Debtor in Possession - Authority to Accept or Reject Contracts
The Power of the Bankruptcy Debtor to Continue or Terminate Contracts
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What is the authority of the debtor in possession?
The authority of the debtor in possession (DIP) is similar to that of a bankruptcy trustee. The objective of the DIP is to guard the interests of creditors by reshaping the bankruptcy estate to allow the business to continue operations. In doing so, the DIP is vested with the following important powers.
Accept or Reject Contracts
The DIP may accept or reject contracts of the debtor that have not yet been performed or are on-going. In this way, the DIP can get rid of contracts that are oppressive or cause losses to the business but can retain contracts that are beneficial and necessary for the reorganization of the business. This rule invalidates provisions in a contract restricting, conditioning, or prohibiting a debtors rights to assign a contract. To retain or assume a contract, the DIP must provide adequate assurance of continued performance and must cure any defaults under the contract. The court may impose timelines and restrictions on the termination or any modifications to existing contracts. Further, there may be limitations on the ability of the debtor to later assign an assumed contract (such as a requirement for assurance of future performance). Lastly, any contract that has been terminated pre-petition may not be assumed in bankruptcy.
Next Article: Avoiding Powers of Debtor in Possession Back to: BANKRUPTCY LAW
Why do you think the bankruptcy law allows a DIP to accept or reject executory contracts of the debtor? Do you think it is fair to contract parties that the DIP can accept beneficial contracts and reject non-beneficial contracts? Is requiring the DIP to provide adequate assurance of performance sufficient to protect the rights of parties to retained contracts?
ABC Corp is suffering a decline in business and cannot meet its obligations. ABC decides to declare Chapter 11 bankruptcy. As a DIP, ABC seeks to reject several contracts that are causing losses and retain several contracts that are beneficial to the business. What rules apply to ABCs plan?
- Bankruptcy Law (Intro)
- What is Bankruptcy?
- Insolvency - Definition
- What are the types of business bankruptcy?
- Chapter 9 Bankruptcy
- Chapter 12 Bankruptcy
- Chapter 15 Bankruptcy
- Who are the participants in the bankruptcy process?
- Key concepts behind the bankruptcy process?
- Absolute Priority Rule
- Pari Passu
- What rules govern the bankruptcy process?
- Bankruptcy Abuse Prevention and Consumer Protection Act
- American Bankruptcy Institute Definition
- What the authority of the bankruptcy court?
- What is the authority of the trustee (debtor in possession) in bankruptcy?
- Debtor in Possession
- What assets of the debtor are included in the bankruptcy estate?
- Bulk Sales Law
- What is the automatic stay in bankruptcy?
- What is a claim by creditors of the bankruptcy estate?
- What is voluntary and involuntary bankruptcy?
- What is the Chapter 7 bankruptcy process?
- What is the Chapter 11 bankruptcy process?
- How to File Bankruptcy for a Business
- Accept or reject contracts?
- Avoiding powers?
- Stay of Proceeding?
- Use of Business Assets?
- Post-Petition Financing?
- Bankruptcy Financing - Definition
- What is the appointment of a Trustee or Examiner in business bankruptcies?
- What is a Plan of Reorganization?
- Reorganization - Definition
- Subordinated Debt
- Preferred Debt
- What is Cramdown of a reorganization plan?
- To what extent does the bankruptcy process relieve a debtor's debts?