Section 364 SaleEdit
Section 364 Sale refers to a set of bankruptcy tools under the United States Bankruptcy Code that allow a debtor in Chapter 11 proceedings to obtain financing or to sell assets with court supervision when ordinary market channels or existing credit lines are insufficient. This family of provisions is aimed at preserving or maximizing value for the debtor’s estate and its creditors by enabling post-petition liquidity, preserving going-concern operations, and expediting orderly asset dispositions. In practice, Section 364 transactions are a central mechanism by which a financially distressed business can continue to operate while a plan of reorganization is developed and negotiated, rather than collapsing into a broken “fire sale” that would erode recoveries for all stakeholders. See, for example, discussions of the broader framework in Bankruptcy Code and Chapter 11 bankruptcy.
A Section 364 proceeding typically involves the debtor petitioning the court for authority to obtain credit on terms that senior creditors would not otherwise grant, or to sell assets with protections that allow the debtor to continue operations during restructuring. The court weighs the proposed financing or sale against the needs of the creditors, the debtor, and the estate, applying standards that emphasize the preservation of value and fair dealing. In many cases, the debtor seeks post-petition financing, known as debtor-in-possession (DIP) financing, under which new lenders become secured or superpriority lenders to keep the business afloat. See DIP financing and Going-concern value for related concepts.
The relationship between Section 364 financing and asset sales is important. While 363 sales (the sale of assets outside the ordinary course) are a separate mechanism within Chapter 11, Section 364 funds and liens can underpin or accompany such sales, ensuring buyers have the confidence and capital needed to close quickly. The goal is to avoid an insolvency process that rips assets away at fire-sale prices and to protect the recoveries of creditors, employees, and other stakeholders. See Asset sale and Lien (security) for related ideas; discussions of expediting sales and auctions can be found under Auction (law).
Legal framework
Section 364 comprises several subsections that address different ways a debtor may obtain financing or grant liens. In a typical DIP financing scenario, a court must determine that the new credit is necessary to preserve the estate and that the terms are fair and reasonable given the circumstances. Courts also require adequate protection for existing secured creditors whose liens will be retained or adjusted as a condition of the new financing. See Adequate protection and Superpriority liens for related concepts. The process is designed to balance the debtor’s need for liquidity with the rights of creditors, while enabling a structured path toward reorganizing or liquidating assets in an orderly fashion. See Creditors’ committee for the role of creditor representation in these proceedings.
Types of Section 364 transactions
DIP financing with superpriority liens: A debtor may obtain post-petition funds from new lenders whose liens on assets are given priority over existing unsecured and, in some cases, secured claims. This arrangement is common when existing lenders are unwilling or unable to extend additional credit on acceptable terms. See DIP financing and Priority of claims.
Adequate protection for existing creditors: Courts require mechanisms to protect the interests of creditors who hold pre-petition liens or interests, typically through replacement liens, periodic cash payments, or other forms of compensation. See Adequate protection.
Use of collateral and cross-collateralization: The court may permit liens that secure the new financing to encumber assets across the estate, subject to protections for secured creditors. See Lien (security) and Cross-collateralization.
Financing paired with a sale process: In some cases, a Section 364 motion accompanies a proposed asset sale under the broader umbrella of Chapter 11, where the financing helps sustain operations during the sale process and the ultimate disposition of assets is conducted with court oversight. See Asset sale and Stalking horse bid for related procedures.
Process and requirements
Filing and initial court review: The debtor must file a motion detailing the need for new financing or authority to sell assets, describing how the proposed terms maximize the estate’s value. A hearing is typically scheduled to consider approval.
Good faith and necessity findings: The court evaluates whether the financing or sale is necessary to preserve the value of the debtor’s business and whether it is negotiated in good faith and at arm’s length.
Market checks and term adequacy: Courts expect that the terms reflect market terms to the extent practicable, with consideration given to the debtor’s operation needs, the risk profile, and the potential impact on existing creditors.
Notice, objections, and auction mechanics: Interested parties are given notice and an opportunity to object. In asset-sale scenarios, an auction or bidding process (including stalking horse bids) may be employed to maximize value.
Court-entered orders and implementation: Once approved, the financing or sale is implemented under court supervision, with ongoing reporting and compliance obligations.
Controversies and debates
Supporters of Section 364 tools argue that they are essential for preventing the collapse of viable businesses in chapter 11 situations. They contend that DIP financing keeps operations going, preserves value, protects jobs in the short term, and ultimately leads to higher recoveries for creditors by enabling a more orderly reorganization or a higher-value sale of assets than would occur in a liquidation. Proponents emphasize that these mechanisms are market-driven, subject to court approval, and designed to align incentives toward a successful restructuring.
Critics, however, raise concerns about the leverage that new lenders can gain through superpriority liens and the potential for existing creditors to receive diminished recoveries if the debtor’s collateral is pledged to fresh financing. Some argue that the process can favor fewer, better-funded bidders or lenders, potentially at the expense of smaller creditors, workers, or pension-related claimants. Others worry about the risk of the debtor’s management steering the process to preserve an ongoing business only for the benefit of certain stakeholders, rather than maximizing broad-based value. In response, many jurisdictions require robust disclosures, independent valuation, and rigorous court oversight to ensure that the terms reflect a genuine best-interest standard and not merely expedient financing.
From a broader policy perspective, supporters contend Section 364 serves a disciplined, market-oriented approach to crisis management in business, reducing the social and economic costs associated with abrupt liquidations. Critics, including some who question government intervention in private markets, challenge whether court-approved financing and lien structures always serve broader economic efficiency. Debates often touch on how to balance rapid liquidity and valuation discipline with protections for non-owning creditors and workers, and how to prevent potential distortions in bargaining power during restructurings.
See also debates surrounding how these tools interact with other bankruptcy processes, such as Chapter 11 bankruptcy reorganizations and 363 sale proceedings, and how courts apply standards like good faith (law) and adequate protection in real-world restructurings.