Over the last several years, the nature and way that Chapter 11 bankruptcy filings are being handled has changed. Gone seem to be the days of traditional restructurings in which a company filed a Chapter 11, worked its way through the issues that caused it to file in the first place, and ultimately filed a plan of reorganization some nine months to two years later, all the while being funded either by the company’s existing lender or by a new debtor-in-possession (DIP) lender. More and more cases these days are being disposed of by way of a relatively quick Section 363 sale.
A 363 sale is so named because it is authorized under Section 363 of the U.S. Bankruptcy Code. It provides a fast way for a distressed company to sell assets to the highest bidder, free and clear of all claims. Speed is important because financially distressed companies can melt like ice cubes—every day that a company burns through more cash than it earns, it loses value. In fact, in many instances the filing itself is driven by the desire of a prospective purchaser of the debtor’s assets to buy in bankruptcy, thereby obtaining the benefit of a “free and clear” order from the bankruptcy court. Sometimes, this motivated purchaser is the major secured creditor of the debtor’s assets.
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