Vol 11 (2014) - Issue 5

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The Section 363 Sale: A Popular Chapter 11 Tool

Section 363 of title 11 of the United States Code (the 'Bankruptcy Code') authorises a debtor to sell its property in the ordinary course of business without court approval, which facilitates continued and uninterrupted business operations. Conversely, the debtor needs court approval to sell its property outside the ordinary course of business.4 When such sale of property – commonly known as a 'section 363 sale' – involves the debtor’s crown jewel or all of its assets, the sale often becomes a central event that can achieve the goals of a chapter 11 reorganisation without the potentially protracted process of a chapter 11 plan confirmation.

Key features of a section 363 sale
The popularity of section 363 sales can be attributed to the following features.

(i) Property can be sold 'free and clear' of any interest of another entity in such property. The sale of property is approved by the bankruptcy court free and clear of interests (even over the objection of a party holding such interest) if one of the following applies: (i) applicable nonbankruptcy law permits the sale of such property free and clear of such interest; (ii) the entity holding the interest consents; (iii) the interest is a lien and the price at which the property is to be sold is greater than the aggregate value of all liens on such property; (iv) the interest is in bona fide dispute; or (v) the entity holding the interest could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
(ii) Challenges seeking to set aside the sale are limited. Bankruptcy Code section 363(m) protects a good faith purchaser and provides that the authorisation or modification on appeal of an order authorising the sale of assets does not invalidate such sale if the purchaser bought such property in good faith (regardless of whether the purchaser was aware of the pendency of the appeal), unless the sale was stayed pending appeal.
(iii) The sale can be accomplished in a relatively short timeframe. The most notable flash sale took place in the Lehman Brothers chapter 11 case, in which the debtor sold substantial assets only four days after the petition was filed. This factor is particularly relevant when the debtor is running out of cash, when the debtor’s ability to restructure successfully is questionable, or when the value of the debtor’s assets may deteriorate quickly. In addition, a fast section 363 sale often precludes the need for a protracted confirmation process for a chapter 11 plan, which prevents the accrual of substantial administrative fees.