Selling Assets of a Distressed Business Through Section 363

During a Chapter 11 proceeding, a debtor that continues to operate the business and control company assets may seek court approval for a Section 363 sale. This court-supervised auction process allows the debtor-in-possession (DIP) to sell selected assets quickly, free and clear of liens, claims and other encumbrances — something that is often difficult or impossible to do outside bankruptcy. 

To initiate a Section 363 sale, the DIP files a motion with the bankruptcy court requesting permission to sell specified assets. The debtor typically must demonstrate that the proposed sale is an appropriate and effective way to maximize the value of those assets for the benefit of creditors and the estate.

A Section 363 sale offers significant advantages to both buyers and sellers. Buyers can acquire assets free and clear of liens, claims and other encumbrances, making the assets more attractive and reducing the risk associated with the transaction. Sellers benefit because assets can often be marketed and sold more quickly than in a traditional sale process, allowing the business to generate liquidity and preserve value during restructuring.

The debtor also has substantial flexibility in structuring the sale. With court approval, the DIP may establish bidding procedures and negotiate directly with potential buyers. The court typically approves procedures governing deadlines, competing bids and the auction itself, helping ensure a transparent and competitive process designed to maximize value.

With the court’s approval, the DIP may designate a stalking-horse bidder. This bidder agrees to purchase the assets for a specified minimum price, establishing a floor for the auction and encouraging other interested buyers to submit competing bids. In return, the bidder receives certain protections, such as breakup fees or reimbursement of certain expenses if another bidder ultimately prevails.

Following the auction, the bankruptcy court must approve the successful bid before the sale can close. After the costs of the sale are paid, the proceeds are distributed in accordance with the Bankruptcy Code, with secured creditors typically receiving priority treatment.

With experienced legal guidance, a Section 363 sale can provide an efficient way to monetize assets, while buyers gain the opportunity to acquire valuable assets with the protections that come with court approval. 

The Law Offices of Michael Jay Berger in Beverly Hills represents businesses throughout Southern California in Chapter 11 proceedings, including Section 363 sales. To schedule a free initial consultation, contact us online or call 310-271-6223.