Distressed Sales Part 2: Opportunities and Processes to Purchase Distressed Assets

By: Jeffrey Lynne October 12, 2020 7:25 am

Time to read: 5 Minutes

Purchasers of assets are looking for good value or growth opportunities. Acquiring distressed assets may accomplish both or either of these goals. As many businesses are trying to decide what their future holds, selling all or part of the business appears to be a viable option. But what is the process to buy distressed assets? There are several options. Below this note touches on several of the methods to purchase distressed assets.

Bankruptcy Sale

As part of a Chapter 11 bankruptcy in federal court a company has the option to sell some or all of its assets. Generally, an auction is involved to allow for the maximum value to creditors. The bankruptcy court will approve of the bid procedures in advance of the auction to allow for bidders to learn the rules. Additionally, the debtor company’s creditors are on notice of the sale will allows the Court to enter orders which affect their rights.

A purchaser from a Ch. 11 sale under 363 of the Bankruptcy Code is able to purchase the assets and obtain a court order approving the sale of the assets. This court order may offer several benefits, including: (i) a finding the sale of assets is free and clear of all interest, claims, and encumbrances; (ii) protections for good faith purchasers; (iii) a finding that the sale was fair to guard against fraudulent transfer challenges; and (iv) findings which assist with title and ownership issues related to the assets.

The are some issues to keep in mind with a bankruptcy sale:

1. Bankruptcy sales are generally accelerated. This shortens typical due diligence periods.
2. Sales are generally on an “as is, where is” basis.

Bankruptcy sales are conducted under Federal Law and are often utilized by large companies, including Brooks Brothers and Neiman Marcus to name a few. Smaller companies are also able to utilize this approach and the Small Business Reorganization Act may make this option more appealing.

Assignment for the Benefit of Creditors Sale (ABC Sale)

Assignments for the Benefit of Creditors (“ABC”) are not as well known as bankruptcy; however, this approach to liquidating assets have existed under the law for centuries. An ABC is based on state law and is filed in state court. A more complete summary of ABCs is here.

In an ABC proceeding, the company assigns all of its assets to an independent party (the “Assignee”). The Assignee is then empowered under state law to, subject to Court approval, sell the assets of the company. A sale may consist of the entire going concern business, parts of the business, or a piecemeal sale to maximize value for the company creditors. Generally, a court order will approve the sale “free and clear” of creditor claims.

Similar to bankruptcy sales, these sales generally offer a limited due diligence period and are on an “as is, where is” basis; however, the value obtained may justify these limitations for certain purchasers.

Receivership Sale

A court may appoint a receiver over a business when there is a dispute amongst the ownership group or at the request of a lender. If empowered by the Court, the receiver may then sell assets of the company. Unlike the foregoing approaches, bankruptcy or ABC, receiverships often have fewer statutes governing the process. This may reduce some of the benefits listed above; however, a court appointed receiver may seek a court order to approve the sale which, if combined with notice to affected parties, provides certain protections against fraudulent transfer and other risks which were discussed in part 1 of the distressed sales series. Like the above procedures, a receivership sale will likely be “as is, where is.”

Asset Purchase

The prior processes (bankruptcy, ABCs, and receiverships) were sales as part of a court proceeding. A court proceeding is not required to purchase distressed assets. Instead, certain buyers and sellers may prefer an asset purchase which is accomplished out-of-court. Reasons for an asset purchase rather than an in-court process include, among others:

• Desire to keep the sale terms private vs a public court proceeding.
• To avoid an auction which risks another buyer acquiring the assets.
• Cost concerns related to the court proceedings.

Without a court order or following a statutory framework a purchaser does not receive the benefits of the above, including: findings that the purchase was for fair and reasonable value to guard against fraudulent transfer actions; or a finding that the sale is “free and clear” of interests, liens, and encumbrances. Depending on the transaction and the parties, both in-court and out-of-court processes should be evaluated when determining how to proceed with the sale.

How to Learn About Distressed Sales and Next Steps

Local professional publications often advertise distressed sales, particularly for in-court proceedings. Locally, the South Florida Business Journal and the Daily Business Review advertise auctions and other sales. Additionally, professional fiduciaries such as bankruptcy trustees, assignees, and receivers often have websites which feature upcoming sales and opportunities.

Distressed sales present an opportunity to acquire assets at a good value. Distressed sales also have unique future litigation risks that should be evaluated as part of due diligence.