CIRA CIRA Bankruptcy & Restructuring Procedures 2 — Questions and Answers
Question 1: What does 'DIP financing' stand for, and what is its primary purpose in a Chapter 11 case?
- Debtor-in-Possession financing; provides working capital to fund operations during restructuring (Correct answer)
- Debt Issuance Protocol; governs how new bonds are sold post-emergence
- Distress Insolvency Placement; pays off existing lenders at filing
- Debtor Installment Plan; schedules repayment of pre-petition debt
Correct answer: Debtor-in-Possession financing; provides working capital to fund operations during restructuring
DIP financing is new credit extended to a bankrupt debtor, typically with super-priority status, to ensure the business has sufficient liquidity to continue operating while it reorganizes.
Question 2: An 'executory contract' in bankruptcy is best described as:
- A contract where both parties still have material unperformed obligations (Correct answer)
- A contract that has been fully performed by all parties
- A lease that has expired but not yet been formally terminated
- Any contract signed within 90 days before the bankruptcy filing
Correct answer: A contract where both parties still have material unperformed obligations
An executory contract is one where both the debtor and counterparty have ongoing obligations; the debtor may assume (keep) or reject (breach and treat as pre-petition claim) such contracts.
Question 3: Which term describes the process by which a bankruptcy court confirms a Chapter 11 reorganization plan over the objection of a dissenting class of creditors?
- Cramdown (Correct answer)
- Discharge
- Conversion
- Substantive consolidation
Correct answer: Cramdown
Cramdown allows the court to confirm a plan even if a class votes against it, provided the plan satisfies statutory requirements including the absolute priority rule.
Question 4: In an out-of-court restructuring, what is a 'forbearance agreement'?
- A creditor's agreement to temporarily refrain from exercising remedies in exchange for concessions from the debtor (Correct answer)
- The debtor's agreement never to file for bankruptcy protection
- A court order prohibiting creditors from filing suit
- A contract between two creditors to share collateral proceeds
Correct answer: A creditor's agreement to temporarily refrain from exercising remedies in exchange for concessions from the debtor
A forbearance agreement buys the distressed debtor time to negotiate a more permanent solution by having lenders agree not to accelerate loans or enforce defaults for a defined period.
Question 5: Which metric in a restructuring plan indicates whether the reorganized company can realistically meet its future debt obligations?
- Feasibility, demonstrated by projected cash flows sufficient to service reorganized debt (Correct answer)
- Confirmation vote percentage among all creditor classes
- Asset coverage ratio measured at a single point in time
- The debtor's pre-petition EBITDA without adjustment
Correct answer: Feasibility, demonstrated by projected cash flows sufficient to service reorganized debt
Under 11 U.S.C. § 1129(a)(11), a plan must be feasible, meaning the court must find that the reorganized company will not likely require further liquidation or reorganization.
Question 6: What is the role of a 'chief restructuring officer' (CRO) in a distressed company?
- To lead the operational and financial turnaround, often with authority over strategic and restructuring decisions (Correct answer)
- To exclusively represent creditor interests on the board
- To serve as the court-appointed trustee replacing all management
- To liquidate assets as quickly as possible regardless of value
Correct answer: To lead the operational and financial turnaround, often with authority over strategic and restructuring decisions
A CRO is typically an experienced restructuring professional brought in to stabilize operations, develop a restructuring strategy, and interface with creditors, lenders, and the court.
CIRA CIRA Bankruptcy & Restructuring Procedures 2
What does 'DIP financing' stand for, and what is its primary purpose in a Chapter 11 case?