FAQ

Frequently Asked Questions Regarding Assignments for the Benefit of Creditors, also known as General Assignments or ABCs

1. What is an Assignment for the Benefit of Creditors?

  • A transfer of all assets to a third party called an “Assignee” for the benefit of the transferrers (called “Assignor”) creditors
  • The Assignee liquidates the assets and reduces them to cash
  • The Assignors creditors have up to 180 days to file claims with the Assignee
  • By filing a claim, creditors agree to participate as a contracting party to the General Assignment and are bound by its terms
  • From the cash received from the liquidation of the assets Assignor pays costs of the Assignment for the Benefit of Creditors and distributes the remaining funds to creditors on a pro rata basis in accordance with statutory priorities.

2.  What is the difference between a Chapter 7 Bankruptcy and an Assignment for the Benefit of Creditors?

  • Functionally they are much alike. The Assignee, like a bankruptcy trustee, liquidates the assets and reduces them to cash and, after paying the expenses for the ABC makes distributions to creditors.
  • An ABC, unlike a bankruptcy, is not court supervised in most states
  • More often than not distributions to creditors are made more quickly through an ABC
  • ABCs are generally less expensive than a bankruptcy because the assets may be liquidated and distributions can be made to creditors without governmental oversight or court approval

3. What are the advantages of an Assignment for the Benefit of Creditors in comparison to a bankruptcy?Assignment for the Benefit of Creditors?

  • More often than not distributions to creditors are made more quickly through an ABC
  • ABCs are generally less expensive than a bankruptcy because the assets may be liquidated and distributions can be made to creditors without governmental oversight or court approval

4. Who is an eligible candidate to make an Assignment for the Benefit of Creditors?

  • With very limited, industry-specific, exceptions, almost any individual, corporation, limited liability company, association and partnership is eligible to make an Assignment for the Benefit of Its Creditors
  • However, the authorization to make an ABC can be limited by state law or the document controlling an entity’s governance (such as corporate bylaws, a limited liability companies operating agreement, or a partnership agreement)

5. What is required to make an Assignment for the Benefit of Creditors effective?

  • The entity making the General Assignment must, by appropriate entity action (such as a resolution of the board or a meeting of the partners/members), must authorize an officer to make the General Assignment
  • When a secured creditor is involved and a piecemeal liquidation is contemplated, the consent of the secured creditor may be required. This often involves the preparation of a budget for the liquidation process and an agreement with the secured creditor to use the proceeds of its collateral to accomplish the piecemeal liquidation.
  • Execution of the General Assignment Agreement
  • Execution of a verification of the creditor claims identifying each creditor with their address, account number and amount owed

6. What steps are necessary to the making of an Assignment for the Benefit of Creditors?

  • Before a General Assignment is accepted, Equitable Transitions conducts a thorough due diligence of the prospective assignor so that all contingencies and/or potential difficulties and problems can be identified and resolved
  • The Terms of the General Assignment agreement must be agreed and the contract is prepared
  • A listing of the names, addresses and amounts owed to creditors must be verified by an officer of the Assignor
  • The entity making the General Assignment must, by appropriate entity action (such as a resolution of the board or a meeting of the partners/members), must authorize an officer to make the General Assignment
  • When a secured creditor is involved and a piecemeal liquidation is contemplated, the consent of the secured creditor may be required. This often involves the preparation of a budget for the liquidation process and an agreement with the secured creditor to use the proceeds of its collateral to accomplish the piecemeal liquidation.

7. Can the assets transferred in an Assignment for the Benefit of Creditors be sold in a manner to preserve their ongoing value?

  • Yes. However, the transaction must be fair and equitable.
  • Before transferring the assets of an entity through a General Assignment, Equitable Transitions obtains independent third-party evaluations of the assets and determines the security and other interests which may exist in the assets
  • Equitable Transitions conducts an arm’s-length negotiation with the prospective buyer of the assets to assure that they are being sold for a fair and reasonable price based on reasonable business judgment.
  • The process assures a value will be obtained for the assets equal to or greater than the valuation obtained by Equitable Transitions

8. What should be expected of an Assignee, such as Equitable Transitions, once the Assignment for the Benefit of Creditors has been made?

  • Communication of the ABC to all creditors by mailing a written notice of the ABC, a copy of the General Assignment, and a claim form.
  • Maintenance of bank accounts
  • Securing all assets which will be liquidated
  • Accounting for the disposition of all property including the maintenance of records evidencing the disposition of each asset and the amount received on account of each asset
  • Regular and periodic communications with creditors regarding the status of the process including accountings, in summary format, of all receipts and disbursements
  • Maintenance of all claims filed with Assignee and a review of all claims to determine if they are allowable for distribution purposes
  • Distribution of dividends to creditors as promptly as possible after the deadline for filing claims has transpired

