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Disposing of company assets in bankruptcy

On Behalf of | Jan 27, 2023 | Corporate Bankruptcy & Restructuring

One of the most critical issues that attorneys and courts face is what to do with company assets during bankruptcy, specifically, how to dispose of them. Selling the firm’s assets with court approval, allowable by §363 of the bankruptcy code, permits the sale of the company’s assets with court approval. It is an efficient way of disposing of the assets by sale without having to go through reorganization under Chapter 11 of the code.

§363 of the bankruptcy code

This mechanism creates contention, usually between secured and unsecured creditors. On the one hand, secured creditors favor a quick and easy sale so they can get as much as they can before the value of the assets decreases. Unsecured creditors and their shareholder counterparts are the last ones to get paid in bankruptcy. Therefore, they could benefit from waiting because the assets’ value could increase over time.

How realistic is it that the value of the assets will increase over time?

It is quite possible that there is a hidden value in keeping the assets and that this value could be high enough to justify waiting before approving a quick sale. Using well-established financial models and similar cases, shareholders stand to lose a significant amount of potential value if the court approves the sale of the assets.

Current laws do not require the courts to consider these factors when deciding how to dispose of company assets in bankruptcy, but research and financial models have shown that the answer is not so simple. Due to the factors mentioned above, including the potential of significant financial loss, it is worthwhile for the court to take its time to thoroughly consider whether a §363 sale is appropriate.