Asset Sales in Bankruptcy

An Effective Means to Realize the Maximum Value of a Distressed Company
By: Raymond J. Urbanik
Dallas Business Journal
September 2009

Despite certain recent and modest signs of improvements in the United States economy, many businesses continue to struggle financially and may be forced to explore every option to survive the economic downturn. When faced with tough challenges, one option a business may consider is the reorganization of the business, including the possibility of a sale of part or all of the business, through Chapter 11 of the United States Bankruptcy Code.

Chapter 11 can provide economically challenged companies the ability to restructure debts through a plan of reorganization and/or to sell unwanted assets through the asset sale provisions of the Bankruptcy Code. Asset sales, sometimes called “363 Sales” because they are governed by Section 363 of the United States Bankruptcy Code, have become increasingly used as a means for realizing the maximum value of a distressed company. The sales of “good assets” by General Motors and Chrysler Corporation in their respective Chapter 11 bankruptcy cases during the summer of 2009 were headline-making news. The size and complexity of these two automakers and the urgency of the survival of General Motors and Chrysler resulted in Court approved bankruptcy sales which took place at record-breaking speed. Sales of assets for other businesses may not take place so quickly, but can be carried out efficiently and can enable a struggling business to get its fresh start.

Section 363 of the Bankruptcy Code permits the bankrupt company (known as the debtor or the debtor-in-possession) to sell some or all of its assets to the highest bidder. The Bankruptcy Code also permits the business owner to reject unfavorable contracts and/or leases or assign such contracts or leases that are economically favorable to a new purchaser. Asset sales allow the seller (identified in this article as the debtor) to realize the maximum value for any one of its assets or its entire business. The goal of a debtor’s asset sale should be to obtain the highest price for the property sold. The pool of money generated from an asset sale or series of sales enables the debtor to pay off its debts through a plan of reorganization. A sale of assets by a debtor in a Chapter 11 case differs from the sale of assets in a Chapter 7 case. Chapter 7 cases are liquidation cases administered by a Chapter 7 Bankruptcy Trustee. In a Chapter 7 case, the business owner simply files the case, no longer has any involvement with the business and the Chapter 7 Trustee takes possession of all of the business assets and promptly liquidates them. In a Chapter 11 case, the business owner generally stays involved in the case overseeing the reorganization and/or sales process.

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