Buying the assets of a company in bankruptcy offers the purchaser an opportunity to acquire valuable property at liquidation sale prices and to acquire title to the assets free and clear of liens. But buying a bankrupt company’s assets is not as simple as making a purchase at a rummage sale.
The procedure for selling a bankrupt company’s assets gives creditors and other interested parties a say in almost every major step the debtor takes, which can delay completion of the sale and add to the buyer’s transaction costs.
Even when the debtor and buyer agree on the terms, there’s no guarantee the buyer will end up with the asset. The bankruptcy court has to approve the sale agreement, creditors have an opportunity to object and other buyers may bid. To obtain court approval, the sale price must be sufficient to cover the liens on the asset and the debtor’s costs to sell the property, and add something to the estate to pay other creditors.
Also, creditors and interested parties must receive notice of the terms of the sale, and the debtor must advertise the terms and hearing date. Because the goal is to obtain the highest price, once the sale is negotiated, the assets are put up for public sale.
The assets may be sold to another bidder, despite the fact that the initial buyer may have spent thousands of dollars to perform due diligence and negotiate the sale contract.
The standard rules of the competitive bid procedure offer some protection to a buyer. These rules usually include stipulations that:
- Competing bidders must exceed the contracted sale price by some minimum amount to qualify for consideration.
- Bids after the first competing offer must exceed it by specific increments.
- Offers must be in the same form as the initial bid to avoid comparing apples and oranges.
- The buyer will win if it matches the highest bid rather than exceeding it.
- Competing bidders have to put down a deposit or otherwise demonstrate their financial stability before they can qualify as a bidder.
Bankruptcy judges have a great deal of discretion in approving these bid and sale arrangements. A buyer and its attorney should be familiar with the track record of the judge assigned to the case and prepare motions accordingly.
Peter N. Pross is an attorney in the Bankruptcy and Creditors’ Rights Department at Eckert Seamans Cherin and Mellott. Reach him at (412) 566-5934 or [email protected].