Aon | Financial Services Group
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The U.S. Bankruptcy Code allows debtors to sell their assets quickly and efficiently in what is known as a Section 363 sale. This process has become increasingly popular in recent years, as companies considering bankruptcy (as well as their creditors and equity holders) seek to maximize value and minimize disruptions.
This insight takes a high-level look at 363 sales to clarify why it is a popular filing route, as well as its potential pitfalls.
The Section 363 asset sale is the preferred bankruptcy route for corporate debtors that are in financial distress but do not want to cede control to a court-appointed trustee (Chapter 7) or plan on emerging from bankruptcy after restructuring debt (Chapter 11 reorganization). There are several reasons that debtors, creditors, and buyers use 363 bulk asset sales, including but not limited to:
- Dwindling cash reserves and a need to liquidate quickly; and
- Significant liabilities and the nature of the business makes it difficult for prospective buyers to conduct due diligence in the desired time frame.
To qualify for a 363 sale, a debtor must meet certain requirements:
- The assets being sold must be deemed to be necessary for the debtor's continued operations;
- The sale price must be at least as high as all offers received prior to filing bankruptcy (in some cases, the court may require the debtor to provide notice to other potential bidders and give them a chance to compete); and
- Finally, the debtor must obtain court approval, which typically involves showing that the sale is in the best interests of the creditors and the debtor.
Risks of 363 Sales of Assets
While the speed and efficiency of a 363 sale can offer significant advantages, those same characteristics create risks. One is that the speedy process may not allow for sufficient time to market assets or solicit competing bids, resulting in a lower price than what could be achieved through a traditional bankruptcy sale. Additionally, the debtor may be required to sell assets that it would have preferred to retain. Finally, the speed of the process can also make it more difficult to identify and address any legal issues or liabilities associated with the assets being sold (though the buyer retains favorable protections given to purchasers in bankruptcy).
Overall, 363 sales can be powerful tools for companies who need to liquidate assets quickly within the favorable parameters of the bankruptcy process. Be sure to discuss the benefits and potential pitfalls of the process with bankruptcy counsel.
Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or tax advisors on any commentary provided by Aon. The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity.