An investment banker recently wrote in, saying: “I am currently helping a troubled company sell its assets. The proposed buyer wants to buy its assets through a 363 sale in chapter 11 and is offering to pay the full amount the bank is owed on its secured debt. The bank is pushing back, trying to get the buyer to buy in an Article 9 sale. I understand the buyer’s motivation to do it in chapter 11, but why is the bank pushing back?”
Let’s compare 363 sales vs Article 9 sales in the eyes of the bank, a secured creditor.
Like so many things, the answer is about money. The fact of the matter is that chapter 11 is very expensive, and bankruptcy cases require lots of lawyers (and lawyers require lots of fees). Additionally, chapter 11 is normally pretty slow, even when a debtor tries to use the 363 sale process to speed things up.
Another major reason, especially where there will be enough money to pay a secured creditor in full but nothing left to pay unsecured creditors, is the “toll” that unsecured creditors will seek to impose. While not the view of all courts, most courts agree that a chapter 11 case may not be administered exclusively for the benefit of the secured creditor, and that the secured creditor must make some concession that is beneficial to the general unsecured creditors in order for the case to remain in chapter 11.
Furthermore, a secured creditor typically has more control in an Article 9 sale. The Bankruptcy Code provides the procedure for the chapter 11 process, and the bankruptcy court ensures that debtors and creditors follow this prescribed process. An Article 9 sale, while subject to Article 9 procedures, allows a secured creditor to sell its collateral either publicly or privately without judicial intervention; this lack of judicial oversight allows a secured creditor to exert more control over the sale process.
These are just a few examples of how a buyer and a creditor see a 363 sale vs Article 9 sale, and why secured creditors will often prefer to sell outside of bankruptcy.
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[Editors’ Note: This 90 Second Lesson is based, in substantial part, on material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives For and Against Distressed Businesses, with permission of Thomson Reuters. Both books are written for a primary audience consisting of people who are not bankruptcy specialists. This is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected], and we will try to answer it.
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The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.
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