A Few ABC's on Insolvency Restructuring Strategies

There are many insolvency and restructuring strategies that are aimed at saving companies from total liquidation and loss.

Let's take a look at three strategies: 363 sales, Article 9 transactions, and Assignments for the Benefit of Creditors (ABC), providing a detailed comparison, including well-known examples for each. These are distinctly different strategies used in distressed situations (often involving insolvency), each with its unique legal framework, process, and outcomes.

1. 363 Sale (Under U.S. Bankruptcy Code)

How It Works:

• A 363 sale refers to a process under Section 363 of the U.S. Bankruptcy Code, which allows a distressed company in Chapter 11 bankruptcy to sell its assets, or even its entire business, free and clear of liens, claims, and encumbrances. This allows the buyer to acquire the assets without assuming the company’s liabilities (with some exceptions).
• The sale must be approved by the bankruptcy court, and the process is conducted under the oversight of the bankruptcy judge.
• The sale may involve a stalking horse bidder, who sets a minimum bid for the assets, and other potential buyers can submit higher offers in a competitive auction.

Key Features:

• Court Approval: The bankruptcy court must approve the sale to ensure it is in the best interests of creditors.
• Free and Clear: The assets are sold free and clear of any encumbrances or liens, which can make it more attractive to buyers.
• Maximizing Value: The goal is to maximize the value of the sale, often through a competitive bidding process.
• Speed: While faster than a full reorganization, the process can still take several months due to legal and procedural requirements.

Successful Examples:

• Chrysler (2009): Chrysler used a 363 sale to sell its assets to a new entity, largely controlled by Fiat. The court approved the sale, allowing Chrysler to exit bankruptcy quickly and continue operating under new ownership.
• General Motors (2009): Like Chrysler, GM went through a 363 sale during its bankruptcy, with the U.S. government taking a significant role in the transaction. This allowed GM to emerge as a viable entity and restructure its operations.
• Toys "R" Us (2018): Toys "R" Us filed for bankruptcy and conducted a 363 sale of its assets to liquidate its remaining stores and brand. The sale helped recover value for creditors.

2. Article 9 Sale (UCC Article 9 - Uniform Commercial Code)

How It Works:

• An Article 9 sale occurs outside of bankruptcy, and it is governed by Article 9 of the Uniform Commercial Code (UCC). This provision regulates secured transactions, including the sale of collateral after a default.
• If a company is in financial distress and has secured creditors, those creditors may decide to foreclose on the debtor’s assets through an Article 9 sale. The secured creditor has the legal right to sell the collateral (assets pledged as security) in a commercially reasonable manner.
• The sale may be private or public (through an auction), and the sale is generally free and clear of liens, but the process is typically less formal than a 363 sale and does not involve a bankruptcy court.

Key Features:

• Self-Executing: Unlike a 363 sale, which requires bankruptcy court approval, an Article 9 sale is executed by the secured creditor without the need for court intervention, provided they follow the UCC’s requirements.
• Commercially Reasonable: The sale must be conducted in a commercially reasonable manner to ensure that the process is fair to the debtor and creditors.
• No Court Supervision: Article 9 sales do not require bankruptcy court approval, but the creditor must still provide proper notice to the debtor and any other parties with interests in the collateral.

Successful Examples:

• Circuit City (2008): Circuit City, a major electronics retailer, was sold in an Article 9 sale process after it filed for bankruptcy. The assets were liquidated, and the sale was executed by secured creditors.
• Borders Group (2011): Borders, the bookstore chain, underwent an Article 9 liquidation following its bankruptcy filing, where its secured creditors sold the company's remaining assets to recover debt.
• Ames Department Stores (2001): Ames, a regional department store chain, was liquidated through an Article 9 sale of its assets after bankruptcy, which helped recover value for creditors.

3. Assignment for the Benefit of Creditors (ABC)

How It Works:

• An Assignment for the Benefit of Creditors (ABC) is a state law procedure used in non-bankruptcy liquidation cases. It is typically a voluntary process initiated by the debtor, in which the debtor assigns all of its assets to an assignee (an independent third party) to liquidate and distribute the proceeds to creditors.
• ABCs are often faster and cheaper than bankruptcy, as they do not require court oversight or the formalities of a bankruptcy proceeding.
• The assignee acts similarly to a bankruptcy trustee but does not have the same level of court supervision.

Key Features:

• Voluntary: The debtor typically chooses this route, often because it’s seen as less cumbersome than filing for bankruptcy.
• Private and Quicker: Unlike a 363 sale or Article 9 transaction, an ABC is typically faster and does not involve public court hearings or extensive procedural requirements.
• No Court Oversight: Unlike a bankruptcy, there’s generally no court oversight, making the process more flexible but less structured.
• Creditors’ Control: Creditors may have less influence than in a bankruptcy, as the debtor selects the assignee and the assignee carries out the liquidation. 

Successful Examples:

• Mervyn’s (2008): The retail chain Mervyn’s entered into an ABC process when it faced financial distress. The assignee liquidated the assets of the company to pay creditors.
• Toys “R” Us (2018): Before filing for bankruptcy, Toys “R” Us conducted an ABC process for its Canadian operations to liquidate assets and pay creditors. This was separate from the Chapter 11 process used in the U.S.
• Bergoff's Fine Jewelry (2002): A high-end jewelry retailer in California used an ABC process to liquidate its assets and pay creditors during financial distress, avoiding a full bankruptcy filing.

Recap:

• 363 Sales are ideal for distressed companies in Chapter 11 bankruptcy seeking to maximize the value of their assets and exit bankruptcy quickly with court oversight.
• Article 9 Sales work best when a secured creditor needs to liquidate assets outside of bankruptcy, typically involving faster resolution but with less protection for creditors.
• Assignments for the Benefit of Creditors (ABC) are useful when a debtor wants to avoid bankruptcy proceedings and liquidate assets more efficiently, but the process is generally quicker and less formal.

Don't Go It Alone

Each approach has distinct advantages depending on the situation and the parties involved, including the speed of the process, level of oversight, and how much protection is provided to creditors and buyers. In any case, it's always best to retain/engage professional counsel in the form of attorneys and other professionals such as financial advisors, restructuring experts and management consultants.

Paul Fioravanti, MBA, MPA, CTP, is the CEO & Managing Partner of QORVAL Partners, LLC, a FL-based advisory firm (founded 1996 by Jim Malone, six-time Fortune 100/500 CEO) Qorval is a US-based turnaround, restructuring, business optimization and interim management firm. Fioravanti is a proven turnaround CEO with experience in more than 90 situations in more than 40 industries. He earned his MBA and MPA from the University of Rhode Island and completed advanced post-master’s research in finance and marketing at Bryant University. He is a Certified Turnaround Professional and member of the Turnaround Management Association, the Private Directors Association, Association for Corporate Growth (ACG), Association of Merger & Acquisition Advisors (AM&MA), the American Bankruptcy Institute, and IMCUSA. Copyright 2024, Qorval Partners LLC and/or Paul Fioravanti, MBA, MPA, CTP. All rights reserved. No reproduction or redistribution without permission.

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