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? Are pre-packaged sales possible?
Restructuring & Insolvency (3rd edition)
In BIA/CCAA restructurings, the Court must approve any sale of property outside of the normal course of business. In deciding whether to approve such a sale the Court is to consider, among other things, (i) whether the process leading to the proposed sale or disposition was reasonable and approved by the Trustee/Monitor; (ii) the report and opinion of the Trustee/Monitor; (iii) whether creditors oppose the sale; and, most importantly (iv) whether the consideration to be received for the assets is fair and reasonable, taking into account their market value.
In a bankruptcy, the Trustee has broad powers to monetize the debtor’s estate, including any sale of assets, subject to the approval of the inspectors, if required. The Trustee does not have the power to alter rights attached to the property sold at the moment of the sale – the property is usually sold on an “as is, where is” basis.
In both the restructuring and the liquidation contexts, and under both statutes, the Court has authority to order that any charge or security interest that attaches to the property or assets subject to the sale will be payable from the proceeds of the sale of such property or assets. Such an order is often sought in the restructuring process in order to attract potential buyers and collect funds which, in turn, may permit the negotiation of a viable Proposal or Plan.
As to credit bidding and pre-packaged sales, both are valid and are part of Canadian insolvency practice.
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.
However, the liquidator cannot give a purchaser better title to property than the company had, though if the company has legal title, a bona fide purchaser for value without notice affecting the property will take that legal title free of equities.
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).
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
There is no legislation dealing, specifically, with pre-packaged sales and the BVI has not enacted the parts of the IA dealing with administrations, where pre-packaged sales are more commonly seen. An office-holder is under an obligation to achieve the best return for creditors and if, on balanced and reasonable judgment, a pre-packaged sale offers the creditors the best return, there are no prohibitions on an office holder entering into an agreement.
There is no prescribed marketing process for the sale of assets in liquidation, but the liquidator has a duty to take reasonable care to obtain the best price available in the circumstances. There is no provision of Cayman Islands insolvency law which enables the buyer to acquire the assets "free and clear", and the liquidators will usually only provide very limited representations as to title. Liquidators also cannot release any security without the consent of the secured creditor.
Where a sale is being conducted in provisional liquidation (as will often be the case where the company's business is being sold as part of a restructuring), the provisional liquidator will need the sanction of the Cayman Court to conduct the sale. The Court's sanction will also be required in official liquidation if the buyer is a related party. In either case, in determining whether to sanction the sale the Court will consider the sales process and the efforts by the liquidators to obtain the best price for the assets that is available in the circumstances.
Pre-packaged sales are permissible, but will usually attract more scrutiny from the Court when the provisional liquidator applies for sanction for the sale.
Credit bidding is permitted (with the sanction of the Court).
As the law provides, bankrupt assets should be sold via auction, but the creditors’ meeting may resolve to dispose of the assets by other ways. In recent years, an increasing number of bankruptcy auctions are carried out online. Digital or physical, one thing remains unchanged is that open bidding is at the core of a fair auction. Buyers merely take away the debtors’ assets, which are free of liabilities and do not contain any equities in the debtors, either. In this way, buyers will not get embroiled in any dispute arising out of such liabilities or equities. Generally, the foregoing purchase will not incur any obligations that are not relating to the purchased assets, but under some circumstances, such as when the bankrupt assets are to be disposed of as a whole, the purchaser may be asked to shoulder extra obligations, for example, to employ the debtor’s employees. In bankruptcy procedures, existing security over bankrupt assets will not be released automatically, and the administrator may have the security released by repaying corresponding debts or provide other security to the satisfaction of the claiming creditor.
If the debtor reaches an asset disposal agreement with an intending investor before the bankruptcy filing is accepted by the court, such agreement should not be deemed different from any other agreement concluded before the acceptance, and it will not automatically become enforceable after the acceptance. If the administrator intends to continue the performance of the agreement, it may face various conditions precedent, for instance, the performance should be reviewed by the creditors’ meeting and be reported to the creditor committee or the court, and disposal of assets contemplated under the agreement may not be viable until the court announces the bankruptcy of the debtor.
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 based on a restructuring proposal made by the restructuring administrator. 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.
- Pre-packaged sales
Legislation on pre-packed sales has not been passed in Denmark.
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 supervisory judge’s authorisation. The supervisory 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 distribute proceeds as efficiently as possible and according to the rank of 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.
The fate of the debtor shall not be determined prior to the opening of insolvency proceedings. Therefore, the disposal of assets beyond the debtor’s regular business/trade normally does not take place during the preliminary insolvency proceedings. However, the preliminary insolvency proceedings are often used to start a sales process. Thus, while German law does not provide for pre-packaged deals, pre-arranged deals that can be quickly implemented after the opening of insolvency proceedings are typical.
