When a business files for chapter 11 bankruptcy protection, the first question
is what happens to the cash held in the business bank accounts and to
the future business income – after all this is the lifeblood of
the business. If the debtor has creditors with a security interest in
the business inventory and its proceeds, the cash generated from the sale
of these goods is considered cash collateral.
The bankruptcy code defines cash collateral as “cash, negotiable
instruments, documents of title, securities, deposit accounts, or other
cash equivalencies” in which others have an interest.
See link outlining cash collateral in bankruptcy.
Simply stated, a debtor may obtain use of cash collateral by agreement
with the secured creditor. Alternatively, a debtor can receive approval
to use cash collateral by filing a motion with the court in which a hearing
will be held. The debtor needs to demonstrate that the secured creditor’s
interest will be adequately protected. The purpose is to protect the secured
creditor from diminution in value of its collateral while still in the
hands of the debtor.
This must be addressed early in the case as otherwise the debtor may be
prohibited from using its cash. The penalties for its unauthorized use
can be harsh. Some courts have clawed-back unauthorized payments made
by the debtor. For this reason, such motions are filed alongside the filing
of the bankruptcy. This is known as first day motions - matters which
require immediate attention for the business to operate and are filed
alongside the filing of the bankruptcy.