When a company has exhausted all available remedies to turn itself around and wishes to wind down its business in an orderly manner, an Assignment for the Benefit of Creditors (“ABC”) can be a cost-effective and relatively quick way to sell the assets and distribute the proceeds to creditors. Assignments are creations of state law, so unlike bankruptcy, which is governed by a uniform federal code, the laws governing assignments will vary across each state.
Here’s how an ABC proceeding compares with bankruptcy:
Who can file an Assignment for the Benefit of Creditors?
Nearly any insolvent business can avail itself of an ABC. The company must obtain shareholder approval which may make it impractical for a public company to avail itself of an ABC. A board resolution is also required authorizing the assignment.
How does an assignment start?
An assignment begins with the company (the “assignor”) reaching an agreement with the firm or individual (the “assignee”) who will act as a fiduciary on behalf of the assignor’s creditors. The agreement will transfer all rights, title and interest to the assignee who then liquidates the assets and distributes proceeds to the creditors.
What are positive attributes of an assignment?
- The sale of assets under an assignment are completed faster than a 363 sale in bankruptcy because assignments do not require a court process. There are no pleadings, bid procedures, and sales motions to file.
- Management and the assignee work collaboratively on preparing communications about the assignment. This alleviates negative publicity of the winddown whereas a bankruptcy liquidation is a very public process.
- Management controls the selection of the assignee. In bankruptcy, there are many parties with a voice in the process, such as the court, the Office of the United States Trustee and the unsecured creditors committee. And, in a Chapter 7 bankruptcy, a trustee will be appointed to sell the assets.
- An assignment does not cost nearly as much as a 363 sale in bankruptcy. The assignor only has to pay the assignee’s fees and costs. In a bankruptcy, the debtor not only has to pay for its professionals, but also the unsecured committee’s professionals. Furthermore, since the bankruptcy process is so much longer than the assignment, the debtor has to pay for both sets of professionals over a longer period of time.
- An assignment provides a way to shield the officers, directors and the buyer from litigation of a fraudulent transfer of the assets to the buyer.
- The ability to complete the sale quickly by the assignee reduces the disruption caused by a bankruptcy filing and helps to maintain continuity of the business thus saving jobs.
What are the limitations of an assignment?
- An assignment does not provide an automatic stay which means creditors can continue to pursue actions against the assignor. However, since the secured lender is a cooperating party in an assignment, the risk of the secured lender foreclosing on its collateral is unlikely.
- An assignee cannot assign executory contracts to the buyer. The assignee must get the contract counterparts, such as a landlord, to agree to accept the buyer as the new obligor.
- An assignee cannot sell assets “free and clear” of liens or “cram down” the secured lender as in bankruptcy. Thus, the secured lender must agree to the sale if the secured lender isn’t going to be paid in full with the sales proceeds.
What does the assignee do during the pre-assignment period?
From the commencement of the assignment until the date the assets are transferred to the assignee, the assignee will be working with management in conducting its due diligence on the background of the company, the liabilities, any litigation, reviewing debt agreements and collateral positions, and ascertaining the highest and best offer for the assets (reviewing the company’s marketing efforts as well as performing its own marketing efforts, if necessary). It is during this period that most of the cost of the assignee will be incurred.
What does the assignee do during the assignment?
Upon the effective date of the assignment, the assignor transfers its assets to the assignee. The assignee often then immediately sells the assets. The assignee will contact the unsecured creditors and notify them of the assignment and the bar date which is the deadline for the creditors to file their claims. The assignee will distribute proceeds from the sale, if any, to the unsecured creditors.
Companies in distress should consider an Assignment for the Benefit of Creditors vs. bankruptcy to more more quickly satisfy creditors, conserve any remaining capital, avoid negative publicity and benefit from a more timely dissolution.
EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: http://www.ema-group.com.
 An ABC is a state law creation, so rules and regulations vary by state. It is important to retain counsel familiar with the assignment laws applicable to your state.
 In California
 As is often the case, the sale proceeds are not sufficient to pay the secured lender’s claims in full which means there are not distributions to the unsecured creditors.