An Assignment for the Benefit of Creditors (ABC) is a legal process through which a financially distressed business voluntarily transfers its assets to a third-party assignee for the purpose of liquidating those assets and distributing the proceeds to its creditors.
ABC is an alternative to formal bankruptcy proceedings and is governed by state laws in the United States. In this article, we will explain why an ABC can potentially be a good alternative to bankruptcy, and other reasons why a distressed business should consider it.It is an unfortunate truth that many businesses in all industries are struggling through uncharted economic times.
- Millions of Americans in the workforce died from COVID-19 or had to reduce their hours due to long-COVID symptoms.
- High rates of inflation affected consumers and small business owners alike
- The economy continues to suffer from supply chain issues
When circumstances feel bleak, owners of distressed businesses may start to feel like bankruptcy is their only option. An ABC should, at the very least, be considered.
Assignment for the Benefit of Creditors: An Alternative to Bankruptcy
In an ABC, the business serves as the assignor, who transfers all assets to the control of another person–the assignee. This third-party individual sells the assets and distributes the sale proceeds to the creditors.
Importantly, initiating an ABC does not require a court filing. Thus, it is not subject to ongoing court oversight. Instead, an ABC is merely a contract pursuant to which the company transfers legal and equitable title, as well as custody and control, of its assets to an independent third-party assignee. This assignee is required to sell the transferred assets and distribute the proceeds of their sale.
Choosing an Assignee
Unlike a trustee who is randomly assigned by the bankruptcy court, an ABC assignee is selected by the assigning company. This is important because you can hand-pick an assignee with specialized knowledge and experience.
A hand-picked assignee with the right experience can maximize the value of your assets and help reduce your debt burden to your creditors.
When you choose a highly qualified assignee, the ABC can proceed much faster than bankruptcy, as there is no court oversight and no strict procedural requirements the assignee must follow. This also leads to a lower overall cost compared to other options.
The ABC can also benefit the management of a struggling company by placing the responsibility for winding down the business and disposing of assets directly on the assignee, whose fiduciary duty is to the creditors. The assignor’s burden can be lifted.
Creditors of the assignor must simply submit proofs of claim to the assignee to receive payment by the assignee from the proceeds of the sale of the assignment estate. After liquidation, the assignee determines the distribution amounts based on claim priority frameworks. Generally, an ABC will only be a feasible option if there is buy-in and cooperation from the struggling company’s largest creditors.
Why Should Distressed Companies Consider an ABC?
Some distressed companies may not be qualified to take advantage of Chapter 11 reorganization. For example, California’s cannabis companies are unable to qualify for Chapter 11, as they cannot participate in any federal programs. Other struggling companies may prefer to find a faster, cheaper method to dissolve their business, as opposed to Chapter 11.
Griswold Law–A Receiver Who Can Also Serve as an Assignee
Richardson “Red” Griswold has been appointed as a receiver by the California courts more than 180 times. Much of the work of a receiver overlaps with that of an ABC assignee, which is why Red has also helped companies pursue an Assignment for the Benefit of Creditors.
To learn more about ABCs and if they are the right option for your struggling business, contact us today.