In regular insolvency proceedings, only the insolvency administrator is entitled to sell the debtor’s assets. In DIP proceedings such power vests in the debtor, but the insolvency court may order the debtor to obtain the consent of the insolvency monitor.
Internally, the insolvency administrator or the debtor-in-possession, respectively, shall obtain the consent of the creditors’ committee if he or she intends to engage in transactions of particular importance to the insolvency proceedings. If no creditors’ committee has been appointed, the administrator shall obtain the consent of the creditors’ assembly. In case of a sale to a person with a specific interest (e.g. a secured creditor or a person close to the debtor), the transaction shall require the approval of the creditors’ assembly.
The purchaser acquires the assets, including encumbered assets that the administrator is allowed to dispose of in accordance with Sec. 166 Insolvency Code (see Question 2) free and clear of third-party claims and liabilities. If the insolvency administrator erroneously sells assets that are subject to a right of segregation (Aussonderungsrecht, Sec. 47 Insolvency Code) and/or are not up for his or her disposal/collection, the purchaser only acquires the assets free and clear of claims and liabilities if the acquisition took place in good faith, according to Sec. 932 et seq. Civil Code. In such a case, the administrator may be held liable by the owner/beneficiary of the sold asset.
Under German law, any party may bid on pledged assets, including lenders or pledgees, in a public or private (freehand) sale process. However, German law does not provide for rules on non-cash credit bidding but requires (partially) debt payments in public auctions.
Property in which security has been granted cannot be sold by the Company in liquidation, does not form part of the liquidation estate and the security cannot be released without the secured creditors consent. Pre-packaged sales in the traditional sense are not possible for this reason. Otherwise the liquidator may dispose of any assets of the company with sanction of the Court or the Committee of Inspection and may also achieve a transfer of the undertaking of the company in liquidation or provisional liquidation through a scheme of arrangement.
The terms of sale of any business or its assets are likely to be individually negotiated on a case by case basis. In a sale of shares, there may be residual liabilites in the insolvent company that are acquired by a purchaser. On a sale of assets, it is common for office holders to give no representations or warranties as t the title being acquired.
Secured creditors are afforded significant protection under Guernsey law and it is very unlikely that security could be released without their consent. Credit bidding is permitted.
Historically, the Royal Court has only sanctioned one pre-pack in Guernsey in Esquire Realty Holdings Limited (unreported). In doing so, it made it clear that it had been comforted by the parties’ compliance with the UK SIP16 (as it was then). In his judgment, the Bailiff stated that any pre-pack in Guernsey should follow the SIP16 regime in the future.
A scheme of arrangement in an examinership does not involve the sale of the assets and business of the company. Rather, the balance sheet of the company is rendered solvent through the cramming down and discharge of pre-petition liabilities. The pre-petition equity is also typically transferred, free from encumbrances, to the investor in the scheme.
It is commonplace for a scheme of arrangement to provide for the cramming down and discharge of secured claims (to the value of the security), whereupon the security will be released. A scheme of arrangement can provide for the cramming down of secured claims and the release of security without the consent of the secured creditor(s) provided that (a) the majority of at least one class of impaired creditor has voted in favour of the scheme and (b) the scheme is not unfairly prejudicial to the secured creditor.
There is nothing under Irish law to suggest that a secured creditor cannot put forward an investment proposal to fund a scheme of arrangement with a view to acquiring an equity position in the company, and such a proposal could involve some element of credit bidding, including a debt for equity swap, although payments to other classes of impaired creditors under scheme of arrangement will need to be cash funded.
A liquidator is required to obtain the best price reasonably obtainable for the assets of the company. Where the liquidator has decided to continue to trade the business post-liquidation, he can also sell the business as a going concern. However, the liquidator will invariably exclude all warranties and personal liability in the sale contract.
Where assets are secured in favour of a creditor a liquidator will not be able to sell free and clear of that security unless the secured creditor agrees to release its security, save where the proceeds will be sufficient to discharge the entirety of the secured obligation.
A liquidator may permit a credit bid by a creditor provided that other creditors are not prejudiced and all pro rata payments due to other creditors are paid in cash.
The receiver has a statutory to obtain the best price reasonably obtainable for the secured assets over which he or she has been appointed. Where the receiver has also been appointed as a manager he or she can also carry on the trade and sell the business as a going concern. However, the receiver will invariably exclude all warranties and personal liability in the sale contract.
