Section 363 Sale
A Section 363 Sale is a bankruptcy-court-approved sale of estate property under Bankruptcy Code Section 363, commonly used to sell substantial assets or an operating business outside the ordinary course of business during Chapter 11.
Section 363 can sell a business before plan confirmation
A debtor does not always need to wait for a confirmed Chapter 11 plan to dispose of substantial assets.
That can preserve value when liquidity is limited or the business needs a rapid sale.
Court-approved bidding procedures create a market test
The debtor can establish qualification requirements, bid deadlines, deposit rules, auction procedures and standards for determining the highest or otherwise best offer.
The stalking horse sets an initial floor, but qualified competing bidders can improve on that offer.
Sales can address liens and interests
Section 363(f) provides circumstances in which property may be sold free and clear of an entity's interest.
The sale order and statutory prerequisites determine which liens, claims or interests are affected and where those rights attach afterward.
Section 365 often operates alongside Section 363
A buyer acquiring an operating business may want contracts and leases as well as physical assets.
The debtor can seek to assume and assign selected executory contracts under Section 365 as part of the sale process.
A Section 363 sale should be analyzed on net estate value, not headline price
Suppose Bid A offers $500 million of cash but requires the estate to retain $60 million of liabilities and pay $20 million of cure costs.
Bid B offers $475 million but assumes $50 million more liabilities and requires only $5 million of cure costs.
The gross cash price favors Bid A. The net estate economics can favor Bid B.
Bankruptcy sale analysis therefore looks beyond the number in the press release. Assumed liabilities, cure obligations, break-up fees, taxes, closing certainty and excluded assets can materially change which transaction is actually higher or otherwise better.
For creditors, the important output is net distributable value after transaction costs and retained obligations, not merely gross purchase consideration.
Common mistakes
Treating a stalking-horse signing as the completed sale The deal can remain subject to higher bids and court approval.
Assuming every liability disappears The purchase agreement and sale order define assumed and excluded obligations.
Ignoring contract-assignment issues Critical contracts can require Section 365 treatment.
Example
A Chapter 11 company signs a stalking-horse agreement to sell substantially all operating assets for $400 million. The court approves bidding procedures, competing bidders are invited, an auction occurs, and the court later approves the highest or otherwise best transaction under Section 363.
Example
A Chapter 11 company signs a stalking-horse agreement to sell substantially all operating assets for $400 million. The court approves bidding procedures, competing bidders are invited, an auction occurs, and the court later approves the highest or otherwise best transaction under Section 363.
Professional note
A Section 363 sale is a process, not just an asset purchase agreement. Evaluate bidding procedures, sale protections, assumed liabilities, excluded liabilities, contract assignments, credit-bid rights and the final sale order.
Related terms
- Recovery Rate
Recovery Rate is the value a creditor receives or is expected to receive after a default, restructuring or bankruptcy, expressed as a percentage of the creditor's allowed or affected claim.
- Liquidation Value
Liquidation Value is the estimated net value available for distribution to creditors and other stakeholders if a business's assets are sold or otherwise realized in liquidation rather than preserved in an operating reorganization.
- Automatic Stay
The Automatic Stay is the statutory injunction under Bankruptcy Code Section 362 that generally arises upon a bankruptcy filing and halts specified lawsuits, collection efforts, lien enforcement, judgment enforcement and acts to obtain or control property of the estate.
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