What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted?
Restructuring & Insolvency
Different procedures, that are subject to the supervision of the court, apply to the sale of the debtor’s immovable and movable assets in restructuring and insolvency proceedings provided that sales must be carried out by the trustee through competitive procedures and based on experts’ appraisals.
The purchaser acquires the assets “free and clear” of claims and liabilities. Securities cannot be released without creditor consent and credit bidding is not allowed.
In the context of In-court Settlement, it has been a common practice that debtors file pre-packaged plans providing for the sale of the debtor’s business or assets to a third party investor based on a binding agreements entered into by the debtor and the investor prior to the filing. However, this practice has been recently affected by a new provision of law whereby if the plan includes a proposed sale of the debtor’s business or assets, a court-approved bidding and auction process must be carried out to seek competing offers.
In case of transfer of the business as a going concern in a restructuring or insolvency process, unless the parties have agreed otherwise and with limited exceptions, the purchaser does not incur liability for the obligations of the purchased business incurred prior to the transfer.
In the framework of the consultations that must be carried out among the debtor, the purchaser and the employees’ representatives, the parties can agree on a partial-only transfer of the employees to the purchaser and on certain amendments to the transferred employees’ agreement.
In case of transfer of business in the context of the extraordinary administration of large insolvent enterprises, the commissioner, the purchaser and the employees’ representatives may agree on a partial-only transfer of the employees to the purchaser. However, the protection of the employees is higher as the purchaser must be chosen not only based on the price offered but also on the guarantee given with respect to the stability of the employment. Moreover, the purchaser shall maintain the employment level established at the time of the acquisition for at least two years.
A declaration of insolvency does not trigger suspension of the commercial activities of the debtor and the sale of assets within the debtor’s ordinary commercial activities are permitted. Moreover, the insolvency administrator may provide directors with a general authorization to enter into certain transactions, notwithstanding their obligation to report to the insolvency administrator upon transactions entered into by the debtor.
During the insolvency procedure and before approval of a reorganization plan, other debtor’s assets cannot be sold without court authorization.
The insolvency administrator must attempt the sale of business units as a going concern (as the best way to protect creditor’s interests). Within the framework for the sale of the business unit (preferably by public auction), the law enables, among other things: (i) assumption or rejection of executory contract, licenses and administrative permits; (ii) release of debts, aside from certain social security and labour claims and (iii) the release of the security interests, so long as the 75% of secured creditors consent.
Secured creditors who fail to enforce their security interest prior to liquidation to lose control over the collateral, although they are entitled to a percentage of the price achieved equivalent to the value of the collateral.
In order to promote the sale of a distressed debtor’s business, the Spanish Insolvency Act, envisages an abbreviate procedure if the debtor files a pre-packaged, plan or reorganization plan that includes the transfer of all its assets and liabilities through a structural change in the company. Additionally, abbreviated procedures also apply when the debtor files, along with the petition for insolvent, a liquidation plan containing a binding written offer to purchase a business unit, or when the debtor has ceased carrying out its activity and has no employment contracts in force.
In both types of proceedings, business and asset sales are possible during the rehabilitation process, but are subject to the consent of the court and/or the supervisor in some cases. Whether the purchaser can acquire the assets ‘free and clear’ of claims and liabilities depends on the agreement between the debtor or the trustee and the purchaser.
In restructuring as well as insolvency proceedings transfer of individual assets and entire businesses may take place.
In restructuring proceedings, the entire business or part of such business is sold on the basis of a restructuring proposal made by the restructuring admin-istrator. The proposal must be approved by the creditors.
The transfer typically takes place free of claims and liabilities but the final terms depend on the restructuring proposal.
When insolvent estates sell assets together or one by one, such assets will as the predominant main rule be transferred without any liability for the insolvent estate or the trustee and any buyer must consequently take over the asset as is.
In insolvency proceedings the trustee is not obliged to ask the creditors unless the assets transferred are charged.
If the assets are charged, the creditor must accept the transfer unless the sale is a forced sale.
If employees are transferred as part of a transfer of the entire business, the buyer takes over the employees’ employment contracts, including the terms of the employment contract and any due payments.
• Credit bidding
Credit bidding is allowed under Danish law, but it requires that the chargee outbids the other bidders in respect of the charged asset.
A voluntary administrator may sell assets, noting, however, it is not permitted to sell assets subject to security without consent (normally, a receiver will be appointed and have control over such assets). Administrators can apply to the court if such consent is not given and the court may make an order if it is satisfied that the secured creditor is adequately protected.
