GLOSSARY OF BANKRUPTCY TERMSA
A sale of assets by a debtor, with the approval of the Bankruptcy Court, is effected pursuant to section 363 of the Bankruptcy Code. Therefore, any sale of a business or its assetsout of a bankruptcy is commonly referred to as a §363 sale. “Bankruptcy Sale” and “§363 sale”are synonymous.
The most common form of bankruptcy that A company would deal with. Chapter 11 is a reorganization proceeding in which the debtor may continue in business or in possessionof its property as a fiduciary. A Chapter 11 proceeding can go one of three ways: (1) a sale of assets (a), whereby the proceeds of the sale are to be used to satisfy the debt; (2) A confirmedChapter 11 plan that provides for the manner in which the debtor will repay the claims of creditors in whole or in part over time; or (3) a conversion to a Chapter 7 (in the event options 1and 2 don’t pan out) followed by a liquidation of assets.
Admin claims include claims by professionals retained in the bankruptcycase, such as attorneys, investment bankers, etc. If the bankruptcy does not produce adequateliquidity through the sale of assets or other actions to repay all secured claims plus administrativeclaims, the bankruptcy estate is deemed “administratively insolvent”. This happens with somefrequency, which is why it is important for A company to get a “carve-out”.
Article 9 Proceeding
In lieu of allowing the debtor to file for Bankruptcy, a secured creditor may elect to foreclose on their collateral (the debtor’s assets) and liquidate the assets in order torepay their claim. Article 9 proceedings are a state court proceeding, and therefore the venue isan important consideration for the lender (some states are more debtor-friendly than others).Generally, the creditor(s) need to have a compelling reason (such as the avoidance of massivelegal fees in a Chapter 11) to pursue an Article 9 transaction, and will only do so if it will lead to asignificantly better recovery than the alternative.
“ABC” (Assignment for the Benefit of Creditors)
In lieu of filing for Bankruptcy (Chapter 7in the case of a proposed liquidation), a Company may elect to make an assignment (of its assets)for the benefit of creditors. In this situation, the priority creditor(s), typically the bank, wouldtake control of the Company’s assets and liquidate them as payment for their claim. Generally,the creditor(s) need to consent in advance to such assignment, otherwise the officers of theCompany may have personal liability for what happens to the assets when they “hand over thekeys”.
Assume (as in
assume an obligation)
An agreement to continue performing duties under acontract or lease. In the context of an M&A transaction, if the buyer “assumes” certain contracts,such as a real estate lease or a lease for equipment, that assumption reduces the total obligationsof the bankruptcy estate.
An injunction that automatically stops lawsuits, foreclosures, garnishments, andall collection activity against the debtor the moment a bankruptcy petition is filed. The timing of most bankruptcies is geared toward triggering the automatic stay in order to avoid a lawsuit or other action against the Company.B