The financing of financially distressed companies is challenging. While additional financing could be provided outside of formal insolvency proceedings, corporate statutes in many jurisdictions prohibit incurring of additional debt while insolvent unless there is notice to, and consent of, creditors. In such circumstances, absent special protection, creditors are reluctant to advance further financing. Where debt is held by multiple creditors, insolvency proceedings are usually necessary to prevent a race to the assets and to allow the debtor company a short period in which to determine whether a going concern business plan and financing are possible.
Janis Sarra, Financing Insolvency Restructurings in the Wake of the Financial Crisis: Stalking Horses, Rogue White Knights and Circling Vultures, 29 Penn St. Int'l L. Rev. 581 (2011).