Liquidators appointed in the context of either voluntary or compulsory liquidations can sell or otherwise dispose of unencumbered property of the company without needing to seek approval from the court or other parties to the liquidation. The purchaser will acquire the assets unencumbered unless there are debts or liabilities passing to the purchaser as provided for in the sale documentation. If assets are encumbered, consent of the encumbrancer will be required unless a court directs otherwise.
A liquidator owes fiduciary duties to the company. In realising company property, a liquidator (or administrator) has a duty to obtain the highest possible prices for the assets of the company, keeping in mind that the winding up should not be unnecessarily protracted. Property may be sold in any way the liquidator deems fit, including private contract and, usually, public auction. While creditors may purchase assets of the company, the purchase price will not be able to be set off against the debt owed to the creditor by the company. Instead any funds raised by the sale of company property will be for the benefit for the creditors as a whole, to be distributed according to the relevant distribution rules.
As previously noted, a receiver is under a statutory obligation to obtain market value or, in the absence of a market, the best price obtainable in the circumstances pursuant to section 420A of the Corporations Act. Upon a sale, the receiver will transfer the asset free of security interests (a release will be provided by the appointing secured creditor) and often the terms of any intercreditor arrangements will provide for the automatic release of subordinated security. In circumstances where an automatic release mechanism is not provided for, director negotiations will need to take place with the subordinated creditors.
Schemes of arrangement
The terms of the scheme itself can provide for the disposal of assets and any associated release of security provided. Such releases will not be automatic (unless specifically provided for in an approved scheme) and will need either agreement from the creditors or the provision of such release in associated finance and security documents.
In an informal reorganisation of a company the conditions of the reorganisation and sale or use of assets are as negotiated with the relevant creditors.
Credit bids are permissible under Australian law and generally a means of pursuing loan to own strategies, but are rare given the need for a sales process to be conducted and the need for proceeds to flow.
The principal of caveat emptor will apply to any purchaser of a company's assets / business by a liquidator (whether a provisional liquidator or official liquidator). Only very limited representations and warranties will be given by the liquidators, who will act as agents of the company without personal liability. The purchaser will therefore take the assets subject to existing claims and security interests, although the company will remain liable for any existing creditor claims.
Liquidators have no power to release security without creditor consent. Whilst rarely seen in practice, there is no prohibition on credit bidding pursuant to Cayman Islands law.
In bankruptcy proceedings, the requirements for the sale of assets depend on the type of proceedings. While in ordinary proceedings the receiver in bankruptcy must generally follow more strict rules with regard to the realization of assets, in particular where it is envisaged to realize an asset of the insolvent debtor by means of a bilateral sale outside of an auction process, there is larger discretion in case of summary bankruptcy proceedings. In each case, the secured creditors must consent to such asset not being sold by public auction and all creditors must be given the possibility to submit a higher offer for real estate property or other assets of high value. Sales generally occur on an 'as is where is' basis and, thus, the acquired asset would not necessarily be free of claims and liabilities. No representations and warranties are typically given by the receiver in bankruptcy. Upon completion of the sale, the security will be released. Credit-bidding is available to a secured creditor only.
In composition proceedings, the insolvent debtor typically requires both the consent from the administrator and the competent court if it wishes to sell its assets or even the entire business during the moratorium phase. Administrator's consent is sufficient for the sale of current assets, though. Court approval can also be sought at the outset of the proceedings which would allow a pre-packaged restructuring under Swiss law. The consent of a secured creditor will be required for a release of a security interest. The terms of the disposal, including representations and warranties, will have to be negotiated between the seller and the purchaser. Again, credit-bidding is only available to a secured creditor and subject to contract.
In preliminary insolvency proceedings, the insolvency court generally orders that acts of dispositions (including sales) of the debtor shall require the consent of the preliminary insolvency administrator. It may also order that only the latter can make acts of dispositions.
In insolvency proceedings, only the insolvency administrator has the power to sell the debtor’s assets. In self-administration cases, the debtor has such power, but the court may order that the trustee’s consent is required. The sale of the business as a whole, of significant assets, immovables if sold out-of-court, and shareholdings belonging to the estate requires the approval of the creditors’ committee or, if no creditors’ committee has been appointed, the creditors’ assembly.
In general, the insolvency administrator’s objective is to sell the debtor’s business as a going-concern (übertragende Sanierung). In this case, the transferee succeeds by law into the rights and duties under the existing employment relationships (Sec. 613a Civil Code).
