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Overview of Limitations on Employee Compensation in Bankruptcy
The filing of a bankruptcy case by a company creates substantial uncertainty for its employees. This uncertainty can translate into employee departures, lack of focus on the business, and diminution in the value of the company. Recognizing these potential consequences, companies in Chapter 11 bankruptcy often try to reduce employee uncertainty by seeking authority from the bankruptcy court to: 1) honor unpaid compensation and benefit obligations to employees; 2) continue severance and benefit plans post-bankruptcy; and/or 3) continue existing bonus programs or establish retention or new incentive programs for employees.
The Bankruptcy Code, however, imposes a variety of limitations on the ability of a debtor-employer to provide certain types of compensation and benefits to "insiders," a term that is broadly defined in the Bankruptcy Code. Moreover, as a general matter, compensation and benefits paid to insiders by a debtor company are closely scrutinized, and incentive programs for insiders often become a focal point for disputes between a company, its creditors, and the United States Trustee. This article, which focuses primarily on Delaware law, provides a high-level summary of several common issues that often arise in bankruptcy related to insider compensation and benefits.
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