The prior chapter of Behind The Curtain can be found with the following link:
As you recall from Chapter 8, while Brettco is allowed to conduct business as normal without asking for permission from the Court, whenever it wants to do something outside of its ordinary course of business, it can only do that after it asks for, and receives, approval from the Court. An example of this is the sale of assets.
The Bankruptcy Code has a section, 363, that deals with how assets can be sold. This section says that anything sold outside of the ordinary course of business is subject to “higher and better bids.” What that means is that the debtor can’t just agree to sell something to another company. Instead, whatever is being sold has to be offered to others who may have an interest in it, so that it brings in as much money as possible. Whether it is a single piece of equipment, a division of a company, or all of the assets of the company, the debtor has to follow the process.
To show how it works, let’s look at Brettco wanting to sell one of its AB paint robots to Patrice Painting for $25,000. Before Brettco signs the agreement, it will need to tell Patrice that the Court has to approve the sale and it is subject to higher and better bids. After Brettco signs an agreement with Patrice to sell the robot for $25,000, it files a motion to sell it. The motion process will have two phases. First, there will be “bidding procedures,” which is how other companies can engage in the purchase process. The second part is the actual sale.
The Court will establish the bidding procedures (usually those that are proposed by Brettco). Bidding procedures include items such as bidding increments and any other things that are relevant to the proposed sale. In a larger sale (such as all of the assets of a company where there will be a lengthy asset purchase agreement), bidding procedures will include a requirement that potential bidders agree to the terms of the agreement or, if they disagree with some of the terms, state what their terms would be. Once the bidding procedures are established, Brettco will need to contact other companies that may have an interest in purchasing the robot. In a case such as the sale of the robot, Brettco will most likely know other companies that would be interested and will mail the information to them. In larger cases, there may be advertising in trade publications, the internet, or anything else that will get the widest advertising of the sale.
There is then a period for other interested parties to make “qualified bids.” This will include some type of refundable deposit and a markup of the agreement. Once this first stage is done and all of the qualified bidders are known, there will be an auction, which is conducted according to the bidding procedures. The auction can either be in Court or at the lawyer’s office. In the case of Brettco selling the robot, since there may only be a few other companies interested in bidding on the robot (if any at all), the auction will take place in Court, with the hearing to approve the sale taking place right after the end of the auction. If instead of just selling the robot, Brettco was selling the entire company, the auction might take place at Jeff’s office. In that situation, the hearing on approval of the sale will be in Court a few days after the end of the auction.
What if there are other companies interested in buying the robot? Let’s say there are two other companies, Danco, Inc. and Ian, LLC and the bidding increments are $2,500. Danco bids $27,500, Ian bids $30,000 and Patrice bids $32,500. There are no other bids, so now Patrice has to pay Brettco $32,500, instead of $25,000.
While Patrice is interested in purchasing the robot for $25,000, why would she be interested in subjecting her company to perhaps paying more money? The reason for this (and this applies more when all of the assets of a company are being sold), is because the sale will be “free and clear of all claims, liens, and encumbrances, with all such claims, liens, and encumbrances attaching to the proceeds.” In English, this means that Patrice doesn’t have to worry about anyone coming after her company and saying that she needs to pay them something. For example, let’s say that when Brettco purchased the robot, he borrowed money from RL Funding, with RL getting a lien on the machine. So, after the sale, RL is first in line to get paid. If RL was still owed $40,000, it would get the $32,500 and have an unsecured claim against Brettco of $7,500. RL could not ask Patrice for the $7,500.
Bottom line is that a sale under Section 363 makes sense for Brettco, because it will maximize the amount for the robot. It also makes sense for Patrice, because she will own the robot knowing that she will not have to pay any money to RL.
Earlier chapters of Behind The Curtain can be found at the following links: