Define: Bankruptcy Sale

A bankruptcy sale refers to the process by which assets of a bankrupt individual or entity are sold off to repay creditors. When a debtor is unable to meet their financial obligations and files for bankruptcy, a bankruptcy trustee is appointed to oversee the liquidation of assets. These assets may include real estate, inventory, equipment, or intellectual property. The bankruptcy sale is conducted either through a court-supervised auction or a negotiated sale, with the proceeds distributed among creditors according to their priority. Bankruptcy sales aim to maximise the value of the debtor’s assets to satisfy as much of the outstanding debt as possible and provide a structured method for resolving financial insolvency.

In many corporate bankruptcy cases, the debtor will use the bankruptcy process to sell its assets and to assume and assign valuable leases, executory contracts, and licences (see earlier posts on what happens to leases in bankruptcy, to executory contracts, and to intellectual property licences, a special type of executory contract).

There are a variety of mechanics involved in the bankruptcy sale process and certain facts about how parties to executory contracts and leases can protect their rights.

The Section 363 sale. A bankruptcy asset sale often happens in the first few weeks or months of a Chapter 11 case, rather than as part of a plan of reorganisation. Frequently, this will involve the sale of all or substantially all of a debtor’s business as a going concern. You may hear the sale referred to as a “Section 363 sale” because Section 363 is the key Bankruptcy Code section that governs a debtor’s sale of assets in bankruptcy. Regardless of what is being sold, the debtor must seek bankruptcy court approval of the sale and of any effort to transfer executory contracts, licences, and leases to the buyer.

Sales “free and clear” of liens. When the debtor files a motion seeking to sell its assets, it usually asks to do so free and clear of liens. The term “lien” includes everything from UCC security interests filed by banks or other secured lenders taking the debtor’s assets as collateral for loans to judgement and other types of liens. In a Section 363 sale, a debtor may propose to sell the assets and hold the sale proceeds in a separate account, with the secured creditors’ liens being transferred over to those funds. Debtors ask for authority to sell the assets “free and clear” of liens because the buyer wants clear title to the assets, unencumbered with any of the debtor’s old debts and liens.

Motion to assume and assign executory contracts and leases. The debtor will typically file another motion (or may combine it with the motion to sell free and clear) seeking authority to assume and assign to the buyer certain executory contracts and leases. If you are a party to an executory contract or lease, you should follow the sale process closely because your rights could well be affected.

The debtor will likely send out a notice to parties to executory contracts and to landlords with a list of the contracts and leases proposed to be assumed and assigned. This is a very important document and you or your counsel should review every page carefully.

The notice typically will list the amount the debtor proposes to pay to “cure” any defaults. The debtor must cure any defaults in cash before the contract or lease can be assumed and assigned to the buyer. Very often, the notice will indicate that the proposed cure amount for some contracts or leases is zero or it may leave the amount blank with an asterisk stating that the debtor believes that no cure amount is owed. Here’s an example of a notice, with a fairly typical multi-page chart listing scores of contracts to be assumed and assigned as part of the sale and indicating proposed cure amounts.

Scream or die. This is a phrase bankruptcy lawyers have coined to describe a creditor’s requirement to file an objection by the stated deadline or face the loss of your rights. (You have to admit it’s catchy.) To put it in less vivid terms, if you want to object (1) to the assignment of your executory contract, licence, or lease at all, (2) to its assignment to the particular buyer proposed, or (3) even to the amount proposed to be paid to cure defaults, you have to file a written objection by the deadline listed in the notice. If you don’t, the debtor will ask the bankruptcy court for an order approving the transfer of your contract, licence, or lease, and that may well involve no cure payment at all. Because bankruptcy cases move quickly by necessity, “screaming” after the deadline will generally be too late.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 10th April, 2024.