Save where the proceeds exceed the entirety of the secured liabilities, the receiver cannot compel the secured creditor to release its security on the sale of the assets.
There is nothing under Irish law to prevent a secured creditor from credit bidding to acquire the secured assets from a receiver that it has appointed (although usually the asset is acquired by an affiliate rather than in the secured creditor’s own name) provided that other creditors are not prejudiced and any payments that the receiver is obliged to pay to preferential creditors are cash funded.
Pre-pack sales (usually implemented through a receivership) are not prohibited under Irish law. The insolvency practitioner must take precautions to ensure that he obtains best price reasonably obtainable at the time of sale (usually by reference to a market valuation) and that no creditor is prejudiced as a result of a swift sale.
- The Viscount or a liquidator is able to pass unconditional title to assets free and clear of claims and liabilities.
- The SIL provides that the operation of any security interest agreement is unaffected by a désastre or winding up process, although that may be waived by secured creditors who may wish to prove in the winding up or désastre.
- Although possible, the Royal Court has not considered whether a security can be released without the consent of the secured party.
- Credit bidding is not generally recognised as part of Jersey law but there is no reason why it would not be permitted.
- Although Administration is not known to Jersey law the just and equitable jurisdiction has been employed to effect a pre-pack sale of a business as a going concern.
Except for the application of avoidance powers, the Insolvency Law is unconcerned with M&A transactions in the vicinity of insolvency. However, a purchaser of a distressed asset may find itself in an area of risk if the seller becomes insolvent and is declared en concurso after the sale. The contract could be subject to special scrutiny and set aside or, if the sale is an executory contract (i.e., a contract which has not yet been fully performed), is still subject to rejection by the bankruptcy representative or conciliator.
There are two levels of authority for disposing of assets during reorganization: (1) in the ordinary course of business; and (2) out of the ordinary course of business. The debtor is entitled to dispose of assets in the ordinary course of business, but will require the conciliator’s consent to dispose of assets out of the ordinary course of business. The determination as to what constitutes a transaction in the ordinary course of business is fact-specific and must be made on a case-by-case basis.
Distressed M&A is an underdeveloped area of legal practice in Mexico. Aside from the overriding principles of value maximization and the preservation of a going concern, there are no clear rules on the permitted strategies for disposing of assets. Arguably, any “363 Sale” (ie, a sale during the pendency of the reorganization stage) would only require the conciliator’s consent (with the approval from the conservators), which is a more expedient procedure than seeking court approval, and no exceptions to the general principles of law would be available in a disposition of assets during reorganization. Mexico does not recognize theories of de facto merger, so the risk of successor liability in distressed M&A transactions is basically nonexistent. There are, however, some tax, labor and social security obligations that could follow the transfer of an enterprise as a going concern.
During liquidation the receiver will sell off the assets of the estate, and shall attempt to receive the highest return on the sale. If the sale of productive units allows for receiving the highest proceeds from the sale, the receiver must consider the advisability of keeping the enterprise as a going concern.
In principle, the sale must be carried out through public auction. The receiver may employ different means of sale in the case of perishable goods or, prior judicial authorization, if such alternative means of sale would yield a higher value for the asset in question.
The receiver may oppose the foreclosure on estate assets if he deems it is beneficial to the estate to sell those assets together with other unencumbered assets. To oppose foreclosure, the receiver must adequately compensate the secured creditor in question.
In liquidation, assets are sold “as is”, unless receiver specifically undertakes to provide representations and warranties.
In a restructuring proceeding, there are no regulations allowing a purchaser to acquire the debtor’s assets “free and clear” of claims; in addition, there are no regulations prohibiting the sale of all or part of a debtor’s assets.
In contrast, in a liquidation, the purchaser acquires the debtor’s assets “free and clear” of claims, as the purchase will trigger an automatic clearance of all encumbrances, precautionary measures, and liens attached to the debtor’s assets, without requiring a court order or the intervention of a creditor who has a security interest on the asset; in addition, a debtor’s assets may be acquired either as a going concern or individually.
Credit bidding is not regulated by the Insolvency Act; however, in a restructuring or liquidation proceeding, a similar method to purchase assets may be applicable. Additionally, the Insolvency Act does not regulate pre-packaged sales.
Sale of assets/business within bankruptcy proceedings enjoys execution sale effect, what means that the purchaser acquires the assets “free and clear” of claims and liabilities, and security is released even without the permission of creditor, but such creditor is satisfied from money received in result of sale transaction. In restructuring proceedings, in turn, sale of assets or business enjoys execution sale effect only within remedial proceedings.
Credit bidding is planned to be introduced within amendment to the Bankruptcy Law, which is currently in legislative process.
