Companies in financial trouble are often forced to liquidate their assets to pay creditors. While a Chapter 11 bankruptcy sometimes makes the most sense, other times a Chapter 7 bankruptcy is required, and in still other situations a corporate dissolution may be best. Here we examine another of the options, the assignment for the benefit of creditors, commonly known as an "ABC."
A Chapter 11 bankruptcy filing is problematic because there is insufficient cash to fund operations going forward, no significant revenues are being generated, and debtor in possession financing seems highly unlikely unless the buyer itself would make a loan. The board prefers to avoid a Chapter 7 bankruptcy because it's concerned that a bankruptcy trustee, unfamiliar with the company's technology, would not be able to generate the best recovery for creditors.
The ABC Option.
In many states, another option that may be available to companies in financial trouble is an assignment for the benefit of creditors (or "general assignment for the benefit of creditors" as it is sometimes called). The ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law.
In California, where ABCs have been done for years, the primary governing law is found in California Code of Civil Procedure sections 493.010 to 493.060 and sections 1800 to 1802, among other provisions of California law. California Code of Civil Procedure section 1802 sets forth, in remarkably brief terms, the main procedural requirements for a company (or individual) making, and an assignee accepting, a general assignment for the benefit of creditors. In California, the company and the assignee enter into a formal "Assignment Agreement."
1802. (a) In any general assignment for the benefit of creditors, as defined in Section 493.010, the assignee shall, within 30 days after the assignment has been accepted in writing, give written notice of the assignment to the assignor's creditors, equity holders, and other parties in interest as set forth on the list provided by the assignor pursuant to subdivision.
(b) The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equity holders, and other parties in interest, signed under penalty of perjury, which shall include the names and addresses for each creditor together with the amount of that person's anticipated claim in the assignment proceedings.
Important Features of the ABC
The following highlights some (but by no means all) of the key features of ABCs:
Court Filing Issue. In California, making an ABC does not require a public court filing.
Select the Assignee. Unlike a Chapter 7 bankruptcy trustee, who is randomly appointed from those on an approved panel, a corporation making an assignment is generally able to choose the assignee.
Shareholder Approval. Most corporations require both board and shareholder approval for an ABC because it involves the transfer to the assignee of substantially all of the corporation's assets. This makes ABCs impractical for most publicly held corporations.
Liquidator as Fiduciary. The assignee is a fiduciary to the creditors and is typically a professional liquidator.
Assignee Fees. The fees charged by assignees often involve an upfront payment and a percentage based on the assets liquidated.
No Automatic Stay. In many states, including California, an ABC does not give rise to an automatic stay like bankruptcy, although an assignee can often block judgment creditors from attaching assets.
Event of Default. The making of a general assignment for the benefit of creditors is typically a default under most contracts. As a result, contracts may be terminated upon the assignment.
Proof of Claim. For creditors, an ABC process generally involves the submission to the assignee of a proof of claim by a stated deadline or bar date, similar to bankruptcy.
Employee Priority. Employee and other claim priorities are governed by state law and may involve different amounts than apply under the Bankruptcy Code.
Landlord Claim. Unlike bankruptcy, there generally is no cap imposed on a landlord's claim for breach of a real property lease in an ABC.
Sale of Assets. In many states, including California, sales by the assignee of the company's assets are completed as a private transaction without approval of a court. However, unlike a bankruptcy Section 363 sale, there is usually no ability to sell assets "free and clear" of liens and security interests without the consent or full payoff of lienholders. Likewise, leases or executory contracts cannot be assigned without required consents from the other contracting party.
Choosing the ABC versus the other processes described requires a careful analysis of the client’s specific situation. Our team at the Bay Area Receivership Group understands the complexities of an Assignment, given it takes much more than just signing a contract between the Assignor (the Company) and the Assignee. A deep understanding of the specific situation and a comprehensive strategic plan to properly and efficiently monetize the assets for the benefit of the creditors is required.
For an ABC Case Example please click here.