The Mechanics of a Deal

From Allens Inc. to General Motors, distressed debtors have increasingly opted to sell part or all of their assets through what is called a “363 sale” rather than to reorganize through the Chapter 11 bankruptcy process. This type of sale gets its name from the specific section of the Bankruptcy Code dealing with the procedure. In this article, we describe what constitutes a Section 363 sale, how the process works, and some of the pros and cons of taking this route.

Section 363 Defined
A Section 363 sale allows a distressed company to market its assets to bidders immediately after filing for bankruptcy without first developing a plan for reorganization. All or substantially all of a debtor’s assets outside the ordinary course of business may be sold free and clear of liens, claims, or third-party interests in the property. These assets can include anything from equipment and fixtures (discrete assets) to whole subsidiaries and large enterprises. The sale cannot include, however, assets sold on a routine or day-to-day basis, such as inventory. In contrast, Chapter 11 reorganization requires a plan that includes all of a corporation’s debt and assets to be restructured. Assets are then liquidated pursuant to the plan.

At least one of the following conditions must exist for a 363 sale to be approved by the bankruptcy court: (a) applicable nonbankruptcy law permits such a sale; (b) the sale price exceeds the value of the liens or claims on the property; (c) the creditor consents (or fails to object) to the sale; (d) the creditor’s interest is in bona fide dispute; or (e) the creditor could be compelled, in a legal or equitable proceeding, to accept a ‘money satisfaction’ (payment made in cash versus nonmonetary property) of such interest.

The University of California Los Angeles (UCLA)-LoPucki Bankruptcy Research Database shows 34 percent of large public companies in bankruptcy in 2013 disposed of their assets through 363 sales versus 10 percent in 2000. The percentage of 363 sales peaked at 43 percent in 2011; experts attribute the trend to the weak economy and tight credit markets.

Top Benefits
The 363 process is swift, less costly, and not as complicated as the traditional Chapter 11 filing process and procedures for reorganization. “Section 363 sales don’t take long—two to four months—and in some situations within one month,” comments Mark Amendola, senior litigation counsel at Martyn & Associates, P.A. in Cleveland, Ohio.

By contrast, Chapter 11 reorganization can take up to four to five years, and is the most expensive of all bankruptcy proceedings. “As ironic as it sounds, filing Chapter 11 is expensive,” Amendola says, explaining how debtor companies must pay for lawyers, financial advisors, accountants, and other professionals throughout the process.

A 363 sale also takes much of the complexity out of the process. A reorganization plan is not required prior to the sale, no disclosure statement is needed, and creditors do not have a ballot vote, among other things. This simpler, more efficient procedure also keeps costs low—a significant advantage for the parties involved.­

“Usually, there are two situations that give way to a 363 sale,” explains Amendola. “One is when the debtor’s assets are losing value.”