Cash Collateral

Cash Collateral is cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents where the estate and someone else have an interest in the property. Also included would be the proceeds of noncash collateral, such as inventory and accounts receivable and proceeds, products, offspring, and rents, profits, or property subject to a security interest, if converted to proceeds of the type defined as cash collateral, provided the proceeds are subject to the prepetition security interest.

To use cash collateral, the creditor with the interest must consent to its use, or the court, after notice and hearing, must authorize its use. The court may authorize the use, sale, or lease of cash collateral at a preliminary hearing if there is a reasonable likelihood that the debtor in possession will prevail at the final hearing. The Bankruptcy Code also provides that the court is to act promptly for a request to use cash collateral.

Requirements of cash collateral

Cash collateral includes property that satisfies each of the following requirements:

• it is made up of either

1. cash, negotiable instruments documents of title, securities, deposit account, or other cash equivalents in which both the bankruptcy estate and another entity have an interest
2. the proceeds products, offspring, rents, or profits from such property
3. fees, charges, accounts, or other payments for the use or occupancy of rooms or other public lodging facilities.

• it is subject to a security agreement that the debtor and creditor entered into before the bankruptcy case commenced
• the security agreement extends to both property the debtor acquired prepetition and to either the proceeds or profits of such property or amounts paid as rents of such property
• applicable non bankruptcy law does not prohibit the security agreement

When a debtor's cash constitutes cash collateral, that debtor must either obtain the consent of every party that has an interest in such cash collateral, or file a motion for the use of such cash collateral

Motion of cash collateral

The motion to use cash collateral must consist of a concise statement of the relief requested, and list or summarize all material provisions, including:

1. the name of each entity with an interest in the cash collateral
2. the purposes for the use of the cash collateral
3. the material terms, including duration, of the use of the cash collateral
4. any liens, cash payments, or other adequate protection that will be provided to each entity with an interest in the cash collateral or, if no additional adequate protection is proposed, an explanation of why each entity's interest is adequately protected

Where the lender consents to the use of cash collateral, a court order is necessary to approve the cash collateral agreement.

Examples of the types provisions

Examples of the types of provisions that are found in cash collateral agreements to give adequate protection include:

• security interest in and lien on all of the property of the debtor, including post-petition inventory and receivables
• a continuing security interest in and lien on the collateral and proceeds thereof, with the lien subordinated only to the extent necessary to pay post-petition wages
• release off all cash collateral, which becomes a post-petition claim

Advantages of Cash Collateral

The use of cash collateral can provide numerous advantages to a debtor in a bankruptcy proceeding. These advantages include:

• Preservation of the debtor's assets: Cash collateral is usually already owned by the debtor, so it allows them to keep possession of their assets, while allowing the trustee to monitor their use.
• Availability of additional funds: Cash collateral can often be used to provide funds for the debtor's operations and other needs during the bankruptcy proceedings.
• Increased creditor protection: By using cash collateral, creditors may be able to receive some of the funds that were secured by their security interest prior to the bankruptcy filing.
• Improved asset liquidity: By using cash collateral, the debtor can improve the liquidity of their assets, which may make it easier for them to raise additional funds.

Limitations of Cash Collateral

Cash collateral can be a valuable asset to a business, but it also has some limitations. Specifically, cash collateral is subject to the following restrictions:

• The use of cash collateral is limited to the amount of the debt secured by the collateral. This means that the debtor cannot use more of the cash collateral than the amount of debt it is securing.
• Cash collateral must be used for the benefit of the secured creditors. This means that the debtor cannot use the cash collateral for its own benefit, but only for the benefit of the secured creditors.
• Cash collateral must be kept separate from the debtor’s other assets. This means that the debtor cannot commingle its cash collateral with its own funds and must keep track of the source of the funds at all times.
• Cash collateral may not be used to pay off other debts of the debtor. This means that the debtor cannot use its cash collateral to pay off any other obligations it may have.
• Cash collateral may not be used to pay for services or goods that are not related to the secured debt. This means that the debtor cannot use its cash collateral to pay for services or goods not related to the secured debt.

Other approaches related to Cash Collateral

Cash Collateral can take many forms, such as cash, negotiable instruments, documents of title, securities, deposit accounts, proceeds of noncash collateral, and other cash equivalents. Below are some other approaches related to Cash Collateral:

• Secured creditor control: Secured creditors can use cash collateral to control the debtor's financial activities. This control allows the secured creditor to prevent the debtor from using the cash collateral to make payments to other creditors or to fund activities that are not in their best interests.
• Protection of creditors: Cash collateral can act as a form of protection for creditors. It ensures that creditors can be paid back in the event of a bankruptcy or other insolvency event.
• Preservation of assets: Cash collateral can be used to preserve assets of a business in the event of a liquidity crisis. This can help a business survive a tough economic period without having to liquidate its assets.

In summary, cash collateral is a valuable tool that can be used by creditors to protect themselves, preserve assets, and control a debtor's financial activities.

Footnotes

Cash Collateral — recommended articles

Fixed and floating charge — Assignment of insurance — Corporate guarantee — Bankers lien — Spendthrift clause — Satisfaction of mortgage — Equitable lien — Contract guarantee — Residual payment

References

• Ginsberg R.E., Martin R.D., Kelley S.V., (2018). Ginsberg and Martin on Bankruptcy, Aspen Publishers, New York.
• Newton G.W., (2009). Bankruptcy and Insolvency Accounting, John Wiley & Sons, Canada.
• Sanders M.I., (2013). Joint Ventures Involving Tax-Exempt Organizations, John Wiley & Sons, Canada.

Author: Karina Stefańska