenses and receipts. 
  • Establish accounting and bookkeeping procedures to allow for ready access to financial information regarding cash and securities positions. The debtor-in possession is required to file periodic financial statements summarizing cash transaction and other financial data. 
  • Avoid excessive expenditures, particularly for utilities and unnecessary leased luxury items (cars, special office equipment). 
  • Do not make gifts to charity or to anyone else. 
  • Do not offer, give or accept any payments that could be interpreted as bribes. 
  • Do not make transfers for other than reasonably equivalent value or outside the normal scope of your business.  Do not make advances to employees other than actual, anticipated expenses. 
  • Maintain complete accounting of cash expenditures, including vouchers and receipts. 
  • Do not engage in speculative ventures or activities. 
  • Capital purchases for vehicles, land, furniture, and machinery should be avoided. (Certain capital purchases may be made if reasonably necessary or in the ordinary course of business.)
  • Provide counsel with complete information regarding any proposed sale of assets. 
  • Assets that are unnecessary to the operation of the business and are depreciating in value may have to be sold at a fair price. Bankruptcy court approval must be obtained for any such sale. 
  • Any proposed sale of real estate requires notice of a hearing. 
  • Legal inquiries from creditors should be referred to counsel. 
  • Extending credit to insiders or employees may subject you to criticism. Extending credit in a sale not in the ordinary course of business requires prior court approval.
  • Report to counsel any payment of pre-petition debt after the filing of the petition. 
  • Report to counsel any payments on or giving of security for unsecured debt within the last year.                                                              

Payment made without proper authorization or for improper purposes may have to be repaid by the debtor-in-possession. Personal liability for officers or directors may also result if there is a willful or deliberate violation of these fiduciary duties. In addition, failure to carry out the duties of a debtor-in-possession may lead to the appointment of a trustee or the conversion of the case to a Chapter 7 liquidation.

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