The insolvency administrator may also dispose of encumbered movable assets in his possession (other than subject to retention of title), in which case the purchaser acquires the assets “free and clear” of claims, liabilities and encumbrances. Following such sale, the insolvency administrator shall use the proceeds, after deduction of the costs of determining and disposing of the asset (in general 9%), to pay the secured creditor.
While the insolvency administrator can sell encumbered real estate either
- out-of-court, in which case the encumbrances remain (unless released by the secured creditor), or
- at public auction, in which case the encumbrances are in certain cases extinct,
in practice, the administrator concludes an agreement with the secured creditors regulating the out-of-court sale by the administrator, the release of the collateral and the distribution of the proceeds (including a fee for the estate).
Credit bidding, ie allowing a secured creditor to bid, in the sale of its asset, the amount of its debt as a credit bid, ie not a cash bid, is not permitted by the Insolvency Code.
As of the issuance of an Insolvency Judgment, any sale of assets should be approved by the Insolvency Court. In a liquidation scenario, all assets should be transferred free and clear of claims and liabilities.
A security interest cannot be released without creditor´s consent.
Credit bidding is not regulated by the Insolvency Law.
British Virgin Islands
From the date of their appointment, the liquidator has custody and control of the company’s assets and also the power to sell the company’s property, subject only to the supervision of the court or the creditors’ committee, depending on the type of liquidation. The only other qualification on the liquidator’s power to sell company property and give clear title is the requirement that the liquidator notify the creditors’ committee of any sale to a person connected with the company.
The general rule nemo dat quod non habet applies to liquidators: the liquidator cannot give a purchaser greater title to property than the company had.
The appointment of a liquidator does not affect the right of a secured creditor to take possession of and realise or otherwise deal with his collateral. A secured creditor may therefore exercise rights to foreclosure, sale, the appointment of a receiver, and so forth, that are generally available to holders of security interests (see above). As always, a secured creditor exercising a power of sale must get the best price reasonably obtainable for the asset and account to the liquidator for any surplus. If the price obtained does not discharge the debt owed to the creditor, they may prove a claim for the balance as an unsecured creditor.
Alternatively, the secured creditor may choose to place a value on the assets that are subject to their security interest and submit a claim in the liquidation for the unsecured balance. If they do so, the liquidator may give notice of an intention to redeem the security interest. On the expiry of 28 days, if the creditor has not sought to revise the valuation placed on the assets, the liquidator may redeem the security at the value placed on the assets.
If a secured creditor omits to disclose its security interest when submitting a claim in the liquidation of the company, the security is surrendered, though the creditor may apply to the court for relief. A secured creditor may also elect to surrender their security for the benefit of the estate, and submit an unsecured claim for the entirety of the debt they are owed.
There are no specific rules concerning credit bidding, though a secured creditor exercising a power of sale cannot purchase the asset themselves. A receiver selling on behalf of a creditor may accept a credit bid from the creditor, however. In certain cases concerning secured assets, the liquidator may cause a public sale by auction, and in those circumstances both the liquidator and the secured creditor may bid for the assets.
A permanent liquidator has broad statutory powers, though usually exercisable only with the sanction of either the Court or of the committee of inspection (section 175 Companies Act 1981). This includes the power to sell the assets of a company in liquidation and the power to release security that the company holds over assets. The release of security however cannot be effected without the consent of the secured creditor unless the security is voided pursuant to the avoidance provisions in the Companies Act 1981 discussed above.
The liquidator sells company assets on behalf of the company, and as such, can pass no better title than that which the company has. The title acquired by purchasers is unaffected by the liquidation. Thus, a purchaser of an asset which has an encumbered title will take title to the property subject to the encumbrance.
There is no code to dictate the fairness of the procedure for credit bidding. Instead, one has to make application to Court and argue first principles, or look to other jurisdictions’ prescriptions on such matters.
Sale of assets in a restructuring process may be provided in the reorganization or restructuring plan, although once a reorganization plan is ratified the debtor is free to sell assets within the frame of regular business and unless otherwise provided in the agreement with the creditors.
In bankruptcy, after the verification of claims and the organization of creditors in a group, the bankruptcy trustee proceeds to the liquidation of the debtor's assets and distributes its proceeds to creditors either by selling the business as whole or by selling its individual components, separately or in groups. Assets sold through the public tender are transferred free and clear to the purchasers.
