363 Sale

The sale of an organization’s assets under Section 363 of the US Bankruptcy Code

What is a 363 Sale?

A 363 Sale refers to the sale of an organization’s assets under Section 363 of the US Bankruptcy Code. The sale allows debtors to fulfill their obligations to creditors by selling their assets and using the funds collected to settle the debts. The purchasers of the assets also benefit from the opportunity to acquire valuable assets that are free of liens, claims and other interests. The bankruptcy court grants the debtor-in-possession or trustee the power to sell the organization’s assets even when there is an objection from junior creditors, and after a court hearing of their petition.

 

363 Sale

 

The 363 sale gives the debtor-in-possession more control in the disposition of assets unlike when the trustee is allowed to sell the assets under Chapter 7 liquidation bankruptcy. The debtor-in-possession controls the bulk disposal of assets under the protection of the bankruptcy court, giving the debtor the opportunity to control the deal terms offered during a bidding auction. In a Chapter 7 liquidation bankruptcy, the court-appointed trustee disposes of the assets without the involvement of the debtor-in-possession.

 

The 363 Sale Process

The process of a 363 sale is straightforward, although each organization’s sale may vary and each bankruptcy court may decide to follow its own procedure. Most 363 sale procedures follow the following process:

 

1. Debtor markets the assets to potential purchasers

The 363 sale starts with the debtor marketing the organization’s assets to attract potential purchasers. If there are several interested purchasers, the debtor settles on the highest bidder to act as the stalking horse bidder. This bidder’s price works as the base price for the auction bids, and the other bidders will use this bid as a benchmark. The debtor and the stalking horse bidder then draft an asset purchase agreement that outlines the terms of the sale.

 

2. Debtor files motion with the bankruptcy court

After the preparation of the asset purchase agreement, the debtor then seeks court approval of the sale of assets at an auction commissioned by the court. The debtor also seeks the court approval of the procedures and rules to be used during the auction. The reason for the bankruptcy auction is to allow competitive bidding among purchasers to maximize the value of the assets on sale. The auction procedures may require minimum bid increments and a clause addressing the risk that other bidders may outbid the stalking horse bidder, and therefore offer a break-up fee or some form of a refund.

 

3. Bankruptcy court approves the sale of the assets

The motion for approval may request the court to expedite the bidding process. The approval may take seven days, after which the debtor informs interest purchasers of the auction. The court may allow up to 30 days for the bidders to place their bids, but the duration of the bidding period may vary with the type of asset.

After the bidding period ends and the bidding closes, the auction is opened. The debtor makes public the bids from the interested purchasers and then chooses the winning bid in a transparent atmosphere. In a situation where there are no other bids apart from the stalking horse bidder, the debtor is allowed to pick the stalking horse’s bid.

 

4. Selling the asset to the successful bidder

After the close of the bidding and announcement of the winning bidder, the court must approve the sale of the asset before it is transferred to the successful bidder. If there are parties that are objecting to the sale, they must make their case known to the bankruptcy court. The debtor must also demonstrate to the court that there is a sound business purpose of selling the asset (s), and if the value of the asset is increasing or decreasing. The bankruptcy court reserves the right to approve or reject the sale of the assets depending on the issues presented before it. One of the reasons for seeking court approval on the sale is for the court to rule that the sale of assets was for a “fair consideration,” and reduce the risk of a fraudulent conveyance challenge. Also, if the court rules that the asset sale was made in “good faith,” the ruling protects the asset sale from reversal on appeal.

 

Benefits of the 363 Sale

A 363 sale commissioned by the bankruptcy court benefits all the parties involved. Debtors who do not want to go through a reorganization benefit from the opportunity to maximize the returns of the assets through a competitive bidding process. The purchasers get an opportunity to buy assets at a bargain with the approval of the court and without worrying of a reversal if the auction is conducted correctly and the court rules that the sale was in good faith. The purchasers also obtain ownership of assets that are free of lien or claim.

A 363 sale also benefits the creditors. As key stakeholders in the bankruptcy process, they may object or approve any motions presented by the debtor to the court. For example, if the debtor seeks approval for the sale of assets to a purchaser at a lower valuation, the court must listen to the creditor’s objections before granting the approval or rejection. Also, a 363 sale allows secured creditors to place a “credit bid,” which cancels some or all of the debts owed by the debtor to the creditor. If chosen as the winning bid, the creditors take possession of the debtor’s assets subject to the approval of the bankruptcy court.

 

Limitations of the 363 Sale

Some interested purchasers of the assets may be uncomfortable with the transparent nature of the bankruptcy proceedings that makes their bids public. It means that other interest purchasers may place higher and better bids, and this subjects them to the risk of being outbid. Also, having several interested purchasers may complicate negotiations for the stalking horse bid.

Another limitation of the 363 sale is that, if the manner in which it is conducted does not conform to the requirements of the bankruptcy court, the asset sale will not be approved by the court. If the court rules that the sale was not conducted in good faith, the sale may be reversed on appeal.

 

Other resources

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