How a Liquidation Bid Can Derail a Prepackaged Chapter 11

When a company files a prepackaged Chapter 11 bankruptcy, it has already negotiated a deal with creditors and potential buyers for the business to be sold as a going concern. This approach can streamline the process, minimize disruptions and maximize value for stakeholders. However, complications can arise if a liquidation bid emerges as a competing path. 

A prepackaged Chapter 11 plan provides for selling the company to a predetermined buyer (the “stalking horse bidder”), whose bid serves as a baseline offer. The stalking horse bid typically includes protections, such as a breakup fee, to compensate the bidder if another party submits a higher offer.

A liquidation bid can arise if vendors, creditors or other stakeholders decide that the company is worth more dead than alive and so propose selling the company’s assets piecemeal. Liquidators typically assess the value of tangible and intangible assets, including inventory, real estate, intellectual property and equipment, aiming to monetize these items quickly.

When a liquidation bid surfaces, the court, creditors and other stakeholders must evaluate which option maximizes recovery. This may involve the following aspects:

• Stakeholder conflicts — Secured creditors may favor liquidation if it ensures repayment. Unsecured creditors and employees may prefer a going-concern sale to preserve jobs and relationships.
• Auction bidding — The liquidation bid could trigger a competitive auction process. Potential buyers, including the stalking horse bidder, may make offers to outbid the liquidator.
• Revised valuations — The court may require updated appraisals and financial analyses to determine the merits of competing offers.

If the liquidation bid is ultimately accepted, the company’s operations cease, its assets are sold and proceeds are distributed according to the bankruptcy code’s priority scheme. Secured creditors are paid first, followed by unsecured creditors, equity holders and others.

In evaluating a proposed liquidation, the court must ensure that the bidding process is fair and transparent and that it maximizes the value of the bankruptcy estate. If the court determines that liquidation yields a better return for creditors, it may approve the bid over the prepackaged sale.

However, liquidation might be refused. Courts often prioritize maintaining businesses as going concerns when feasible, as this can have broader economic benefits. The decision hinges on the court’s assessment of the bids’ impacts on creditors and stakeholders, as well as the feasibility of maintaining operations under new ownership.

If your business is facing insolvency, a skilled Chapter 11 attorney can advise you on the benefits and risks of a prepackaged plan and provide representation through all stages of the process.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your company needs help with debt reorganization, call 310-271-6223 or contact us online to schedule a free consultation.