The COVID-19 pandemic has created a lot of turmoil in every industry and every company. For the last five months at least 171 companies in the energy, transportation, entertainment, health & personal care, retail, travel, lodging and leisure industries have cited Covid-19 as a factor in decision for bankruptcy.
The risk of dealing with a company in a financial distress is at all times high. Understanding the bankruptcy tools available to a company that is on the path to or already in a court-supervised reorganization can help you in managing and reducing this risk.
Reorganizations in a Nutshell: Chapter 11 of the Bankruptcy Code governs the restructuring of businesses and individuals’ assets and liabilities. It provides financially distressed companies and individuals with protections that are attractive for the debtor and unavailable in many other jurisdictions. Among the key benefits of the US reorganization regime are:
- the management stays in control of the company and an outside trustee/administrator is not brought in unless there are extraordinary circumstances.
- the company can cherry pick beneficial contracts and reject burdensome ones.
- the company can sell its business, selected business lines or individual asses free and clear of any encumbrances or interests.
Chapter 11 filers choose to opt for bankruptcy relief for various reasons: to stop debt collection action, to revise unworkable capital structure, to address overwhelming litigation, to facilitate the sale of major assets to a prospective buyer, and to reject burdensome contracts, to name a few.
Chapter 11 brings all stakeholders to one forum and facilitates global resolution of claims and liabilities. It may have different impact on the different stakeholders and these mini-series will cover the impact of a bankruptcy proceeding on trade creditors, distressed asset buyers, landlords, and the art world. The final summary is intended to help small business owners better understand how valuable a tool chapter 11 can be during a time of crisis by availing themselves of the new restructuring mechanism for businesses (and individuals with business debt) with undisputed liabilities that do not exceed $7.5 million.
What If You Are Interested in Buying Assets From A Company In Bankruptcy/Financial Distress
The current market conditions present opportunities to acquire businesses at relatively good prices. The key benefit of a 363 sale is that the buyer takes the assets free and clear of any liens, encumbrances and interests.
With a growing number of cases where courts allow a traditional asset buyer (purchasing assets out-of-court) to become liable for the seller’s liabilities, a court approved sale of all or part of the seller’s assets brings distinct advantages. Another benefit is the ability to cherry-pick favorable contracts and leases, including to the ability to take over contracts even if they contain anti-assignment clauses.
Section 363 of the Bankruptcy Code provides a chapter 11 debtor the opportunity to sell its assets free and clear of claims, liens, encumbrances, competing ownership interests, and other liabilities which may prevent a sale outside of chapter 11. As a result, buyers are incentivized by the unique opportunity to purchase distressed assets inside of bankruptcy (as opposed to out-of-court), especially because the bankruptcy court order approving the sale often expressly forecloses “successor liability” claims against the purchaser.
The bankruptcy court approval of a 363 Sales takes place in two stages. The first stage entails obtaining court approval of the bidding protection procedures. These procedures are described in a motion filed with the court. The second stage is the hearing on the sale of the assets itself when the bankruptcy court hears and rules on any objections to the 363 Sale.
Standards for Approving 363 Sale
The standard that the bankruptcy courts generally apply is whether a sound business reason supports the sale. The factors considered in this process include: 1) the proportionate value of the assets to the estate as a whole, 2) whether the sale price is fair and reasonable under the circumstances, 3) the amount of time elapsed since the filing, 4) the effect of the proposed distribution on future plans of reorganization, 5) the proceeds to be obtained from the disposition compared to appraisals of the assets, 6) whether the asset is increasing or decreasing in value.
Author: Albena Petrakov, Esq.
Articles have been Reprinted with permission from the charlotte observer and Mike Hunter.
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