If the sale of business as a whole is unlikely to be successful, the bankruptcy trustee will require the Court to issue a decision for the sale of assets as a whole, or in classes, or even individually separately for each asset. The sale is made by the bankruptcy trustee before the court with open bids by the interested parties and is subject to the court’s approval. The court may object the sale, if it considers that the price offered by the bidder is not beneficial and that the repetition of the sale process is expected to achieve a higher price.
If it is decided, that the debtor’s business should be sold as a whole, or in its separate operating parts (branches) and the value of the business is assessed by the court to an amount less than one million (1,000,000) euro, the sale of the business, exceptionally, will be conducted in the manner and with the formalities that the insolvency court will decide. The bankruptcy trustee will request the court to permit the hiring of a certified appraiser to assess the value of the business as a whole and of the various parts, taking into account the possibility to continue the operation post sale. If real estate property is part of the assets its commercial value is taken into consideration for the valuation.
The rule is that a business or parts or assets are sold though competitive bids in a public tender following the valuation by the independent appraiser and a relevant decision by the Court which sets the terms, price and publication requirements of the tender. The participants file sealed offers and the selection is done on the basis of the highest bid. In case of business sale all administrative licenses of any nature connected to the operation of the business and of the parts are also transferred ipso jure to the highest bidder. Payment may be agreed, in accordance with terms of the tender, to be in full upon transfer of the business or assets or in installments.
If no bids are submitted duly or the ones submitted are not deemed satisfactory, the public auction is repeated one or more times depending on the nature of the assets auctioned and the minimum bidding price can be amended in subsequent auctions. If the second public auction of a business as a whole fails, then assets are sold individually again in open public tenders.
Secured creditors are allowed to initiate proceedings on the secured real estate in parallel to the bankruptcy liquidation process. Once the creditors are organized in the group, if secured creditors have not initiated any enforcement or are unjustifiably delaying the process, the sale of the property and the ranking of creditors are conducted only by the bankruptcy trustee.
The considerations involved in the sale of assets/the entire business of a company pursuant to a scheme of arrangement or under judicial management or liquidation are not significantly different as compared to the sale of assets in a solvent situation. Generally, the new owner acquires the assets and not the liabilities. However, the new owner may take the asset subject to any encumbrances as to title that may have affected the vendor.
The judicial manager may dispose of or otherwise exercise his powers in relation to any property of the company which is subject to a floating charge as if the property were not subject to the security. In respect of any other security, leave of the Court is required to deal with the charged property.
Credit bidding is not common but it is an accepted tool especially in the context of debt-for-equity restructurings.
An administrator can sell assets free and clear of security either with the relevant securityholder’s consent or with a court order (provided that the proceeds are used to discharge the sums secured by the security).
Unlike in a solvent sale, a buyer from an administrator will generally be expected to acknowledge that it enters into the agreement without reliance on any warranties or representations. A buyer may also be expected to provide wide ranging indemnities to the administrator.
Credit bidding (including where the credit bidder is an assignee of the original creditor) in an administration sale process or pre-pack is permitted, although there is also no specific legislation on this point. It will be up to the administrator to decide whether a particular deal is in the best interests of the creditors and so should be implemented. Where there are no other bidders, it would be prudent to demonstrate that a marketing process was pursued (and that there was no other available bidder) or to obtain an independent valuation of the assets being sold.
In principle, all of the bankruptcy estate must be sold at public auction as requested by the receiver in accordance with the prevailing regulations. According to the request, the auction office will determine the date of the auction. After the announcement of the proposed auction as required under the prevailing laws, any individual or legal entity may participate in the auction as a prospective buyer, except those who are prohibited by law from doing so, such as for example, judges, attorneys general, court bailiffs, notaries public, the auction office officials, employees, attorneys and the head of the auction office which handles the bankruptcy estate and the receiver. The most common auction requirement is the price limit determined by the receiver as the party requesting the auction so that the auction office can decide on the auction winner (whether the highest price is achieved or exceeded).
Once the auction winner has been determined by the auction office, the receiver should surrender the relevant bankruptcy estate to the winner and the winner must pay the price to the receiver. In this case, the auction winner becomes the buyer of the bankruptcy estate. The auction winner must also pay the auction duty (Bea Lelang) and other fees thay may apply. The purchaser acquires the assets “free and clear” of any claims and/or liabilities.
If the public sale is not succeeded, a private selling may be conducted with the prior approval of the supervisory judge.
The proceeds from the sale of the assets (whether at public auction or a private sale) after the deduction of the auction duty (Bea Lelang), the receiver’s fee, and other fees, will be distributed by the receiver to the secured creditors and the relevant unsecured creditors, as applicable, for the debts that have been verified, in settlement of the debts.
