Often a business has obtained term credit and/or lines of credit in order to support and finance its business operations. Usually these term and lines of credit are personally guaranteed by the principals of the business enterprise. It is our experience that both the management of a business enterprise and its secured creditor do not always see eye to eye about the value of the assets of the business enterprise. The secured creditor, seeing the matter as a “problem credit,” seeks a way out, while the borrower principals agree there are “problem credits” and are concerned that the highest possible value for the business assets is obtained in order to reduce their exposure on personal guarantees.
It is our experience that the lender is the least able to maximize the value of assets through any kind of liquidation. On the other hand, we have often found that the management of the financially troubled enterprise is both well-positioned to enable the maximization of the value of assets and is highly incentivized to do so. The lender, however, desires to control the liquidation process and cannot while the borrower’s existing management remains in control. ABC’s are often utilized to allow for a prompt, efficient, and value maximizing liquidation. Because the Assignee is a fiduciary, both the lender and the borrower (including the guarantors) are able to have confidence in the process. The lender receives prompt and efficient reporting of all aspects of the liquidation while the principals of the borrower are able to assist in the liquidation thereby helping to maximize the value of the assets.
At the end, the guarantor’s liability has been reduced because the value of the assets has been maximized, the secured creditor is satisfied the liquidation was conducted in an efficient manner and it has received all of the proceeds due to it. Additionally, because the ABC resulted from a negotiated, in advance, agreement between the lender, the borrower and the borrower’s guarantors, the liquidation becomes a win-win situation for all concerned.
