The U.S. Bankruptcy Code (Title 11), under § 363, allows a Chapter 11 bankruptcy debtor, acting in the capacity of a debtor-in-possession, to sell assets at auction, thus giving the debtor more control in their ultimate disposition than in a Chapter 7 liquidation case where a trustee may sell or transfer assets without the participation of a debtor-in-possession.
A § 363 sale has the potential advantage gained through an auction where participants submit bids competitively, and the final sales price closely reflects the best possible result for their disposition under the present circumstances, which may reflect a better alternative than reorganization. Potential buyers may purchase assets at a bargain price without any threat of a reversal of the sale while obtaining ownership of assets free and clear of any lien or claim.
A § 363 sale commissioned by the bankruptcy court benefits both debtors and creditors. Those debtors with no desire to reorganize potentially maximize any return from disposing of assets because of the competitive nature of the bidding process. Those who bid benefit by the possibility that they may acquire bargain-priced assets with court approval, free and clear of any lien or other claim. Of course, the auction must be legitimately conducted, and any sale must be made in good faith.
Creditors are still in a position to protect their interests in cases where a debtor-in-possession moves to dispose of assets. They may approve of or oppose any motions made by the debtor during the Chapter 11 bankruptcy case. The bankruptcy court must, therefore, consider the objection of a creditor before it approves a motion to approve a sale under § 363.
Also, a § 363 sale enables secured creditors to place a credit bid which may cancel some or all of the debtor’s obligation. When an asset used as collateral is put up for auction, the secured creditor is not limited to making a cash bid, instead, it may bid the amount of the underlying loan’s debt for which the asset served as collateral.
The transparent nature of bankruptcy proceedings means that the bids of purchasers are public information, which may increase the chances that a bidder is ultimately outbid by competitors. Sales that don’t conform to bankruptcy court mandates will not receive court approval. This includes sales not conducted in good faith, which may be reversed on appeal. There is always the possibility that another creditor may challenge the sale on valid grounds delaying or ultimately preventing the sale from occurring. The result: the process restarts, and more time and other resources are consumed.
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