Page 51 - Bankruptcy Volume 1

Use of Property Outside the Ordinary Course of Business

If, however, the debtor-in-possession wants to use, sell, or lease assets outside of the ordinary course of
business, the debtor must obtain court approval. Of particular importance is the debtor’s ability, with
court approval, to sell its assets free and clear of claims, liens, and other encumbrances under Section
363 of the Bankruptcy Code.

The Section 363 sale process usually begins with a stalking horse bidder. After negotiating, the debtor
and the stalking horse bidder reach an agreement on the terms of the sale of the assets. In exchange for
serving as the initial bidder, the stalking horse typically negotiates for bid protections, including break-
up fees, expense reimbursement, no-shop or no-talk clauses, and requirements that other bids be on the
same terms with a fixed overbid amount. Occasionally the asset sale will occur outside of an auction
process, but this is rare.

After the stalking horse bidder and the debtor reach an agreement with respect to the terms of the sale
and bidding procedures, the debtor files the agreement with the court to obtain court approval after no-
tice and a hearing. Typical bidding procedures address notice procedures, the qualification of bidders,
timing of bids, and incremental bidding amounts. After the bidding procedures are approved by the
court, the bidding is opened to other interested parties. If additional bidders emerge, an auction is held.
The debtor, often after consulting with the creditors’ committee, determines the highest or otherwise
best bid. The accountant may conduct financial analyses to help the debtor determine which bid is the
highest or otherwise best bid. The debtor and winning bidder must obtain court approval of the winning
bid after notice and a hearing.

Certain secured creditors may participate in the auction by credit bidding — that is, bidding up to the
amount of its debt secured by liens on the assets being sold. Secured creditors almost always have the
right to credit bid when their collateral is being sold in a Section 363 sale.

Section 363 sales are advantageous compared to sales consummated as part of a plan of reorganization
because they typically occur on a faster timeline, which avoids further declines in asset value and may
prevent litigation. Additionally, Section 363 sales avoid the costs associated with remaining in Chapter
11 and the need to find additional DIP financing. However, Section 363 sales also have numerous disad-
vantages. A public auction may be required, which provides for less predictability regarding the out-
come and the ultimate owner of the property. Additionally, there is a potential for delay in the case,
transfer taxes may be applied to the sale, the sale may require financing, and the sale often impairs the
rights of creditors and shareholders.

Section 363 sales are afforded numerous protections by the court. As part of its approval of the sale, the
court will typically make a finding of good faith pursuant to Section 363(m) of the Bankruptcy Code. It
is difficult to unravel a sale to a good faith purchaser once the sale is complete. Purchasers of assets
from a Section 363 sale are also insulated from fraudulent transfer challenges and successor liability.
Additionally, Section 363 sales are free and clear of any interest in the property if

 applicable non-bankruptcy law permits such a sale,

 the interest holder consents,

 the sale prices is in excess of the value of the liens,

 the sale occurs when any alleged interest in the assets is in bona fide dispute, or

© 2020 Association of International Certified Professional Accountants 49