Meaning
Legal status allows a company under reorganization to retain control of its assets while operating under bankruptcy court oversight. A debtor in possession manages the daily business functions instead of a court-appointed trustee. This arrangement assumes that the existing management has the best knowledge to maximize the value of the estate for the creditors.
It remains in effect until a reorganization plan is confirmed or the case is dismissed. The role carries heavy legal responsibilities and requires constant reporting to a judge.
Management Power
Executive officers keep their roles but must seek permission for any transaction outside the ordinary course of business. As a debtor in possession, the leadership can reject burdensome contracts or leases that hinder the recovery. This power is balanced by the fiduciary duty owed to the creditors rather than the shareholders.
Creditor Oversight
Committees representing the lenders monitor every major expense to prevent the waste of remaining assets. While the debtor in possession runs the office, the creditors have the right to object to any spending that does not clearly lead to a recovery. This scrutiny ensures that the business does not continue to bleed cash during the legal proceedings.
Reorganization Step
Proposals for the future of the company must be submitted to the court for a vote. The period of acting as a debtor in possession provides the time necessary to negotiate these terms with all stakeholders. Success is marked by the company emerging from the process as a viable, solvent entity.
