Options for Selling Assets in a Chapter 11 Bankruptcy

The purpose of Chapter 11 bankruptcy is to allow a troubled company to restructure its debt with the goal of restoring its financial solvency. One way to achieve that goal is the sale of some of the company’s assets. However, bankruptcy law places restrictions on such sales. Debtor companies need to carefully weigh their options and follow certain rules.

Assets sold in Chapter 11 can range from equipment to real estate to entire units of an enterprise. There are multiple reasons for selling company property. Some assets may no longer be economically useful and are better off being sold to save the cost of storage and maintenances. Other assets may have value but might not be a good fit for the restructured company. Sometimes, the company’s physical premises can be worth more than the business itself, so that a sale of all or part of the premises can be profitable. A company unit that is underperforming may be an attractive target for acquisition.

A sale of assets in Chapter 11 can maximize their value, fetching more than could be gained by liquidating the company. Under the applicable bankruptcy code section, 11 U.S.C. § 363, the assets can be sold free and clear of security interests and other liens and claims. The provision also protects good faith buyers from having a sale reversed. This can make buyers more willing to participate. Secured creditors can benefit by bidding on collateral for the debt they hold, thereby cancelling some of it.

A debtor company’s sale of assets while in Chapter 11 requires court approval. There are generally two approaches to take. One is a motion for permission to sell a certain asset or class of assets, which is typically filed after the debtor has sought out willing bidders for the asset. This approach is often used when the sale needs to be completed quickly in order to obtain ready cash for use in the reorganization.

The other approach is seeking to make the asset sales part of the Chapter 11 restructuring plan. This is subject to creditors’ review and possible objection. However, it can be an effective way to provide funds for a repayment plan that creditors and the court find acceptable. This process is sometimes used when a company is not likely to emerge solvent from Chapter 11 but its assets still have value.

A skilled Chapter 11 lawyer can help you decide which path is most appropriate for your business situation. Your lawyer can also prepare a well-founded case for gaining court approval for asset sales.

The Law Offices of Michael Jay Berger is one of Southern California’s busiest bankruptcy law firms, with 12 locations in the region. If your business is financially distressed and needs relief from debt, contact us online or call 310-271-6223 to schedule a free initial consultation.