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
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.