Chapter 11 Bankruptcy vs. 363 Sale: What’s Right for Your Distressed Business?
An expert from the international law firm Skadden discusses the differences between two reorganization strategies.
Given the current economic downturn caused by the COVID-19 pandemic, many businesses are opting for reorganization to mitigate damage. Shana Elberg, a partner at Skadden, a global legal firm, and SS&C Intralinks’ Ben Collins recently discussed the differences between a Chapter 11 plan and a 363 sale — two options available to companies looking to restructure.
When comparing a Chapter 11 plan to a sale under Section 363 of the United States Bankruptcy Code ("Section 363 Sale"), Shana highlights three key distinctions: timing, approval standards, and creditor voting.
The 363 Advantage
- Speed:
A 363 sale can be completed quickly, typically within two to three months, or even faster if the court expedites the process. In contrast, a Chapter 11 plan generally takes six months to a year to complete. - Approval Standards:
The standards for approving a Chapter 11 plan are more stringent than those for a 363 sale. A 363 sale requires a business judgment standard for board approval, followed by approval from the bankruptcy court. A Chapter 11 plan, however, must meet additional requirements under the bankruptcy code, such as feasibility and ensuring creditors receive more than they would under a Chapter 7 liquidation. - Creditor Voting:
Creditors have less influence in a 363 sale compared to a Chapter 11 plan. In a 363 sale, creditors cannot vote on the sale but can file objections to be heard in bankruptcy court. In a Chapter 11 plan, impaired creditors are entitled to vote on the plan.
Treatment of Claims
Shana also explains the differences in how claims are treated under the two options:
- Secured Claims in a 363 Sale:
A secured creditor can credit bid the full amount of their claim if the collateral they have a lien on is being sold. If they don’t credit bid, their lien attaches to the sale proceeds. - Secured Claims in a Chapter 11 Plan:
A secured creditor must be paid in cash equivalent to their claim or receive their collateral back. Unlike in a 363 sale, secured creditors cannot be given equity in the company unless the class of secured claims agrees to such treatment.
