Although acquiring a distressed company through chapter 11 "363 sale" is the best way to ensure a buyer the maximum protection from the creditors of the debtor, this protection comes with significant issues for the buyer.
First, the cost of a chapter 11 proceeding is not insignificant and lenders may be unwilling to fund it, especially in smaller cases where they are already under-secured and the debtor is eroding assets values. Second, the delay attributable to the marketing requirements of the 363 process, which are rarely less than 45 days even moving at light speed through the process, typically results in the business losing customers and value. Third, the process also exposes the buyer to the risk that its offer will be shopped, which makes the process less attractive notwithstanding the typical stalking horse status. Finally, the buyer and the lender will have to deal with an unsecured creditors committee using its ability to further delay and possibly derail the sale to extract funds for unsecured creditors that are out of the money. For these reasons, debtors and lenders seeking to preserve value, as well as buyers desiring to quickly take advantage of opportunities, should consider purchases of the company's secured debt.
Purchasing a distressed company's secured debt from the bank to acquire the business is essentially a typical UCC Article 9 sale, except that the buyer purchases the secured debt, forecloses on the collateral, usually via a surrender agreement in a "friendly foreclosure" and then retains the collateral in full or partial satisfaction of the debt under 9-620 rather than selling it under 9-610. In a transaction structured this way, which can be done in days rather than weeks, the lender, debtor and buyer avoid the costs of a chapter 11 case, the erosion of value due to the delays of the marketing process, and the risk of having to pay hostage money to unsecured creditors that are out of the money. The buyer also benefits by avoiding the risk of a bidding war.
This structure also has benefits over the more typical Article 9 sale where the lender gets the assets via surrender or foreclosure and then sells them to the buyer. First, the lender not having to take title, makes this alternative more attractive for lenders. Second, because the buyer takes title as a secured creditor, it receives greater protection from successor claims of certain types of creditors, such as tax authorities. Additionally, its status as a lender can enable a buyer, in some cases, to conduct additional due diligence or plan the transition by letting the debtor continue to operate while it funds operations.
Of course, there are still risks associated with acquiring any distressed business and this structure does not eliminate them. For example, while the buyer receives the debtor's rights in the collateral, and junior liens can be discharged via the requirements of Article 9, the assets are not taken free from the claims of the debtor's unsecured creditors. As such, the buyer still needs to consider issues such as successor liability and other theories under which the company's unsecured creditors can seek payment from the buyer. However, in many cases, if structured correctly, the risks of acquiring a distressed company by purchasing its secured debt outweigh the risks making this a better means than a 363 sale to get the deal done.