Assignment for the Benefit of Creditors - an ABC

An Assignment for the Benefit of Creditors (an ABC) is a process by which a distressed debtor contractually transfers (assigns) legal title to its assets and property to a trustee or assignee.  Assignments are structured to save time and expense in winding up the affairs of an insolvent company.  Using an ABC, the insolvent company's assets can be sold quickly and efficiently, and the proceeds of the liquidationcan be distributed to creditors.

Any type of company can enter into an ABC.  The trustee or assignee liquidates those assets for the benefit of creditors. The ABC procedure is governed by state law.  As such, specific laws and procedures vary from state to state, as do the requirements for filing claims against the money received by the trustee or assignee as a result of the liquidation of the assets. The compensation paid to the assignee for the work they perform is determined in contract of assignment and is generally paid from the proceeds of the sale of assets.

An ABC is an alternative to a Chapter 7 bankruptcy liquidation.  However it may not provide significant benefits to general unsecured creditors when the debtor's assets are pledged to secured creditors including the debtor's bank.  In situations in which liquidation value of the assets exceeds the balances owed to secured creditor's, the assignee is not required to obtain the consent of the secured creditor prior to taking the ABC. 

Proceeds from sale are generally distributed first to secured creditors.  As a result, when creditors learn of an Assignment for the Benefit of Creditors they have the right as well as the responsibility to consider whether an involuntary bankruptcy filing would be a better option for them, meaning one that would result in a higher recovery rate.

Assignment Process:  Assignments for the Benefit of Creditors are controlled usually by statute or court rules of procedure, or both. The debtor signs a document that effectively transfers all assets to an assignee. The trustee also collects any money owed to the debtor company.  The document can be in the form of a deed, bill of sale, encumbrance, or combination of the above.  It is whatever document or documents are required in the applicable state or jurisdiction. The assignee is usually required to be someone unaffiliated with the debtor that is qualified to liquidate the assets of the debtor company and distribute the proceeds according to an order or precedence or priority of claim against the debtor. 

Duties of the Assignee:  The Assignee must:

• Investigate the assets of the debtor to determine their appropriate value
• Provide for an orderly liquidation of the assets of the debtor
• Collect accounts receivable, notes receivable, and other debts owed to the debtor company
• Investigate any causes of action which may be available to the debtor that could generate additional funds and pursue them in the name of the debtor, if appropriate
• Investigate the prior acts and conduct of the debtor to determine that the Assignment is made in good faith and that the assets of the corporation or company were not embezzled or otherwise reduced by the company's owners or officers in an effort to defraud creditors

Role of the Creditor:  In most situations, creditors are notified of the procedure for filing claims with the trustee against the company making the Assignment for the Benefit of Creditors.   Creditors should always file a claim as promptly as possible in accordance with the procedures outlined. Creditors should make certain that the assignee has investigated the activities of the debtor prior to the assignment process to ensure that there are not preferences, fraudulent transfers, or improper activities that should be remedied either by the assignee or a bankruptcy trustee.

Advantages and Disadvantages:  An advantage of the ABC is the speed with which it is handled, the lack of mandated structure, and the lower expenses than would normally be incurred if the debtor filed for Chapter 7 bankruptcy protection.  A serioius disadvantage of an ABC is that creditors lose some of the protections afforded to them under the U.S. bankruptcy code.  For example, the assignee may not have the legal right to demand that insiders that received preference payments within one year of the filing and non-insiders that received payments within 90 days of a bankruptcy filing be required by a federal Court to disgorge and return payments received which are Preferential under the U.S. Bankruptcy Code. 

A counter argument is that creditors who find an ABC not to be in their best interest may choose to file an involuntary bankruptcy petition under Chapter 7 of the Bankruptcy Code.

(Source: Manual of Credit and Commercial Laws, edited by Charles M. Tatelbaum and John K. Pearson, available at the NACM Bookstore)

Edited by Michael C. Dennis