A debtor in possession (DIP) is a jargonistic legal notion used by insolvency lawyers and practitioners. The term refers to a person or firm that has formally declared them self to be bankrupt by filing a bankruptcy petition and has been granted permission by the court to remain in possession of assets over which creditors have a security interest or claim. In day-to-day practice, this type of arrangement is most granted to a company rather than a natural person.
A company that continues to run its affairs under Chapter 11 is a DIP. In this situation, the company submits a plan for reorganization. It is permitted to manage in this way without oversight by a bankruptcy trustee Its reorganization plan usually includes proposed refinancings.
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An entity that files a bankruptcy petition is, effectively, seeking protection by the court (that is, by the legal system) from creditors. The rights enjoyed by a DIP granted bankruptcy protection, as well as the rights of creditors dealing with a DIP, can vary between jurisdictions. Parties are commonly referred to specialist legal counsel in these circumstances.
It is possible for a DIP to not only continue operating assets subject to claim by creditors but also often acquire them from creditors at their fair market value, as assessed by independent valuation experts. This is especially true in cases where the debtor can confirm the asset is necessary for employment and to repay creditors.
Contemporary bankruptcy law has evolved over many years to protect debtors from undue pressure by creditors. It can be traced back several hundreds of years to the early merchants in Florence during the 1400s. In that period, bankrupt debtors had few, if any, rights. Creditors held all the cards; unpaid creditors regularly called on the courts to grant them possession of all the remaining wealth of a bankrupt and have the individual jailed. No opportunity to recover from their hardship was afforded to debtors.
Since those years, society attitudes and the legal system have progressively taken a more liberal attitude toward bankrupt debtors. Bankruptcy is now seen as an unavoidable consequence of modern business life. Commercial risk renders some bankruptcies an inevitable outcome, often more because of environmental situations rather than any personal failings. In order to encourage risk taking, the law has developed a framework to protect bankrupt debtors.
Nowadays, most national legal systems recognize that business risk is part and parcel of commercial life. Things do not always go to plan. The law acknowledges that some situations will develop where debtors will not be capable of fully honoring obligations to creditors. To deal with these eventualities, the law has developed protections not only for creditors, but also to allow debtors the chance to recover from their hardship as best they can.
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