Frequently Asked Questions
What is an Assignment for the Benefit of Creditors (ABC)?
An ABC is a business liquidation device available to insolvent debtors. In effect, it is a contractual agreement under which a company’s assets are transferred in trust to an assignee, who is a fiduciary to the company’s creditors. It is one method of liquidating a business without putting the debtor at odds with his/her creditors.
What are some advantages of using an ABC?
The benefits of ABCs are multifold in that they are generally less costly and less cumbersome than traditional bankruptcies. Engaging in an ABC can reduce liability of directors and company management seeking an exit strategy. An ABC can also be beneficial from a public relations perspective, in that a company’s owner may currently own other companies or seek future re-entrance into the same industry.
In practical terms, choosing to engage in an ABC can allow a company’s owners, management, and directors to move forward with day-to-day business and transfer the difficulties of closing out their company to the third party assignee.
How long does the ABC process typically last?
Every case is different and primarily circumstance-driven. Factors such as the involvement of litigation and the number of creditors at hand may affect the length of the ABC process. However, generally speaking, initiating an ABC can happen in a matter of days. Asset sales can take place as soon as necessary, but often last several weeks.
Are employees of the assigned company involved in the ABC process?
Once the ABC process has been initiated, the company’s former employees have no further legal obligations to the company. That being said, they are typically responsible for facilitating the ABC in conjunction with the assignee. Depending on what is required to wind down the company, their assistance may be necessary to ensure a seamless and efficient close down.
What are different types of bankruptcy for an insolvent company?
Chapter 11 “reorganization” and Chapter 7 “liquidation” are two commonly used forms of bankruptcy under the Bankruptcy Code. Reorganizations are usually utilized by corporations, partnerships, Limited Liability Partnerships, or high net worth individuals.
Debts under Chapter 11 are restructured to create an achievable repayment plan. Liquidations are often used by individuals and corporations. Debts under Chapter 7 are discharged subject to the filer’s eligibility and the type of debt.
What is a quick comparison between an ABC and a bankruptcy?
While ABCs are available on a state-by-state basis and are administered by state law, bankruptcy proceedings are governed by federal law. The ABC process in California is non-judicial and governed by common law. Some circumstances in federal bankruptcy cases may allow for the sale of assets clear of liens without the consent of secured creditors. ABCs, on the other hand, cannot sell assets free of liens without the secured creditor’s consent. Moreover, ABCs often have less administrative expenses and are more flexible than traditional bankruptcy.
Both are vehicles through which insolvent companies can wind down and allow their boards to meet fiduciary obligations. The assignee in an ABC and the bankruptcy trustee are both fiduciaries to the distressed company’s creditors and distribute net proceeds accordingly. Overall, determining the right option to meet your needs can be complex and nuanced.
What is an Out-of-Court reorganization?
An Out-of-Court reorganization is an alternative to a Chapter 11 “reorganization”. The process begins with a debtor meeting with its company’s creditors to negotiate an achievable plan for debt repayment. Often, it is wise for the debtor to hire a third party experienced in debt negotiations to assist in facilitating the process.
This process can be beneficial to both debtors and creditors, in that creditors may receive higher repayment totals than if the debtor liquidated and debtors can negotiate extended time to pay back debts.
What is the difference between a secured and unsecured creditor?
As a company enters insolvency, delineations are drawn between different types of creditors. A secured creditor is one who has a lien on specific property of the debtor. If the debtor is delinquent on its payments to the creditor, the lien gives the creditor a legal right to take the asset. Upon a liquidation, secured creditors have priority claims on the collection of debts.
Unsecured creditors are the most common. These are creditors who have no interest in a specific piece of the debtor’s property. General unsecured creditors are typically entitled to a share in the debtor’s liquidated estate, after secured creditors and close-out costs have been paid.
How can CMBG Advisors Inc. help me?
CMBG is your one-stop shop generalist and specialist. We provide general consulting to assess and evaluate your company’s condition and propose viable action plans. We also provide fiduciary services that include initiating and seeing through ABCs or bankruptcies, along with crisis management consulting, out-of-court restructuring and more.