An assignment for the benefit of creditors (“ABC”) is a state law alternative to bankruptcy for companies struggling financially. It is not applicable to an entity desiring to reorganize, but it may be ideal for a company looking to orderly liquidate its assets and pay creditors.
In sum, the ABC process involves a debtor company assigning all of its assets to a third party called an “assignee.” While the assignee performs several functions on behalf of the debtor, the assignee’s primary job is to liquidate the debtor’s property through various methods. Creditors are provided comfort that a neutral party is working to recover value for them without interference by former management. The ABC process, however, does not discharge any debt of the debtor company that is not repaid in full.
Why would a debtor company use an ABC instead of filing for bankruptcy protection? Below are a few reasons:
- The ABC process is generally quicker and less expensive than a bankruptcy proceeding.
- There is typically more flexibility and less “red tape” in selling assets of the company through an ABC. This often results in a greater return for the creditors.
- An ABC helps a company avoid the negative connotations that are associated with a corporate bankruptcy case.
- An ABC permits the debtor company to liquidate in an orderly fashion when the entity does not have enough cash flow to file a Chapter 11 bankruptcy.
- If properly managed by the assignee, an ABC often generates a larger recovery for creditors. This may be an important consideration for an insolvent entity’s directors who may owe a fiduciary duty to creditors.
- Principals of the debtor company have a better chance of maintaining professional relationships, which is important if they desire to continue working in the same market or industry.
- The debtor company can typically choose the assignee in an ABC. In a bankruptcy filing, the trustee is appointed by the Office of the United States Trustee.
To learn more about the assignment for the benefit of creditors’ process, contact Parker Ibrahim & Berg LLC.