DIP (Debtor-in-Possession) financing

Liquidity Injection and Fundraising in Judicial Reorganization: The Path to Rebuilding Your Company

The initiation of judicial reorganization proceedings represents a decisive milestone in the trajectory of any business entity in crisis. Supported by Law No. 11.101/2005, the measure's primary purpose is to allow the reorganization of accumulated debts, halt foreclosures, and avoid the irreversible scenario of bankruptcy.

However, practice shows that the approval of the processing and the legal moratorium are not sufficient on their own to guarantee recovery. The biggest bottleneck faced by the debtor in the first months of the procedure is liquidity: with traditional credit lines summarily cut off by financial institutions, maintaining cash flow becomes an immense daily challenge.

The Role of DIP Financing and Regulation of Fresh Money

Without immediate resources to cover current expenses, productive activity is at imminent risk of paralysis. It is precisely in this context that raising capital through DIP Financing (Debtor-In-Possession Financing) emerges as the main instrument of financial relief for companies undergoing restructuring. Expressly regulated by Law No. 14,112/2020 (articles 69-A to 69-F), this mechanism enables the entry of so-called fresh money—new and revitalized capital—ensuring the company has the necessary liquidity to maintain full operation while negotiating and executing its Judicial Reorganization Plan.

Destination and Versatility of Funds Raised

The great advantage of this type of fundraising lies in its wide versatility, as the funds obtained are not restricted to a single purpose and can be used to meet any operational or strategic need of the company undergoing restructuring. In terms of production, the resources guarantee the continued purchase of raw materials, essential supplies, and merchandise, preventing supply shortages and ensuring the fulfillment of contracts with clients. Furthermore, the funds enable the timely payment of employee salaries, maintaining social peace within the company and retaining talent indispensable for the continuity of the business.

The capital raised also serves to honor payments to strategic suppliers and essential service providers, as well as to cover day-to-day operational expenses—such as electricity, freight, logistics, machine maintenance, and leases. Beyond immediate cash flow, the resources can be directed towards paying creditors subject to the judicial reorganization plan, including as a tool for accelerated debt settlement (exit financing), allowing the company to settle its renegotiated obligations and conclude the judicial reorganization with renewed solidity and credibility in the market.

Legal Guarantees and Investor Protections

To attract investors willing to inject capital into a business during a crisis, Brazilian legislation has provided important incentives and guarantees. The main one is the super-priority of receiving credit: in the event of bankruptcy, the DIP financier has absolute preference in payment over bankruptcy creditors and other suppliers (falling at the top of the list of non-bankruptcy credits, according to article 84, IB, of the Brazilian Bankruptcy and Reorganization Law). Furthermore, the law authorizes the establishment of real or fiduciary guarantees on non-current assets, providing total security to the investor without hindering the company's operations.

Operation Modalities and Technical Structuring

These operations can be structured in either loan-oriented (focused on cash return on investment) or loan-to-own (where financing serves as a bridge to future acquisition of equity or control) modalities, and can be granted by funds, banks, current creditors, business partners, or even the partners themselves. However, structuring a DIP Financing agreement requires high technical rigor, a clear demonstration of financial viability, and the necessary judicial approval or authorization, avoiding conflicts with adverse creditors and ensuring that the contract is signed under beneficial conditions.

The Importance of Specialized Consulting

Navigating the judicial reorganization process and raising capital in the market requires strategic vision, agility, and specialized legal counsel. If your company is facing liquidity challenges, needs to restructure debts, or requires secure capital raising to continue operating, contact our team of lawyers specializing in Corporate Law and Debt Restructuring. We are ready to design the best solution for your business's recovery.

Article written by: Vitor Ferrari, Samar Majzoub and Alex Santos.