Business Workshop: Buy assets at Section 363 sale
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When a company enters bankruptcy, its equipment and real estate often go on sale for below market prices. But buying assets from a bankrupt company can be a tricky process.
Most companies buying assets from a bankrupt company do so through a Section 363 sale, which generally occurs before the approval of a reorganization plan.
For buyers, the main advantages of a Section 363 sale include the relative speed of the transaction and the transfer of assets free and clear of encumbrances and interests.
For a seller, the Section 363 process eliminates director and officer liability for the sale and limits the company's liability for breach of representations and warranties.
Speed is a relative concept in bankruptcies and, while faster than waiting for a reorganization plan, a Section 363 sale must still be approved by a court -- which means it will take a minimum of 120 days to complete.
The other complication of a Section 363 sale is that a company cannot just buy the piece of property or asset. It must first present a bid in a special type of auction. The auction comes only after an initial bidder, called a "stalking horse," makes an offer for the property. The stalking horse agrees to purchase the asset from the bankrupt company if no one else outbids its original offer. If outbid, the stalking horse usually gets reimbursed for its expenses as stalking horse, plus a break-up fee which can be as much as 5 percent of the sale price.
Once the auction takes place, the bankruptcy court must approve it. Among other concerns, the court wants to make certain that the seller took the highest and best offer and that the sale will be in the best interests of the creditors.
-- Robert Dauer
Meyer, Unkovic & Scott firstname.lastname@example.org
First Published July 23, 2012 12:00 am