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363 Sale

Updated on May 9, 2024
Article bySushant Deoskar
Reviewed byDheeraj Vaidya, CFA, FRM

What is 363 Sale?

A 363 sale is a section prescribed in the United States Bankruptcy Code regarding the sale of assets, ranging from office furniture to substantially all assets of an organization’s business, to repay its creditors/lenders.

363 Sale

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Key Takeaways

  • A 363 Sale is a section in the United States Bankruptcy Code that allows selling a company’s assets, from office furniture to all business assets, to pay back creditors or lenders.
  • It is a fast and efficient way to find a buyer for assets while avoiding asset devaluation. To initiate 363 Sale proceedings, a debtor or creditor must file a petition under the code.
  • The sale of assets under Section 363 is applicable if a business files for bankruptcy because it cannot repay its lenders. 
  • Companies in bankruptcy should carefully weigh the merits and drawbacks of 363 Sales against planned sale and credit bidding processes.

Explanation

As laid down by the U.S. Bankruptcy law, Section 363 allows the debtor to sell some or substantially all business assets, with certain clauses attached, outside the debtor’s business. It helps the debtor raise funds to pay the creditors and settle debts.

363 Sale is a quicker and more robust process to get a buyer for asset sales while also avoiding the devaluation of assets to a major extent.

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How does 363 Sale Work?

Although regulated by the Code itself, the process works in tandem with a normal sale process. To start proceedings of 363 sales, either the debtor or creditor has to file a petition under the Code. Following are the steps that lead to the sale –

  • The process is quite straightforward, with the debtor starting the sale of concerning assets to the prospective market of buyers.
  • The debtor can take the help of a team of investment consultants or bankers to market the assets and prepare the legal filing to set forth the sale process.
  • The debtor can then consider an arrangement for a ‘stalking horse bid‘ wherein a lower bar is set, so bidders do not call a lower price.
  • A 363 sale allows a debtor (seller) to be in greater control of this stalking horse bid.
  • After successful approval of the bid by the Court (bankruptcy court), the bidding process is made open to the other buyers in the market.
  • An auction is held post receiving all bids to achieve transparent conduct of the sale.
  • The highest bidder wins the auction and carries out the purchase.
  • The Court, under all circumstances, reserves the right to approve or dismiss the sale based on reasonable adjustments and justifications by other bidders.

Example

Suppose ABC Ltd. had loaned $1 million to an oil exploration company in the U.S. Five years down, and the oil company saw massive breakdowns leading to incapacity to run the projects. The creditor ABC Ltd. asks for loan payback from the oil company.

  • The oil company moves to the Bankruptcy Court to file a motion. The settlement is agreed through 363 sales subject to approval by the Court.
  • A 363 sale will maximum value the assets of the oil company and correlate it with the debts. One such debt is $1 million owed to ABC Ltd., Having valued all the assets to $1.5 million. The Court asks bidders to raise bid offers while simultaneously allowing the oil executives to set the stalking horse bid.
  • After the stalking horse bid is agreed upon and approved by the Court, the subsequent bids are taken in an auction-kind sale in the next phase. The highest bid, placed by the PPP company, wins the claim on the assets.
  • The oil company and PPP company complete the settlement and court approvals at each step. The Oil company receives $1.5 million from the PPP company. It then pays $1 million that it owed to ABC Ltd.

Advantages

  1. 363 sale allows for out-of-court transactions, which help avoid the considerable costs, delays, etc., and the involvement of the time-consuming process.
  2. It allows the debtor to take greater control of the disposition of assets, which is not the case in Chapter 7 liquidation sale when a trustee assumes control of the sale.
  3. Not only the debtor side, but 363 sale also benefits the creditor side by raising questions and appealing to the Courts in cases of a higher ask from the debtor side.
  4. A properly conducted sale under Section 363 should benefit all related parties.

Limitations

  1. A 363 sale is, by all means, a public sale and tries to achieve transparency. Buyers opposed to such a transparent system of bidding do not participate in a sale.
  2. If the sale involves a vast number of buyers, it may complicate the process of establishing a stalking horse bid while also running the risk of being outbid anytime.
  3. Since 363 sale is a jurisdiction of the U.S. Bankruptcy Code, the debtor is required to conform to essentially all the prescribed requirements of the law. In case of any violation or deviation, the Court can reverse or dismiss the sale of assets and ask the debtor to maintain greater compliance.
  4. Such sale processes can demand greater efforts for due diligence and concerning charges when a stalking horse bid takes place.
  5. One of the key disadvantages of conducting is that the debtor gets a limited time from lenders to complete the due diligence.

Conclusion

The United States Bankruptcy Code provides debtors to dispose of distressed business and its assets by filing under Section 363 of the Code. Section 363 differs from Plan sales wherein the principal goal is to allow for a reorganization scheme that provides acceptable recoveries of funds/resources to the creditor parties. It is a useful aid for debtors to clam maximized value for the assets in concern. The sale is clear of all claims, liens, and encumbrances related to the assets.

Sale of assets under Section 363 is applicable only when the business has filed for bankruptcy because of its incapacity to repay funds to its lenders. However, it is best for every company, that faces bankruptcy, to critically evaluate the merits and demerits of 363 sales as against the Plan sale and credit bidding procedures.

Frequently Asked Questions

What is the difference between 363 Sale vs. Chapter 11 bankruptcy?

A 363 Sale is a fast asset sale process, usually taking two to three months, while Chapter 11 bankruptcy is a complex reorganization process that can take six months to a year. Chapter 11 enables a debtor to propose a plan to restructure their debts and continue operating. At the same time, a 363 Sale is a liquidation process in which a company’s assets are sold to repay creditors.

What are the tax implications of the 363 Sales?

A 363 Sale can have tax implications, as it is typically a taxable transaction. However, it may be possible to structure the sale as a tax reorganization under IRC Section 368(a)(1)(G), known as a “G” reorganization, or other asset-based tax reorganizations like “C” or “D” reorganizations, which can reduce the tax owed. Additionally, an acquiring corporation may be able to take on the debtor corporation’s tax attributes following the sale. 

Can a 363 Sale be used to sell intangible assets, such as patents or trademarks?

Yes, a 363 Sale can be used to sell intangible and tangible assets. 363 Sales of intellectual property assets have become increasingly common in recent years, particularly in the technology industry.

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