As to “credit bidding”, secured creditors who hold a certain security right (eg pledge, fiduciary security, hak tanggungan, hypothec, or other security right), may foreclose on their right as if there were no insolvency after a stay period of 90 days as of the date of the declaration of bankruptcy (it might be similar in other jurisdictions and be known as “credit bidding”). In this case, the security may only be released from the objects with the relevant Secured Creditors’ consent. If they do not foreclose on their security right within this period, they are also entitled to receive payment from the proceeds from the sale of the bankruptcy estate.
In amicable proceedings, if the debtor intends to use or sell its assets, there will be no permissions required other than contractual consents of creditors.
During safeguard proceedings, however, if the observation period has started, the debtor is allowed to carry out day-to-day transactions and any transaction that would entail the sale of an important asset of the business would be subject to the insolvency judge’s authorisation. The judge may indeed authorise the sale of certain assets on a piecemeal basis if the situation so requires.
In judicial reorganisation, the same rules as for safeguard proceedings apply. If the court orders the liquidation of the debtor’s assets, a liquidator is appointed. The liquidator will liquidate all the assets of the company in order to best distribute proceeds among the creditors. Either the debtor’s business can be sold as a whole in the framework of a sale plan or its assets can be sold on a piecemeal basis either through a public auction or by mutual agreement.
There aren’t any specific provisions in the law regarding the method of sale. In most cases, the official in charge (receiver/administrator) will invite people to bid for the asset under conditions stipulated by such official.
As compared to a purchase from a solvent company, when buying from an administrator, the buyer will generally be required to acknowledge that it is entering into the agreement without reliance on any warranties or representations.
The purchase agreement is subject to the approval of the court, and creditor consent is not necessary. Any liens on the asset will transfer to the rights received for the sale of the asset.
Credit bidding is permitted. It will be up to the administrator to decide whether a particular deal is in the best interest of the creditors and should therefore be carried out.
In respect of the liquidation of the estate, the trustee is only entitled to sell unencumbered assets that are part of the bankrupt estate. The trustee is not entitled to sell assets that are owned by or secured in favour of a third party, unless with consent of such parties. The trustee is entitled to demand from a secured creditor to, within a reasonable period of time set by the trustee, exercise its rights with regard to the secured assets, for instance by foreclosing its right of pledge or right of mortgage, by failure of which that creditor loses its right to do so in favour of the trustee. In case of a suspension of payments the administrator does not have such possibility.
Under Dutch law any party may bid on pledged assets, including lenders or pledgees, in a public or private sale process with or without the approval of the court. Therefore, the pledgee is allowed to bid for pledged shares in a Dutch company and may do so by way of a credit bid (i.e. bidding by way of (effectively) set-off with the outstanding debt). We note that appropriation of shares by a pledgee is not permitted under Dutch law.
Assets may only be sold with the prior consent of the relevant practitioner/court. There is no credit bidding process provided under Luxembourg law and a receiver would not be entitled to sell assets that are owned by or secured in favour of a third party, without that party’s approval.
Restructuring: transfer of activities. At the request of the company in distress or the public prosecutor, the court appoints a judicial administrator to organise and effect the transfer of activities. The administrator is free to determine the process and conditions, and acts under the supervision of a delegated judge. The transfer is subject to the court’s scrutiny. Subject to certain exceptions, the transfer will be binding on all (secured) creditors.
Bankruptcy. The trustee must sell all assets in the interest of the estate and creditors. He can sell the assets or activities through a private or public sale process. The assets are sold free and clear of any liens or encumbrances. After realising all assets, the trustee must call a final meeting of creditors to approve the accounts, costs and distribution of proceeds. A credit bid is available to certain creditors (such as the first ranking mortgagee in case of a sale of the mortgaged real estate).
During the reorganization procedure assets and even the entire business or units can be sold subject to the authorization of the court and the consent of the receiver and the creditor’s committee.
In that case, assets are acquired as in a normal deal and there is no “free and clear” provision or guarantee.
Thus, it is necessary for the acquiring party to perform a due diligence on the assets or units or the entire business that it is buying.
However, if a company is purchased under reorganization procedure, and after the two-year period that creditors have in order to ask for the recognition of their credits, then the acquiring party will be buying with the advantage of knowing who the creditors are and that there is no chance of receiving a claim from other creditors if they have not shown in the process.
Securities cannot be released without creditor’s consent and credit bidding is permitted.