An insolvent company facing the prospect of a liquidating bankruptcy may look for an alternative to avoid the expense and loss of control that can potentially coincide with a bankruptcy filing. One such alternative is an assignment for the benefit of creditors (ABC), which enables a company (assignor) to wind down its business and sell its assets either through a going-concern sale or as part of a liquidation. An ABC usually lasts approximately 60 to 90 days and provides the company and its creditors a level of autonomy not present in a Chapter 7 bankruptcy. This article provides an overview of the ABC process, discusses the role of an assignee, examines the process for selling assets through an ABC, and presents some advantages and disadvantages to an ABC.
Deciding on an ABC
Not every distressed company is a good candidate for an ABC. In determining whether an ABC makes sense in a particular situation, it is imperative to carefully survey the creditor landscape. Because secured creditor consent is required, an ABC may not be workable for a company with multiple secured creditors holding liens on significant portions of the company's assets unless each such secured creditor can be persuaded that the ABC provides the best prospect for maximizing recovery on its collateral. Thus, a company with a single secured lender is the ideal candidate for an ABC.
Funding of the ABC also needs to be addressed at the beginning of the process. Because the primary beneficiary of the process is the company's senior secured creditor, that creditor typically will commit to covering the fees and expenses incurred in the process. The attraction for the secured creditor is that the ABC is a much less expensive alternative than a bankruptcy and less expensive than a receivership.
Efficiency is crucial in an ABC because of the speed of the proceeding. Therefore, it is important that the company select an assignee with a good deal of experience in handling ABCs. The most likely assignee would be a financial advisory firm (in some jurisdictions, a lawyer may act as the assignee). Several firms around the country have developed an expertise in this area. One of the first steps the proposed assignee will take is preparing a budget for the ABC, which will need to be approved by the party providing the funding.
Before the assignee can "go live" and file the ABC petition in state court, the company and the assignee need to execute a general assignment for the benefit of creditors, which results in all of the assets being placed in the trust of the assignee. Once this occurs, the actual ABC filing can occur. There is, of course, one final consideration: Where should the ABC be filed? Such an evaluation may lead to some forum shopping. Typically, an ABC can be filed in the state in which the company is incorporated or in the state in which it maintains its principal place of business. States like California, Illinois, New Jersey and Delaware have ABC-friendly statutes and are places where an ABC is recommended in the right circumstances. As currently enacted, the New York ABC statute (N.Y. Debt. & Cred. §§2-24) is less desirable than other states due to its complexity and increased burdens on the parties. As ABCs become more predictable in other states, the New York legislature may decide to revisit the structure of the statute, which it has not done in decades.
Filing the ABC
Similar to the role a receiver plays in a receivership, the assignee is responsible for administering the assignor's estate. The assignee will serve as the gatekeeper for the assets, with the ultimate goal of winding down the company. The assignee will market the assets, enter into transactions with third parties, handle the logistics associated with running the assignor's business and make distributions to creditors. Essentially, the assignee is an officer of the court and faces personal liability if it inappropriately administers the assignor's estate. As a result, the assignee will need to retain competent counsel to represent and protect the assignee's interests.
In most states, including New York, the assignee's counsel will file, on the assignee's behalf, a petition for the assignment of the benefit of creditors.1 Typically, the petition for assignment will provide factual background on the company and its business and the reasons for filing the ABC. Attached to the petition will be the general assignment of assets from the assignor to the assignee.
Shortly after filing the ABC petition, the assignee will be required to file a schedule of assets with the court. Specific requirements vary from state to state, but in New Jersey, for example, the assignee must file a schedule of assets in the county where the assignor resides.2 In New York, the assignor making the general assignment is required to make "a full and true inventory of all such debtor's estate at the date of such assignment, both real and personal, in law and in equity, with the incumbrances existing thereon, and the actual value of the same according to the best knowledge of such debtor…."3
As is the case in New Jersey and Delaware, many state courts also will require an appraisal of the assets conducted by a disinterested entity and the posting of a fiduciary bond.4
Administration of the Estate
The assignee has a fiduciary duty to all of the assignor's creditors to properly administer the estate and treat each class of creditors equally. The first step in this process is to provide the assignor's creditors with notice of the ABC.5 In addition to notifying the creditors of the assignment, the notice will typically include a proof of claim form that the respective creditor must complete and return to the assignee.
As mentioned above, the assignee will be responsible for liquidating the assignor's estate. One of the major advantages of an ABC is that the sale of the assignor's assets can occur quickly and, in many states, without the need for court oversight. For example, the Delaware ABC statute does not contain any requirements regarding the sale of the assignor's assets.6 Although some states have no specific requirements governing an ABC sale of assets, it is recommended that an ABC sale conform with the requirements set forth in the Uniform Commercial Code so that such a sale is deemed commercially reasonable. This includes providing, in the case of private sale, all parties with an interest in the particular asset a "10 day" asset sale notice.7 Another aspect to consider in connection with ABC sales is that the purchaser will acquire the assets "as is where is." The assignee will not make any representation regarding the condition of or title to the assets. Essentially, it is buyer beware, which presumably will affect the amount the prospective purchaser will offer to buy the asset(s). In addition, any sale agreement between the assignee and the prospective purchaser will undoubtedly contain an indemnification clause that will require the prospective purchaser to indemnify the assignee from any claims arising from disputes with respect to the acquired assets.
A major question surrounding the assignee's administration of the assignor's estate is whether the assignee has standing to bring preference actions on behalf of the estate. This is a state-specific question because while some states like Illinois have no state preference statutes, others, including New York, Pennsylvania, Delaware and New Jersey, do have preference statutes.8 Another issue with regard to preference actions in an ABC is whether §547 of Title 11 of the United States Code (Bankruptcy Code) preempts state preference law. The Ninth Circuit in Sherwood Partners v. Lycos, 394 F.3d 1198, 1202 (9th Cir. 2005) held that, in fact, the Bankruptcy Code preempts California's preference statute because the state avoidance powers were "inconsistent with the enactment and operation of the federal bankruptcy system…." A number of courts outside the Ninth Circuit have disagreed with the Sherwood decision.9
The assignee's reporting requirements to the court also will vary based on the jurisdiction. For example, in Delaware, an assignee is required to file an accounting with the Delaware Chancery Court within 12 months of the date the assignee secures its bond.10 New York requires that the assignee file an accounting with the court no later than six months after the general assignment.11