NEW YORK (Reuters) –
General Motors Corp's chief executive told a U.S. bankruptcy court on Tuesday that the sale of GM's main assets to government-backed "New GM" must win court approval in order for the iconic automaker to survive.

Fritz Henderson told the court that if the sale is not approved by July 10 and GM loses access to government funding, the company would be forced to liquidate. He testified on the first day of a hearing at which the automaker is seeking court approval for the sale just 30 days after filing for Chapter 11.

"Business is doing better" at GM, Henderson said, as customers, suppliers, workers and others anticipate the completion of a successful deal. He added that the automaker had originally hoped to repay its loans to the government and restructure outside of bankruptcy.

Henderson also discussed the ouster of former GM CEO Rick Wagoner, saying that Wagoner told him that he had been asked to step down by Steve Rattner, head of the Obama administration's autos task force.

The GM sale hearing, before Judge Robert Gerber, is expected to continue for at least two days, as the company faces objections and questions from its creditors committee, a group of dissenting bondholders, those with liability and asbestos claims against the company, as well as unions and dealerships.

A lawyer for GM, Harvey Miller of Weil Gotshal & Manges, opened the proceeding by noting the company had made progress on some of the objections about tort claims and state tax claims, but that others were still unresolved.

If the deal is approved, GM will be able to sell its best assets, including Chevrolet and Cadillac, under Section 363 of the bankruptcy code to a "New GM" while the U.S. Treasury would provide billions of dollars in financing.

GM's old assets would remain behind in bankruptcy court to be liquidated.

BIG WIN FOR U.S. AUTOS TASK FORCE

A successful sale would mark the second big victory for the Obama administration's autos task force, which earlier this month also helped broker the sale of Chrysler LLC to a group led by Italy's Fiat SpA. The U.S. Supreme Court cleared the way for that deal to go through on June 9.

Outside the Manhattan courthouse, about 75 union-affiliated protesters carried placards and chanted "Save our benefits."

No competing bidders have emerged as an alternative to the U.S. government's $60 billion financing for GM, including a proposed equity investment of $50 billion that would give the U.S. Treasury a 60 percent ownership stake.

Under the plan, the United Auto Workers union would gain a 17.5 percent stake in New GM, the Canadian government would own about 12 percent, and GM bondholders are expected to get about 10 percent.

GM has said more than 50 percent of its bondholders support the deal, but a group of small bondholders mounted a challenge to the sale in court on Tuesday.

Several other individual bondholders have filed objections to the sale, along with the state of Texas which contends the sale illegally challenges state laws on dealerships, and a group representing about 300 Americans with lawsuits against GM for alleged product defects.

GM, however, resolved a key objection from nine state attorneys general over the weekend, saying New GM would accept liability for future product defects. The company also said it would address objections raised by more than 20 of its parts suppliers.

The case is In re: General Motors Corp, U.S. Bankruptcy Court, Southern District of New York, No. 09-50026.

(Reporting by Emily Chasan and Caroline Humer, editing by Matthew Lewis)

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