During periods of financial distress, a company may choose to sell a portion of its assets - or its entire business - in order to restructure or repay its debt. This can present a valuable opportunity to investors, who may acquire a distressed firm’s assets for a comparatively low price. In many cases, these buyers benefit from the legal protections of the bankruptcy process, as distressed asset sales frequently take place after a firm has filed for bankruptcy. However, companies and buyers may also choose to complete a transaction independent of the bankruptcy court process.
Although out-of-court distressed sales allow the parties to skip the bankruptcy auction process and speed up the transaction, they also present a number of unique considerations. If the selling company will dissolve following the liquidation of its assets, it may be unable to uphold asset warranties or representations, creating what is essentially an as-is sale. Additionally, out-of-court distressed sales often require the approval of a company’s lenders and shareholders.
Out-of-court distressed asset buyers must also take measures to prevent accusations of fraudulent conveyance, in which an insolvent company transfers its assets solely to keep them from creditors. In order to avoid such complications, a buyer should work with the selling company to build a record of the value of its assets, which may include obtaining professional financial opinions on asset valuations and the company’s insolvent status.
Although out-of-court distressed sales allow the parties to skip the bankruptcy auction process and speed up the transaction, they also present a number of unique considerations. If the selling company will dissolve following the liquidation of its assets, it may be unable to uphold asset warranties or representations, creating what is essentially an as-is sale. Additionally, out-of-court distressed sales often require the approval of a company’s lenders and shareholders.
Out-of-court distressed asset buyers must also take measures to prevent accusations of fraudulent conveyance, in which an insolvent company transfers its assets solely to keep them from creditors. In order to avoid such complications, a buyer should work with the selling company to build a record of the value of its assets, which may include obtaining professional financial opinions on asset valuations and the company’s insolvent status.