Assignments for the Benefit of Creditors
Joseph D. Meddings, Certified Turnaround Professional
After a nice, long bull run in the economy followed by monetary easing and pandemic related funds, you may have forgotten about some of the options related to distressed companies. In this quick article, I’ll cover one of the least advertised methods of liquidation / restructuring – the Assignment for the Benefit of Creditors.
Most people are familiar with the legal procedures of Bankruptcy or Receiverships. In many cases, an Assignment for the Benefit of Creditors (“ABC”) can be a better path of liquidation when compared to these statutory procedures:· Costs are likely to be much lower as ABCs are less expensive due to little (or no) judicial oversight, less paperwork, and therefor are usually less time-consuming. · ABCs are generally less public than either a Bankruptcy or Receivership proceeding. · If speed is important (think perishable inventory), an ABC provides more flexibility in this regard than a Court approved process. · Outcomes can be more tailored to the needs of the buyer and other parties while continuing to be discreet.
While it is possible to continue to run a “going concern” inside of an ABC, most are used to deliver a sale of assets to a new buyer or buyers “free and clear” of any liens. The Assignee can run a process that includes notice and an eventual auction for assets that mimics an Article 9 or 363 Bankruptcy Sale.
How it works
The Assignee of an ABC should be a neutral third-party that ultimately becomes responsible for marshalling the company assets, verifying liabilities in the proper preference order, turning assets into cash, then distributing these proceeds to creditors in the same preference categories you would find in a Bankruptcy proceeding. There is an Assignment Agreement between the distressed entity and the Assignee that outlines the duties of the Assignee, and transfers all right, title, interest, custody and control in all property of the distressed entity to that Assignee.
In general, there are the following steps to the ABC process:· The Assignee provides notice to all creditors of the distressed entity providing information regarding the Assignment and responsibilities. The Assignment Agreement is included in this communication. · Creditors to the distressed entity are provided a reasonable amount of time (at least 60 days) to file a proof of claim with the Assignee. · The Assignee uses the information provided to validate the pool of claims and preference category of each claims in order to disburse funds generated from the sale of assets. · The Assignee liquidates any assets through a sale process and/or an auction, whichever the Assignee decides is the best course of action. · Cash generated from the sale of assets is distributed in one or more distributions to the creditors in the same preference categories one would find in a Bankruptcy case. · When all assets are sold and funds distributed, the Assignee ends the administration of the ABC and notifies all stakeholders.
What are the Preference Categories?
Following the guidelines for a typical bankruptcy case, the proceeds of liquidated assets are disbursed in the following manner:· Claims related to the Federal Government · Administrative Fees and expenses of the Assignee · Priority Wages including both wages and benefits accrued and unpaid at the time of the Assignment Agreement. · Priority Claims related to expenses incurred within 21 days of the Assignment Agreement · Properly perfected secured creditors · Claims related to the State / Local Governments · Verified general unsecured claims · Verified claims of equity holders
Other items worthy of note· There is no automatic stay with an ABC, so creditors to the distressed company could still band together and file an involuntary bankruptcy against the company, potentially voiding any transaction undertaken by the Assignee. · The Assignee does not have the power to assume or assign executory contracts without the consent of the parties involved. · There may be instances where a State run ABC conflicts with the Federal Guidelines of Bankruptcy Law. · There is no judicial oversight with an ABC, so the Assignee must work quickly to resolve any dispute that arises from the proof of claim process.
While not an answer to all distressed company liquidations or asset sales, an Assignment for Benefit of Creditors can be a useful, less expensive tool for achieving your goals. Don’t forget to include this valuable option in your toolbox in this next downturn.
Joe Meddings, CTP is the President and CEO of Hollis Meddings Group, a strategic advisory firm that assists companies that are experiencing operational or financial distress. Hollis Meddings Group specializes in family or closely held organizations with $10 million to $500 million in revenues. He is a member of the Turnaround Management Association (“TMA”), and sits on several Boards including the Connecticut Chapter of the TMA.