In an asset purchase agreement, made out of court, the buyer is generally not responsible for the liabilities of the seller. However, there are exceptions to this general rule so that the buyer might be subject to certain liabilities:
- when the buyer expressly or implicitly assumes all the seller’s liabilities;
- when the purchase is a de facto merger, meaning that the transaction, even though not a merger in the form, is structured as a consolidation or merger of seller and purchasers
- when the buyer is a mere continuation of the seller’s entity;
- when the seller has entered the transaction with the sole intention of defraud the creditors who, however, may assert claims against the buyer.
On the other hand, purchases made during a Chapter 11 insolvency proceeding offer a greater protection to buyers of distressed assets. Indeed, the debtor can proceed with the so-called “363 sale” (the name derives from the relevant section of the Code regulating the sale, which is, indeed, section 363 of the Bankruptcy Code). Such sale allows the debtor to raise funds to pay its creditors and settle its debts. The sale, which must be allowed by the court, starts with the debtor marketing its assets and preparing the bid. The bid will be subject to court’s approval, after which an auction sale will occur. A 363 sale is beneficial for the purchasing party because, on one hand, they will buy the distressed assets at a bargain price and with court approval, and, on the other hand, the purchased (and approved) assets will be generally free and clean of all encumbrances. However, there are certain limits to this rule.
For instance, even though a sale occurring through Section 363(f) is “free and clear of any interest” in the sold property (provided certain conditions are met), courts do not always interpret such sentence as extinguishing all claims, but only as extinguishing all liens, especially when dealing with unidentified claimants for due process violation. Therefore, buyers should conduct proper due diligence, including the existence of claims or potential claims to avoid potential liability.