After a number of rounds of investment, the investors of a privately held corporation have decided not to put in more money to fund the company's operations. The company will be out of cash within a few months and borrowing from the company's lender is no longer an option. The accounts payable list is growing (and aging) and some creditors have started to demand payment. A sale of the business may be possible, however, and a term sheet from a potential buyer is anticipated soon. The company's real property lease will expire in nine months, but it's possible that a buyer might want to take over the lease.
With the ABC overview in mind:
The prospect of a term sheet from a potential buyer may influence whether our hypothetical company should choose an ABC or another approach. Some buyers will refuse to purchase assets outside of a Chapter 11 bankruptcy or a Chapter 7 case. Others are comfortable with the ABC process and believe it provides an added level of protection from fraudulent transfer claims compared to purchasing the assets directly from the insolvent company. Depending on the value to be generated by a sale, these considerations may lead the company to select one approach over the other available options.
The Asset Sale
In California where no court approval is required for a sale, the ABC can mean a much faster closing -- often within a day or two of the ABC itself provided that the assignee has had time to perform due diligence on the sale and any alternatives -- instead of the more typical 30-60 days required for bankruptcy court approval of a Section 363 sale. Given the speed at which they can be done, in the right situation an ABC can permit a "going concern" sale to be achieved.
Secured creditors with liens against the assets to be sold will either need to be paid off through the sale or will have to consent to release their liens; forced "free and clear" sales generally are not possible in an ABC. Unsecured creditor claims are behind secured and priority claims, as in bankruptcy.
If the buyer decides to take the real property lease, the landlord will need to consent to the lease assignment. Unlike bankruptcy, the ABC process generally cannot force a landlord or other third party to accept assignment of a lease or executory contract. If the buyer decides not to take the lease, or no sale occurs, the fact that only nine months remains on the lease means that this company would not benefit from bankruptcy's cap on landlord claims. If the company's lease had years remaining, and if the landlord were unwilling to agree to a lease termination approximating the result under bankruptcy's landlord claim cap, the company would need to consider whether a bankruptcy filing was necessary to avoid substantial dilution to other unsecured creditor claims that a large, uncapped landlord claim would produce in an ABC.
The Deal Falls Through
If the potential buyer walks away, the assignee is responsible for determining whether a sale of all or a part of the assets was still possible. In any event, assets would be liquidated by the assignee to the extent feasible and any proceeds would be distributed to creditors in order of their priority through the ABC's claims process.