2 approaches to the sale of assets in liquidating Chapter 11 cases
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Kupetza partner in SulmeyerKupetz, is an expert in restructuring, business reorganization, bankruptcy, and other insolvency solutions. An assignment for the benefit of creditors ABC is a business liquidation device available liquidate the business and sell the assets abc an insolvent debtor as an alternative to formal bankruptcy proceedings. In many instances, an ABC can be the most liquidate the business and sell the assets abc and graceful exit strategy.
This is especially true where the goals are 1 to transfer the assets of the troubled business to an acquiring entity free of the unsecured debt incurred by the transferor and 2 to wind down the company in a manner designed to minimize negative publicity and potential liability for directors and management. The option of making an ABC is available on a state-by-state basis. During the meltdown suffered in the dot-com and technology business sectors in the early s, California became the capital of ABCs.
In discussing assignments for the benefit of creditors, this article will focus primarily on California ABC law. The assignment agreement is a contract under which the assignor transfers all of its right, liquidate the business and sell the assets abc, interest in, and custody and control of its property to the third-party assignee in trust. In order to commence the ABC process, a distressed corporation liquidate the business and sell the assets abc generally need to obtain both board of director authorization and shareholder approval.
In contrast, shareholder approval is not required in order for a corporation to file a petition commencing a federal bankruptcy case. In some instances, the shareholder approval requirement for an ABC can be an impediment to the quick action ordinarily available in the context of an ABC, especially when a public company is involved as the assignor. The board of directors of an insolvent company a company with debt exceeding the value of its assets should be liquidate the business and sell the assets abc attentive to avoiding harm to the value of the enterprise and the interests of creditors.
Under Delaware law, for example, the obligation is to maximize the value of the enterprise, which should result in protecting the interests of creditors. Further, often the situation is deteriorating rapidly. The company may be burning through its cash reserves and in danger liquidate the business and sell the assets abc losing key employees who are aware of its financial difficulties, and creditors of the company are pressing for payment.
Chapter 7 bankruptcy provides a procedure for the orderly liquidation of the assets of the debtor and the ultimate payment of creditors in the order of priority set forth in the U.
The process can take many months or even years and is governed by detailed statutory requirements. Chapter 11 of the Bankruptcy Code provides a framework for a formal, court-supervised business reorganization. While the primary goals of Chapter 11 are rehabilitation of the debtor, equality of treatment of creditors holding claims of the same priority, and maximization of the value of the bankruptcy estate, Chapter 11 can be used to implement a liquidation of the debtor.
Unlike the traditional common law assignment for the benefit of creditors assignments are governed by state law and may differ from state to stateChapter 7 and Chapter 11 bankruptcy cases are presided over by a liquidate the business and sell the assets abc bankruptcy judge and are governed by a detailed federal statute.
The common law assignment by simple transfer in trust, in many cases, is a superior liquidation mechanism when compared to using the more cumbersome statutory procedures governing a formal Chapter 7 bankruptcy liquidation case or a liquidating Chapter 11 case. Compared to bankruptcy liquidation, assignments may involve less administrative expense and are a substantially faster and more flexible liquidation process.
In addition, unlike a Chapter 7 liquidation, where generally an unknown trustee will be appointed to administer the liquidation process, in an ABC the assignor can select an assignee with appropriate experience and expertise to conduct the wind-down of its business and liquidation of its assets. In prepackaged ABCs, where an immediate going concern sale will be implemented, the assignee will be involved prior to the ABC going effective.
Further, in states that have adopted the common law ABC process, court procedures, requirements, and oversight are not involved. In contrast, in bankruptcy cases, the judicial process is invoked and brings with it additional uncertainty and complications, including players whose identity is unknown at the time the bankruptcy petition is filed, expense, and likely delay.
In situations where a company is burdened with debt that makes a merger or acquisition infeasible, an ABC can be the most efficient, effective, and desirable means of effectuating a favorable transaction and addressing the debt. Most sophisticated buyers will not acquire an ongoing business or substantial assets from a financially distressed entity with outstanding unsecured debt, unless the assets are cleansed either through an ABC or bankruptcy process.
Creditors of the assignor simply must submit proofs of claim to the assignee and will ultimately receive payment by the assignee from the proceeds of the assignment estate. Moreover, compared to a bankruptcy case, where numerous unknown parties e. From the perspective of a secured creditor, in certain circumstances, instead of being responsible for conducting a foreclosure proceeding, the secured creditor may prefer to have an independent, objective third party with expertise and experience liquidating businesses of liquidate the business and sell the assets abc type of the distressed entity act as an assignee.
As a common law liquidation vehicle that has been around for a very long time, ABCs have been used over the years for all different types of businesses. In the early s, in particular, ABCs became an especially popular method for liquidating troubled dot-com, technology, and health-care companies. In large liquidate the business and sell the assets abc, this was simply a reflection of the distressed nature of those industries. At the same time, ABCs allow for quick and flexible action that frequently is necessary in order liquidate the business and sell the assets abc maximize the value that might be obtained for a business that is largely dependent on the know-how and expertise of key personnel.
An ABC may provide a vehicle for the implementation of a quick transaction which can be implemented before key employees jump from the sinking ship. The liquidation process in an ABC can take many different forms. In some instances, negotiations between the buyer and the assignee commence before the assignment is made and a prepackaged transaction is agreed on and implemented contemporaneously with the execution of the assignment.
However, the assignee must weigh the risks and costs of continuing to operate the business against the anticipated benefits to be received from a going concern sale. In many cases, the distressed enterprise has already ceased operations prior to making the assignment or will cease its business operations at the time the ABC is entered. In these cases, the assignee may be selling the assets in bulk or may sell or license certain key assets and liquidate the other assets through auctions or other private or public liquidation sale methods.
