Going Concern Sales

Although a going-concern sale can be affected by a trustee in bankruptcy or a privately appointed receiver, a sale of an insolvent business on a going-concern basis will typically be conducted by a court-appointed receiver or through the CCAA process.

4.2 What is involved in a receivership sales process?

To sell a business on a going-concern basis, a court-appointed receiver will request that the court approve a detailed marketing process for the assets of the company. The requirements for and timelines of the marketing process will vary depending on the nature of the business, the value of the assets, the rate at which the assets will depreciate in value through a sales process, and the realistic pool of potential purchasers. The court-appointed receiver will select the bidder with the best and highest offer, taking into account conditions of closing, timing of closing, the purchaser’s ability to close and any potential purchase price adjustments, among other factors.

Unless specifically authorized by the court, the agreement of purchase and sale with the winning bidder will not be subject to overbids as is the case in the Chapter 11 stalking-horse process. However, stalking-horse sales have been approved in Canada and are becoming commonplace, particularly in situations where a debtor with Canada–U.S. cross-border operations needs to co-ordinate a going-concern sale in both jurisdictions simultaneously.

The receiver, on notice to interested persons, will then request that the court approve the agreement of purchase and sale and vest the assets in the purchaser free and clear of all liens and encumbrances. Liens and encumbrances that exist in the purchased assets will be preserved in the proceeds of sale with the same rank and priority as they had in the purchased assets. Net sale proceeds are typically held by the receiver pending the issuance of a “distribution order” of the court authorizing the receiver to disburse the funds to creditors in accordance with their entitlements. All interested parties are required to receive notice of the motion for the distribution order and disputes between creditors as to priority and allocation of funds are usually addressed at the distribution motion, rather than at the court-approval stage.

4.3 What is involved in a CCAA sales process?

Sales by the debtor while under CCAA protection have become a preferred method of realization in many cases. The debtor remains in possession of the assets, but approval and vesting orders are still available to give the purchaser the necessary comfort that it will acquire the purchased assets free and clear of any liens and encumbrances.

The CCAA sales process is similar to the receivership sales process, except the debtor itself controls the sales process, is the vendor, and is the party requesting the court’s approval of a sales process and eventually the sale itself. Generally, the process is supported by the key stakeholders, who have significant influence over the debtor’s sales process. The debtor will also require the support of its monitor if the sales process and sale are to be approved by the court and courts frequently approve the retainer of a financial adviser or investment bank to conduct the sales process on behalf of the debtor.

The proceeds of the sale will typically be held by the monitor. As is the case with sales by court-appointed receivers, a vesting order will provide that creditors will have the same priority against the proceeds that they had against the assets, prior to the sale. Following court approval, the monitor will distribute the proceeds in accordance with those priorities. If there are surplus funds available for unsecured creditors following payment to secured creditors, it is common to bankrupt the debtor and have any surplus proceeds distributed by a trustee in bankruptcy in accordance with the priorities set out in the BIA, discussed above.

4.4 Can you credit bid in Canada?

There is no equivalent in the CCAA to s. 363(k) of the U.S. Code, which expressly authorizes a secured creditor to credit bid its debt. It is possible to credit bid in Canada, however, based on the first principles, it does not make sense to force a secured creditor to pay cash for collateral when the proceeds of sale would ultimately be distributed to the secured creditor based on its security position. Unlike in the U.S., there is no case law in Canada addressing a collateral agent’s right to credit bid on behalf of a syndicate of lenders and bind dissenting lenders.