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 the business, of an organization, to repay its creditors/lenders.
Explanation
As laid down by the U.S. Bankruptcy law, Section 363 allows the debtor to sell some or substantially all assets of the business, with certain clauses attached, outside the debtor’s business. This helps the debtor to raise funds in order to pay the creditors and settle debts.
363 Sale is a quicker and robust process to get a buyer for asset sales while also avoiding the devaluation of assets to a major extent.
How does 363 Sale Work?
The process works in tandem with a regular sale process, although regulated by the Code itself. In order 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 –
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- 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 arrangement for ‘stalking horse bid’ wherein a lower bar is set such that bidders do not call a price 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 process of bidding is made open to the other buyers in the market.
- An auction is held post receiving all bids so that transparent conduct of sale can be achieved.
- The highest bidder wins the auction and moves forward with carrying 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 foremost 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 that amount to $1.5 million, the Court asks for bidders to raise bid offers while simultaneously allowing the oil executives to set the stalking horse bid.
- In the next phase, after stalking horse bid is agreed upon and approved by the Court, the subsequent bids are taken in an auction-kind of sale. The highest bid, placed by PPP company, wins the claim on the assets.
- The oil company and PPP company complete the settlement will court approvals at each step. The Oil company realizes $1.5 million from the PPP company. It then pays $1 million that it owed to ABC Ltd.
Advantages
- 363 sale allows for out-of-court transactions, which help avoid the considerable costs, delays, etc. and the involvement of the time-consuming process.
- 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.
- 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.
- A properly conducted sale under Section 363 should benefit all related parties.
Limitations
- A 363 sale is, by all means, a public sale and tries to achieve transparency. Buyers that are averse to such a transparent system of bidding do not participate in a sale.
- 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.
- 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.
- Such sale processes can demand greater efforts for due diligence and concerning charges when stalking horse bid takes place.
- 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 for 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.
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