Purchasing Assets Out of Bankruptcy from Debtors
Often, debtors in bankruptcy sell assets. In some cases, the debtor has to go out of business and sell everything to pay its creditors. In other cases, the debtor sells only those assets that are either a financial drain on the business or assets that will not be a part of its business reorganization. Whatever the reason for the asset sale, the buyers usually pay fire sale prices when purchasing assets out of bankruptcy.
Bankruptcy Code Governs Asset Sales in Bankruptcy
Court Approval Required
The bankruptcy court has to approve the sale. Once approved, the parties must comply with the court’s orders governing the procedure for the sale. The court’s order will cover not only the sale price; it will also set forth the requirements pertaining to advertising and notice of the sale and will require full disclosure of the buyers’ information and sale prices.
Asset sales can occur as part of a Chapter 7 Liquidation or a Chapter 11 Business Reorganization. Bankruptcy Code section 363 permits sales of assets free and clear of liens. In a liquidation case, the only way creditors can be paid is through a sale of the debtor’s assets. In a reorganization case, a debtor in possession or a bankruptcy trustee seeks to sell assets to an identified buyer before a plan of reorganization is approved, or the sale can become part of the reorganization plan.
How to Get Court Approval
The debtor or the trustee must file a request with the bankruptcy court to approve the asset sale. The request must describe (i) the assets to be sold; (ii) the terms of the proposed sale; (iii) what efforts have been made to market the assets; (iv) the reason the proposed purchaser is a qualified purchaser and is offering a fair price; and (v) the reason the asset(s) must be sold in advance of a plan of reorganization, if applicable.
To decide whether to approve the proposed sale, the bankruptcy court will hold a hearing. At the hearing, other interested buyers may make a competing bid (complying with the bidding rules that the court establishes). This process ensures the bankruptcy estate receives the highest and best price for the assets being sold. The court can approve a sale of assets under Code section 363 “free and clear” of all liens and liabilities (other than those liabilities that the buyer expressly agrees to assume, tax liens that run with the land, and any other liens that the court specifies).
Depending on how the sale is structured, a sale can enable the debtor to sell assets as a package, that is, the buyer cannot cherry-pick select assets. In other cases, the buyer can buy assets and contracts in ways not possible outside of a bankruptcy context. For example, contracts assumed by a buyer will usually be cleared of any provisions that impede the assumption of the contract, and State laws covering such matters as shareholder approval requirements and bulk transfers generally do not apply to a Section 363 sale.
Timing
Sales out of bankruptcy cases usually do not occur quickly because of the notice and approval process. If any interested party objects to the sale, the ensuing litigation can slow the process down. In a simple, uncontested liquidation involving tangible assets, the sale process takes at least 60 days to complete, if no complications arise.
An asset sale that occurs through a plan of reorganization takes more time. A sale through a plan takes more time because the plan may not be filed for several months. Once a plan is filed, it can take the court several months to approve the plan, depending on the size and complexity of the case. Sales contemplated by the plan must proceed according to the court’s order confirming the plan.
Whether you are contemplating purchasing assets out of bankruptcy estates or filing bankruptcy to liquidate business assets, you should consult an attorney who specializes in bankruptcy and workouts for guidance.
Issues and Strategies
Improve Your Position with Pre-Bankruptcy Planning
Anyone who is thinking of selling assets in a bankruptcy case should take action before filing for bankruptcy. When you see that your company is headed for financial trouble, contact a bankruptcy attorney and workout expert to begin to develop a reorganization strategy. With their assistance, you may want to initiate negotiations prior to the bankruptcy filing. If you are able to reach an asset sale agreement with your creditors, incorporate it in the company’s bankruptcy plan. This is known as a “pre-packaged” bankruptcy. This process can be more efficient by saving time and avoiding some of the hassles of negotiating a sale during the pendency of the bankruptcy, including costs.
Develop a Negotiating Strategy
In a section 363 sale, the buyer should be prepared to negotiate not just with the debtor, but also the other interested parties, such as secured creditors, unsecured creditors, stockholders, trustee, landlords, and so forth. Every case is different, and an experienced attorney can help you develop a successful negotiating strategy in terms of purchasing assets out of bankruptcy.
A bankruptcy debtor selling assets also needs a successful negotiating strategy. There is no one-size-fits-all strategy. The best strategy for you depends on the complexity and value of the bankruptcy estate. Know that potential buyers purchasing assets out of bankruptcy will try to acquire assets at the lowest possible price. The lower the sales price, the less proceeds will be available to pay creditors.
Stalking Horse
The initial buyer is commonly referred to as the “stalking horse”. Being the stalking horse has some advantages in the process. The stalking horse usually has had time to conduct due diligence, has negotiated deal terms already, and any other interested buyers must beat the stalking horse’s bid. If a third party outbids the stalking horse’s bid, the successful bidder is often required to pay a “break-up fee” (usually about 3% of the sales price) to the stalking horse.
Consult an Experienced Bankruptcy and Workout Attorney
Purchasing assets out of bankruptcy can be complicated and full of minefields. Whether you are a buyer or a seller, you need the assistance of a bankruptcy & workouts attorney — one who has handled asset sales and knows their way around the bankruptcy and workout processes. Get advice from an expert and save yourself time and money.