The Debtor in Possession
When a person or company files a chapter 11 bankruptcy, the person or company is called the debtor. The debtor may remain in possession and control of its assets and business or may transfer them to a trustee. If the debtor chooses to remain in possession and control, the debtor is called a debtor in possession(DIP) and has basically all the powers as well as all of the duties of a trustee, except the right to compensation. Among other duties, the debtor in possession must act as a fiduciary and provide accurate information as to financial matters involving the debtor, must investigate mismanagement and/or fraud, and must take into account the interests of the shareholders, creditors and other parties, all while exercising due diligence, prudence, and avoiding conflicts of interest. Officers and directors of the debtor also owe these duties. The debtor in possession can employ professional persons, carry on the business of the debtor, enter into binding contracts, and make binding decisions. The debtor in possession may be held personally liable for these decisions. A debtor in possession may be removed by the Court and replaced with a trustee. The assets of the estate may be frozen during the replacement process. This process is normally initiated by petition filed by a creditor or other party in interest due to perceived impropriety in the carrying out of the duties of the debtor in possession. The Court may also limit the powers of a trustee and appoint nontrustee or independent fiduciaries to act on behalf of the bankrupt estate.
The bankruptcy code provides for the appointment of committees of creditors and equity shareholders to serve as negotiating bodies for creating a plan of reorganization and to protect the interests of these parties in interest. These committees are usually appointed soon after the bankruptcy is filed. The U.S. Trustee has administrative discretion as to the advisability of appointing these committees. A retirement committee can also be appointed.
Proof of Claim or Interest
Claims listed in the schedules are deemed filed and allowed unless listed in the schedules as disputed, contingent or unliquidated. If they are so listed, the creditor should be specifically notified. All such creditors should file claims in order to be able to participate in the reorganization process. If the case is converted to an asset chapter 7 proceeding, the panel trustee appointed will notify creditors and parties in interest as to whether to file claims and as to whether claims filed in the chapter 11 should be refiled in the chapter 7 proceeding. If no such notice is given, it is prudent to file the claim in the chapter 7 proceeding. The Third Circuit has ruled such second filing unnecessary.
If a chapter 11 proceeding is commenced by the filing of a voluntary petition, there is a right to convert to a proceeding under chapter 7 up until plan confirmation. The court may convert a chapter 11 proceeding to a proceeding under another chapter upon request of the debtor.