ABC: An Attractive Alternative to Bankruptcy

The owners of private, financially distressed businesses choosing among unpalatable alternatives should sometimes consider a lesser used state (not federal) statutory course: an assignment for the benefit of creditors, or ABC.

General Advantages over Bankruptcy

ABCs have grown in popularity over the past ten years as an alternative to bankruptcy:

Costs much lower than bankruptcy;
Process much quicker than bankruptcy;
Process much more flexible than bankruptcy;
Value of assets and payment of creditors not compromised or postponed by delay that often attends bankruptcy proceedings, making creditors likely to prefer ABC to bankruptcy;
Secured creditors not subject to compromise of their claims by judge’s decision or, generally, by actions of other creditors or equity holders;
Control remains (largely) in the hands of the business owners, not the court or creditors;
Management better shielded from liability to third parties; and
Visibility significantly lower than bankruptcy.

Liquidation, not Reorganization, Process

The biggest reason not to consider an ABC? Simple and straightforward.  An ABC liquidates the debtor entity’s business, as an ABC typically requires the debtor to assign ALL of its real and personal property for its creditors’ benefit; unlike bankruptcy, there can be no reorganization.

So an ABC could be an alternative to a Chapter 7 liquidation proceeding but not a Chapter 11 reorganization proceeding.

May be Superior to Going out of Business Sale or Negotiated Private Sale

An ABC functions like a “going out of business sale” (if the business is sold piecemeal) or “negotiated private sale” (if the business is sold as a going concern) but can provide several advantages over those procedures:

Conducted by a third party professional, so the debtor’s principals and employees do not have to remain involved in the day to day process of liquidation but can resume their careers elsewhere while the professional does the work of liquidation;
Conducted by a third party professional, so the debtor’s principals and owners are removed from the responsibility and liability of winding up and liquidation decisions;
Debtor’s owners do not have to keep monitoring and funding the debtor while the liquidation proceeds;
ABC statutes typically provide liability shield for debtor and management against creditors;
Potential buyers of the business as a going concern through a negotiated private sale would likely have to assume its unsecured debt, making an acquisition more costly and difficult to consummate; but with an ABC, a buyer could acquire the assets free of unsecured debt obligations, making an acquisition more attractive to a larger number of potential buyers;
Potential buyers from distressed sellers are often wary of fraudulent transfer or successor liability claims; like approved bankruptcy asset sales, asset sales pursuant to properly performed ABCs are not subject to those risks; and
Rights of secured creditors are not compromised.

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