Pre-packaged sales (so-called pre-pack) are possible to execute from 2016. They are – as discussed also above – beneficial for all involved parties and become more and more popular among creditors and debtors.
A judicial manager may dispose of assets subject to a floating charge without the consent of the charge holder. For all other types of charges, the Judicial Manager may apply to Court to dispose of the subject property as if it were not subject to the security.
There are no fixed conditions that apply to the sale of assets in a restructuring or insolvency process, although an insolvency practitioner may be challenged if he does not take reasonable efforts to obtain a fair value for the assets being disposed of. Typically, a buyer would require any assets purchased to be free from any encumbrances, although there may be circumstances where a buyer may be prepared to accept existing claims and liabilities as part of the purchase consideration.
There are no formal statutory processes for credit bidding, although it is an available option for insolvency practitioners to consider when deciding how to restructure a company’s debt.
Under the 2017 amendments to the Companies Act, a company may now also apply to Court for approval of a pre-packaged scheme, which dispenses with the need to hold a meeting of creditors. In order for such a scheme to be approved by the Court, the Court must be satisfied that had a meeting of creditors been summoned, each relevant class of creditors would have approved the scheme.
As the general rule, normal commercial terms and conditions will apply to a sale of assets or of an entire business where the seller is undergoing company reorganization. As mentioned in the above, any agreement entered into during restructuring and approved by the appointed administrator will automatically get so called “super-priority” rights, though often such priority rights will be agreed not to apply in this type of sale.
Security cannot be released without creditor consent. Credit bidding is allowed and will simply be a matter of commercial consideration for the debtor and the administrator.
In bankruptcy, the business as a whole or specific property are sold free and clear of any claims and liabilities (unless otherwise agreed with the buyer). Normally such sale will be on a as-is-basis without any warranties or representations for the buyer to rely on and with a wide disclaimer for the seller.
Credit bidding is permitted and there is also no specific legislation on this point. It will be up to the bankruptcy receiver to decide whether a credit sale is in the best interests of the creditors or not. In most cases, receivers in bankruptcy will tend to favor risk free cash deals over a different types of credit sales.
Pre-packaged sales are possible in practice and is not uncommon. However, a pre-pack and its commercial terms will always be reviewed by the receiver appointed in subsequent bankruptcy proceedings, thus with a risk of being set aside. Also, with little transparency and no creditor consultation pre-packs have been debated, and still are, especially where the business/assets are sold to someone connected to the debtor. When doing a pre-pack sale, it is recommended to do an external third-party valuation of the property sold, to avoid a sale at undervalue which can be criticized and potentially challenged.
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 and with the exception of emergency sales, 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 (or, if one has been formed, the creditor committee) if it wishes to sell its assets or even the entire business during the moratorium phase. The 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 allows a pre-packaged restructuring (including a pre-packaged sale to an independent third party) 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.
The sale of assets in chapter 11 requires that a sound business reason for the sale exists; that accurate and reasonable notice of the sale is given to interested persons; that the sale yields a fair and reasonable price; and that the parties have acted in good faith. The purchaser can acquire title to the assets free and clear of all liens and encumbrances if (i) such a sale is permitted under applicable non-bankruptcy law, (ii) the party asserting a lien consents to such sale, (iii) the purchase price is greater than the aggregate amount of all liens on the property, (iv) the interest or lien is the subject of a bona fide dispute; or (v) the party asserting the lien could be compelled to accept a money satisfaction for such interest. The Code also permits a holder of an allowed secured claim to credit bid to purchase the assets.
An administrator can sell assets free and clear of security either with the relevant security-holder’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 in an administration sale process is permitted (including where the credit bidder is an assignee of the original creditor, and whether or not the administration is a pre-pack administration). However, there is 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 should therefore be implemented.
The administrators must comply with relevant legislation, including “Statement of Insolvency Practice 16” in the case of pre-pack administrations (which are possible and common), which include certain marketing / valuation requirements. Greater protections/constraints apply in sales to connected parties (widely defined).
The judicial reorganization procedure foresees the possibility to transfer all or part of the business under the supervision of the Court. All creditors, and especially creditors that hold securities, are involved in the procedure but the Court has the final say. By selling the movable or immovable property, the rights of the creditors are transferred to the received price. The purchaser will acquire the assets free and clear of any rights (unless the reorganization plan provides otherwise). Pre-packaged sales are not possible.
The bankruptcy trustee has the duty to realize all assets as fast as possible under supervision of the Enterprise Court. The assets are sold free and clear of any liens or rights. Creditors may object to an intended sale. Pre-packaged sales are not possible.