The Pros and Cons of Section 363 Asset Sales as Part of Chapter 11 Bankruptcies

By Nancy L. Kourland

As a Senior Associate at Rosen & Associates, P.C. I have experience in numerous aspects of Chapter 11 reorganizations, including adversary proceedings prosecution and defense, reorganization plans disclosure statements, appeals, and asset sales. The two major events in any Chapter 11 case are confirmation of a reorganization plan and sale of major assets. Selling assets occurs under Section 363 of the Federal Bankruptcy Code and has evolved since the Code’s formulation in 1979 to constitute a viable way of restructuring, rather than reorganizing. A sale expedites a bankruptcy court’s separation of past fiscal issues from future prospects, avoiding an often complex and drawn-out process of reorganization plan confirmation.

While the 363 asset sale route may at first glance appeal to debtors and creditors alike, deciding whether to pursue this route is not always easy. Certain fundamentals must be in place to make a 363 sale desirable, including the possibility of consensual restructuring, an asset purchaser on the horizon, and the distressed business maintaining a minimum threshold of resources to move forward post-bankruptcy. In some cases, existing liabilities may be significant, making a 363 sale a poor choice, and corporate governance issues may restrict the ability to sell the business at all. Shareholders may need to approve a sale, and attorneys and affected parties should weigh this, as well. Finally, a strategic assessment should be taken of the businesses’ value as a relatively intact and ongoing concern in comparison with its immediate value as a liquidated asset.

The key advantages of a 363 sale for a purchaser involve acquiring assets free of outstanding liens or other hindrances. In addition, a buyer of assets under Chapter 11 bankruptcy does not incur the liabilities that he or she would otherwise inherit. Other benefits involve avoiding shareholder approvals for asset sale and the ability of a purchaser to include favorable contracts and leases in the sale. The negative aspects of a 363 sale include potential unfavorable publicity about the company, issues of cost and time to complete the process, and possibility of competing bids. In addition, reorganization plans may offer greater flexibility in certain cases than would 363 sale restructuring. This reflects purchasers’ enhanced ability to draw up favorable plan terms under reorganization.

About the Author: A New York City Attorney with nearly a decade of bankruptcy law experience, Nancy L. Kourland earned her Juris Doctor from the New York University School of Law.