Understanding “Section 363 Sales” in Chapter 11 Bankruptcies

As a general rule, companies that are seeking to reorganize their debts under Chapter 11 must continue to operate in the ordinary course of business. Among other things, this means that they generally cannot sell assets that they would not otherwise sell. However, Section 363 of the U.S. Bankruptcy Code provides a key exception, and conducting “Section 363 sales” can be a strategic approach to protecting insolvent companies’ long-term viability in some cases. Learn more from an experienced Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman:

Using Section 363 Sales to Dispose of Assets During the Chapter 11 Bankruptcy Process

Section 363 of the U.S. Bankruptcy Code allows Chapter 11 debtors to sell assets outside of the ordinary course of business provided that they comply with the statute’s procedural requirements. For debtors, conducting Section 363 sales can provide access to much-needed capital while also eliminating debts and other contractual obligations associated with undesirable assets. Acquiring assets through a Section 363 sale can offer several benefits for purchasers as well—and this means that conducting a Section 363 sale can be a viable strategy in a wide range of circumstances.

Here is an overview of the major steps in the process:

1. Identifying the Asset (or Assets) to Be Sold

The process begins with the Chapter 11 debtor identifying the asset (or assets) to be sold. Since the goal of the Chapter 11 process is to preserve the debtor’s ability to continue operating as a going concern, the identified asset (or assets) should not be essential to the debtor’s core business operations. With that said, debtors can dispose of substantial assets through the Section 363 sale process if they choose to do so—provided that the bankruptcy court approves.

2. Securing Court Approval to Pursue the Section 363 Sale Process

After identifying the asset (or assets) to be sold, the next major step is to secure the bankruptcy court’s approval to proceed with the Section 363 sale process. To secure the bankruptcy court’s approval, a Chapter 11 debtor must file a motion outlining the bidding procedures to be used. These include (but are not limited to):

• Bidding deadlines and the proposed auction date;
• The requirements for submitting a qualified bid; and,
• Procedures for dealing with any executory contracts related to the asset (or assets) to be sold.

Once a Chapter 11 debtor files a motion seeking approval for a Section 363 sale, the bankruptcy court will generally schedule a hearing before rendering a decision. If the bankruptcy court schedules a hearing, the debtor should be prepared to demonstrate that its proposed bidding procedures are designed to help maximize the proceeds of the sale for the benefit of its creditors.

3. Engaging a “Stalking Horse” Bidder

If the bankruptcy court approves the debtor’s request to conduct a Section 363 sale, the debtor will then typically seek to engage a “stalking horse” bidder (though Chapter 11 debtors can also seek to engage stalking horse bidders earlier in the process if desired). A stalking horse bidder places the initial bid on the asset (or assets) to be sold, and the debtor and the stalking horse bidder negotiate a purchase agreement that will serve as the template for any additional bids. Stalking horse bidders will typically receive incentives for their involvement, such as a termination fee if the debtor sells the asset (or assets) to a third party.

4. Providing Notice and Marketing the Asset (or Assets) to Be Sold

Regardless of whether a Chapter 11 debtor chooses to use a stalking horse bidder, it must provide notice of the proposed sale and market the asset (or assets) to be sold. This is a key step in demonstrating that the debtor has taken the necessary measures to maximize the proceeds of the sale—which will be required to secure final court approval.

5. Conducting an Auction

The next step after providing notice and marketing the sale is to conduct the auction. The auction should take place in accordance with the debtor’s court-approved schedule. After the auction, the asset (or assets) will be sold to the winning bidder, subject to the bankruptcy court’s final approval.

6. Securing Court Approval for the Section 363 Sale

After the auction, the Chapter 11 debtor must return to the bankruptcy court to seek final approval of the sale. To secure the court’s approval at this stage, the debtor must be able to show that:

• The bidding process and auction were conducted in accordance with the debtor’s approved procedures;
• The winning bidder submitted the highest bid (or submitted the best bid for other reasons); and,
• The sale price reflects an arm’s-length transaction.

Provided that the debtor meets these requirements, the court should generally approve the sale, and the debtor can then proceed to finalize the process.

7. Closing the Sale

The final step in the Section 363 sale process is to close the sale. Once the Chapter 11 debtor has the bankruptcy court’s approval, the debtor can then finalize the transaction with the winning bidder.

When Should Chapter 11 Debtors Pursue Section 363 Sales?

So, when should financially distressed companies pursue Section 363 sales during the Chapter 11 bankruptcy process? As with all aspects of a Chapter 11 bankruptcy, a case-by-case assessment is required.

If a Chapter 11 debtor has distressed assets (or other assets) that are not essential to its future operations, then pursuing a Section 363 sale could be a good option. On the other hand, if the business will need all of its major assets going forward, then pursuing a Section 363 sale likely will not make sense. With that said, it is worth putting all options on the table, and an experienced Miami Chapter 11 bankruptcy lawyer can help make informed decisions about how best to proceed.

Schedule a Free Initial Consultation with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman

If you would like more information about the Section 363 sale process, we invite you to get in touch. To schedule a free initial consultation with a Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman, please call 305-768-9909 or contact us online today.