At all times, the assignee is guided by its responsibility to act in a reasonable manner designed to maximize value obtained for the assets and ultimate creditor recovery under the circumstances. However, unlike in a bankruptcy case, because the ABC process in California is nonjudicial, there is no court order approving the sale transaction. As a result, a buyer who requires the clarity of an actual court order approving the sale will not be able to satisfy that desire through an ABC transaction.
That being said, the assignee is an independent, third-party fiduciary who must agree to the transaction and is responsible for the ABC process. The buyer in an ABC transaction will have an asset purchase agreement and other appropriate ancillary documents that have been executed by the assignee.
Unlike in a formal federal bankruptcy case, executory contracts and leases cannot be assigned in an ABC without the consent of the counter party to the contract. Further, ipso facto default provisions allowing for termination, forfeiture, liquidate the business and sell the assets abc modification of contract rights based on insolvency or liquidate the business and sell the assets abc commencement of the ABC are not unenforceable as they are in a federal bankruptcy case. Secured creditor consent is generally required in the context of an ABC.
There is no ability to sell free and clear of liens, as there is in some circumstances in a federal bankruptcy case, without secured creditor consent unless the secured creditor will be paid in full from sale proceeds. Moreover, there is no automatic stay to prevent secured creditors from foreclosing on their collateral if they are not in support of the ABC.
The lack of an automatic stay is generally not significant with respect to unsecured creditors since assets have been transferred to the assignee and unsecured creditors claims are against the assignor. While there is a risk of an involuntary bankruptcy petition being filed against the assignor, experience has shown that this risk should be relatively small.
Further, when an involuntary bankruptcy petition is filed, it is generally dismissed by the bankruptcy court because an alternative insolvency process the ABC is already underway. In the context of an out-of-court workout or liquidation, there is always the risk that an involuntary bankruptcy petition may be filed against the debtor.
A policy is in place that favors allowing general assignments for the benefit of creditors to stand. ABCs in California are governed by common law and are subject to various specific statutory provisions.
In states like California, where common law with specific statutory supplements governs the ABC process, the process is nonjudicial. Under California law, an assignee for the benefit of creditors must set a deadline for the submission of claims. Once the assignee has liquidated the assets, evaluated the claims submitted, resolved any pending litigation to the extent necessary prior to making distribution, and is otherwise ready to make distribution to creditors, pertinent statutory provisions must be followed in the distribution process.
Generally, California law ensures that taxes both state and municipalliquidate the business and sell the assets abc unpaid wages and other employee benefits, and customer deposits are paid before general unsecured claims.
Particular care must be taken by assignees in dealing with claims of the federal government. These claims are entitled to priority by reason of a catchall-type statute which entitles any agency liquidate the business and sell the assets abc the federal government to enjoy a priority status for its claims over the claims of general unsecured creditors.
In fact, the federal statute provides that an assignee paying any part of a debt of the person or estate before paying a claim of the government is liable to the extent of the payment for unpaid claims of the government. As a practical result, these payments must be prioritized above those owed to all state and local taxing agencies.
In California, there is no comprehensive priority scheme for distributions from an assignment estate like the priority scheme in bankruptcy or priority schemes under assignment laws in certain other states.
Instead, California has various statutes which provide that certain claims should receive priority status over general unsecured claims, such as taxes, priority labor wages, lease deposits, etc. However, the order of priority among the various priority claims is not clear. Of course, determining the order of priority among priority claims becomes merely an academic exercise if there are sufficient funds to pay all priority claims.
Secured creditors retain their liens on the collateral and are entitled to receive the proceeds from the sale of their collateral up to the extent of the amount of their claim.
Interest is paid on general unsecured claims only after the principal is paid for all unsecured claims submitted and allowed and only to the extent that a particular creditor is entitled under contract or judgment to assert such claim for interest. If there are insufficient funds to pay the unsecured claims in full, then these claims will be paid pro rata. Liquidate the business and sell the assets abc unsecured claims are paid in full, equity holders will receive distribution in accordance with their liquidation rights.
No distribution to general unsecured creditors should take place until the assignee is satisfied that all priority claims have been paid in full. Assignments for the benefit of creditors are an alternative to the formal burial process of a Chapter 7 bankruptcy.
The ABC process may allow the parties to avoid the delay and uncertainty of formal federal bankruptcy court proceedings. In many instances involving deteriorating businesses, liquidate the business and sell the assets abc engages in last-ditch efforts to sell the business in the face of mounting debt. However, frequently the value of the business is diminishing rapidly as, among other things, key employees leave.
In such instances, especially when the liquidate the business and sell the assets abc of a Chapter 11 bankruptcy case may be unsustainable, an assignment for the benefit of creditors can be a viable solution. The September issue of Business Law Today will feature topics and advice for business lawyers such as smart contracts, what structured negotiation can offer business attorneys, shareholder activism, and more.
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Stay informed on the latest business law practice news and information that will benefit you and your clients. Assignment for the Benefit of Creditors: Kupetz About the Authors: The Alternative of Voluntary Federal Bankruptcy Cases Chapter 7 bankruptcy provides a procedure for the orderly liquidation of the assets of the debtor and the ultimate payment of creditors in the order of priority set forth in the U.
Advantages of an ABC The common law assignment by simple transfer in trust, in many cases, is a superior liquidation mechanism when compared to using the more cumbersome statutory procedures governing a formal Chapter 7 bankruptcy liquidation case or a liquidating Chapter 11 case.
Conclusion Assignments for the benefit of creditors are an alternative to the formal burial process of a Chapter 7 bankruptcy. Additional Resources For other materials on this topic, please refer to the following.
