Purchasing assets out of bankruptcy, whether a distressed business or particular assets such as trade equipment or inventory, can be a cost-effective way to obtain a business venture or efficiently procure a block of necessary materials, especially for larger organizations. However, the process is quite a bit more complicated than a straight purchase from a vendor or solvent business.
One reason the process is more complex than the typical business transaction is that there are so many interested parties. Arriving at an agreement may require negotiation not just with the bankrupt debtor, but also with creditors. Then, the transaction must be approved by the bankruptcy court. The assistance of an attorney experienced in purchasing assets out of bankruptcy can help ensure that the process is successful and the transaction favorable to the purchaser.
Approval of the Bankruptcy Court
A company that is in bankruptcy typically requires court approval for any sale that is not within the ordinary course of business. The transfer of significant assets, particularly non-inventory assets, will virtually always be deemed outside the ordinary course of business, meaning that the debtor may not simply sell those assets.
363 Sale Outside of a Bankruptcy Plan
Where no bankruptcy plan is in place, section 363 of the Bankruptcy Code allows for the sale of assets pursuant to notice and hearing. A 363 sale typically involves a two-step approval process, although the specifics may vary in some cases. For example, if adequate notice is provided and no interested party objects to the sale, the bankruptcy court may approve the sale without a hearing. The permissibility of the sale of assets outside a plan will depend primarily on a showing that adequate notice has been served on all interested parties, the sale price is fair and reasonable, and that the purchaser is acting in good faith.
Although bankruptcy law allows for this type of sale of assets in bankruptcy, the bankruptcy court will be vigilant in ensuring that creditor’s interests are protected and the pre-plan sale is not used to circumvent rights that would be protected under a reorganization or repayment plan.
Building Planned Sale of Assets into the Bankruptcy Plan
The other approach to the sale of assets in bankruptcy is to build that sale into the bankruptcy plan, which will then be reviewed by creditors and confirmed or rejected by the bankruptcy court. When the sale is a plan provision, approval will be subject to the standard requirements associated with confirmation of a bankruptcy plan under the applicable chapter, typically Chapter 11.
Timeline for Purchasing Assets Out of Bankruptcy
One consideration to bear in mind when you are considering purchasing assets out of bankruptcy is that the number of interested parties and the approval processes mean that the purchase may take longer to accomplish than a similar purchase from a solvent company. Although it is occasionally possible to conclude a sale of assets in bankruptcy in a week or two, it is also possible that creditor objections and the need for negotiations and leave of court will stretch the process to 60 days or more. Thus, if time is of the essence, you will want to carefully consider the specifics of the purchase with a seasoned professional to determine the likelihood that you will be able to conclude the transaction on a timeline that is workable for your business.
Liens and Claims Against Assets in Bankruptcy
Of course, when purchasing assets from a bankrupt company, you will want to ensure that you take those assets free from liens or other creditor claims. While taking clear title to the property is the norm when purchasing assets out of bankruptcy, it does not occur automatically. In a 363 sale, if the affected party does not consent to the stripping of the lien or encumbrance, certain conditions must be met in order for clear title to pass. There is also some conflict among jurisdictions regarding the bankruptcy court’s authority to protect property from certain types of claims, such as product liability claims.
Contact KPPB LAW Today For More Information
Purchasing assets out of bankruptcy can afford your business an excellent opportunity to acquire needed equipment, inventory and other assets at an excellent price. But, taking advantage of that opportunity requires a solid understanding of the process and possible pitfalls. The experienced attorneys in KPPB LAW can offer the knowledgeable guidance you need to ensure that your interests are protected as you pursue the purchase of assets out of bankruptcy. For further information, please contact KPPB LAW by giving us a call or sending us a message online today.