Best Practices: Navigating the Liquidation of Business Assets

When liquidating business assets, lenders must be sure to follow the guidance outlined in Article 9 of the Uniform Commercial Code (“UCC”). This article provides a refresher on UCC sales and discusses potential ramifications if Article 9 guidelines aren’t followed.

An Article 9 sale consists of three key steps: repossession of collateral, notice requirements, and disposition of proceeds.

Repossession of Collateral: Before a lender can sell a borrower’s assets, it must first take them through repossession. Repossession can occur in one of two ways: voluntary or involuntary. When a borrower is cooperative, they may voluntarily surrender the collateral. This can be very useful and often provides greater opportunity for the lender to liquidate assets quicker. However, borrowers in default are certainly not always cooperative. When the borrower is contentious or has disappeared, a lender can look to self-help options to repossess the collateral. This option has appeal because it does not involve the courts, which can save costs. When self-help options are not available, a lender’s last available (and most expensive) option is to pursue judicial foreclosure. In any of these instances, it is advisable to involve workout counsel to ensure that the actions being taken are compliant.

Notice Requirements: Once the assets have been repossessed, the lender must provide reasonable notice of sale to the borrower, other obligors on the debt, and any other parties who may have an interest in the property (e.g. other secured creditors). In order to ensure all potential interested creditors are properly notified, lenders should order a UCC search within 20-30 days prior to the sale. A notice of disposition of collateral should then be sent to all relevant parties at least ten days prior to the sale. The notice should identify the debtor, secured party, collateral, disposition method, and the debtor’s right to an accounting.

Disposition of Proceeds: Once the ten (10) day period has passed from when the notice of disposition was sent, a lender can proceed with its sale. The sale of assets can be public or private. Proceeds of the sale must then be distributed in a specific order: (1) reasonable expenses, (2) the secured debt, and (3) subordinate liens. If all of these are paid and there is still excess funds, the remainder can be disbursed back to the borrower.

It is critical that the sale of business assets be commercially reasonable. The sale must be conducted in a manner that maximizes proceeds through reasonable efforts. Factors such as price, manner of disposition, time of disposition, and collateral condition are all factors a court may consider when determining the commercial reasonableness of the sale.

It is important to keep in mind that while Article 9 generally creates a uniform system for secured transactions across the states, there are some variations in how it has been adopted state to state. Accordingly, it is crucial to consult with counsel when selling business assets to ensure compliance. If lenders lose out on a source of recovery due to failure to adhere to the standards set forth in the UCC, it is likely to result in a repair of the SBA guaranty.

For questions regarding the liquidation of business assets, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.