When a business faces financial trouble and needs a structured way to handle its debt without going through the formal bankruptcy process, an assignment for the benefit of creditors (ABC) can offer an alternative. An ABC is a state-governed, voluntary process that allows a business to transfer its assets to a third party (the assignee) through a trust, and those assets are liquidated to pay creditors. While less formal and often quicker than bankruptcy, ABCs can still be complex, making them an important option to consider carefully along with legal counsel. This article delves into what an ABC is, how it works, its benefits, and when a business should consider an ABC.
What Is an Assignment for the Benefit of Creditors?
An ABC is a legal process that allows a financially distressed business to liquidate its assets and distribute proceeds to creditors in an orderly manner. Unlike bankruptcy, a federal process governed by strict court oversight, ABCs are typically a product of state law without court oversight and offer more flexibility and speed. More than 30 states allow for ABCs.
In an ABC, a business that cannot meet its financial obligations voluntarily transfers its assets to an independent third party known as an assignee. Self-navigation without professional involvement can subject the business/debtor to increased liability to its creditors (due to a breach of its fiduciary duties to those creditors). Strict compliance with state law statutory requirements can greatly reduce this risk. The assignee’s responsibility is to sell these assets and distribute the proceeds to the business’s creditors. In essence, the process allows for the orderly liquidation of a business without the complexities and costs associated with federal bankruptcy proceedings. For many small to midsize businesses, ABCs can provide a more controlled exit strategy, helping reduce legal fees and potentially protecting some business assets from total liquidation. In some states, depending on the loan documents or other agreements, the ABC may be available involuntarily, generally to a senior secured creditor.
The Process of an ABC
The ABC process, though state-specific, typically follows these core steps:
- Initiating the Assignment: The business owner or management team decides to pursue an ABC in consultation with legal and financial advisors. An assignment document is executed, officially transferring ownership of the company’s assets to the assignee.
- Role of the Assignee: The assignee, who could be a professional liquidator, financial advisor, or lawyer, assumes control of the company’s assets. Their primary role is to sell these assets, which may include equipment, real estate, inventory, or intellectual property. The assignee may also engage professionals for valuation and auction services and negotiate repayments or settlements with creditors.
- Distribution of Proceeds: Once the assets are liquidated, the assignee distributes the proceeds to the creditors based on priority. Typically, secured creditors are paid first, followed by unsecured creditors. Any remaining funds, though rare, may go to the business owner or shareholders.
Compared to Chapter 7 bankruptcy, an ABC generally has fewer procedural requirements, less court involvement, and can be resolved in a shorter time frame. However, an ABC does not automatically provide protection from creditors, as is available in federal bankruptcy, and the business’s ability to continue operations is usually limited.
Benefits of ABCs for Creditors & Debtors
An ABC offers distinct advantages for both the creditors (those owed money) and the debtor (the financially troubled business). Here’s how each side can benefit:
- Benefits for Creditors:
- Quicker Resolution: Because ABCs are less formal than bankruptcy, they often result in a faster repayment process. Creditors may recover funds in a shorter time frame than they would in bankruptcy, where proceedings can last months or years.
- Reduced Legal Costs: The ABC process tends to incur lower legal fees and fewer administrative costs than bankruptcy, which means more funds may be available for distribution to creditors.
- More Efficient Liquidation: Assignees are often able to manage asset sales more efficiently and effectively than through the court-overseen bankruptcy process.
- Benefits for Debtors:
- Greater Control: In general, ABCs allow the business owner or management team more flexibility and control over how the liquidation process is handled, including the choice of assignee.
- Increased Privacy: Because ABCs involve less court oversight, the details of the business’s financial troubles remain more private than in bankruptcy, where records become public.
- Lower Costs: With fewer court appearances and administrative requirements, an ABC is generally less expensive than a bankruptcy, allowing the business to save on legal fees.
However, ABCs also come with limitations. For example, unlike bankruptcy, an ABC does not automatically protect the business from creditor lawsuits, meaning creditors can still pursue legal action to recover their debts. In addition, an ABC may not provide the same discharge options or tax treatments that are available in Chapter 7 or Chapter 11 bankruptcies, which could leave some debts unresolved.
When Should a Business Consider an ABC?
Determining whether an ABC is the right option depends on the specific circumstances of the business. ABCs are particularly suitable for companies that:
- Have Limited Options for Debt Restructuring: When restructuring or reorganizing is no longer viable, and the business has few remaining operational options, an ABC can allow for an orderly liquidation and provide a clear endpoint for the business.
- Want to Avoid Bankruptcy’s Complexity: Businesses that prefer to avoid the complexities, legal fees, and public disclosures associated with bankruptcy may find an ABC to be a more attractive option.
How Forvis Mazars Can Help
An ABC offers businesses a viable alternative to bankruptcy, especially when the goal is to liquidate assets in an orderly manner while keeping costs and time commitments manageable. While ABCs lack some protections offered in bankruptcy, they can provide a path for companies to settle debts, often quicker and with greater flexibility and privacy. If an ABC seems like a potential option for your business, our restructuring and turnaround team can assist. Our deep industry and subject matter knowledge allows us to understand your organization’s challenges as we help you move toward resolution. If you have any questions or need assistance, please reach out to one of our professionals at Forvis Mazars.