9. How do I began the process of making an Assignment for the Benefit of Creditors?

  • We begin our process by collecting information. This information gathering process is something we call a due diligence. We have developed a questionnaire and spreadsheets in order to acquire the information we need to know and understand before commencing an ABC.
  • From our due diligence process we will be able to determine the appropriate steps necessary for the making of the General Assignment as well as what risks and issues need to be resolved and/or understood to make the process smoothly

10. What can I expect will happen once the General Assignment is made and how long will it take?

  • All of the assets of the Assignor will be liquidated as promptly as possible consistent with obtaining the highest value possible
  • All creditors of the Assignor will receive notice of the General Assignment and have an opportunity to file claims for a period not to exceed 180 days
  • Once the claims period has expired and, if sufficient cash is available, a distribution to creditors will be made.
  • The distribution will be a final distribution if all assets have been liquidated
  • The distribution will be an interim distribution (meaning the first of more than one payment on account of claims) if full assets have not been liquidated and sufficient funds warrant a distribution
  • If the assets can be liquidated promptly, final distributions to creditors can be made within seven to eight months after the making of the General Assignment

11. Does an Assignment for the Benefit of Creditors require general creditor consent?

  • Creditors consent to an ABC is not required and, as a matter of course, is not sought. That is why it is important to have prompt and regular communications from the Assignee to the Creditors.
  • It is our practice to give notice of the ABC to the Creditors within days of making the General Assignment
  • It is also our practice to give regular reports to the creditors regarding the status of the liquidation including a summary of the receipts and disbursements.
  • Creditors may, pursuant to the Bankruptcy Code, petition the court to grant an involuntary bankruptcy for the Assignor.
  • If the Assignor has selected a reputable and professional assignee, such as Equitable Transitions, the Bankruptcy Court has routinely recognized the ABC as a viable alternative and has abstained from exercising jurisdiction over the Assignor’s assets through a bankruptcy
  • The Bankruptcy Court has awarded attorney’s fees in defending the involuntary bankruptcy which were required to be paid by the creditors who petitioned for the involuntary bankruptcy

12. Does my secured creditor have to consent to the General Assignment?

  • Not always. If the ABC will:
  • Provide for immediate full payment to the secured creditor;
  • Provide for a sale subject to secured creditors interests; or
  • The liquidation of assets can be accomplished without the using or interfering with the secured creditor’s collateral
  • However, there are circumstances where he piecemeal liquidation will require the secured creditor to consent to the use of the proceeds of its collateral for paying the costs of liquidation. Under these circumstances Equitable Transitions
  • Prepares a liquidation budget setting forth the funds that will be required to complete the liquidation;
  • Negotiates a subordination agreement with the secured creditor to allow for payment of the costs of the liquidation;
  • All with the secured creditors agreement

13. Can you explain to me how the assets of the business can be transferred through a General Assignment to another company?

  • The Assignor transfers the assets to the Assignee (Equitable Transitions) free of all unsecured claims
  • The unsecured creditors have contractual relationships with the Assignor, but have no contractual or legal rights against the Assignee unless they file a claim
  • The Assignee is now free to transfer the assets to a third-party provided there
  • Is an arm’s-length negotiation;
  • The assets are sold for fair value under the circumstances; and
  • The Assignee has exercised reasonable business judgment in conducting the sale
  • The third party purchaser receives title to the assets free of the unsecured creditor claims
  • Unsecured creditors are entitled to participate in the distribution of the proceeds of the sale provided they have first filed a proof of claim, and the time has expired for claim submission

14. Are there any circumstances when a General Assignment doesn’t make sense?

  • There are limited circumstances when an ABC is not viable.
  • When a secured creditor’s consent is required to liquidate assets and to the consent cannot be obtained
  • When the perspective Assignor is an institution prohibited by law from making an ABC, such as a bank or insurance company
  • When the state law or the governing documents of an entity prohibits the making of an ABC

15. Can’t creditors file an involuntary bankruptcy if an Assignment for the Benefit of Creditors is made?

  • Yes. Creditors may, pursuant to the Bankruptcy Code, petition the court to grant an involuntary bankruptcy for the Assignor.
  • If the Assignor has selected a reputable and professional assignee, such as Equitable Transitions, the Bankruptcy Court has routinely recognized the ABC as a viable alternative and has abstained from exercising jurisdiction over the Assignor’s assets through a bankruptcy
  • The Bankruptcy Court has awarded attorney’s fees in defending the involuntary bankruptcy which were required to be paid by the creditors who petitioned for the involuntary bankruptcy

16. What happens to the Company making the General Assignment?

  • It continues to exist as an entity, unless dissolved
  • It can still be sued by creditors, but it is a shell entity without any assets

17. Do I, as a principal of the Assignor, have any input or control over the General Assignment process?

  • Principals of an Assignor have no legal right to participate in the ABC process
  • However, we have found that the principals of an entity most often are most familiar with their industry and no best how to maximize the value of the assets
  • An ABC allows the participation of an Assignor’s principal whereas it never occurs in a chapter 7 bankruptcy process

18. What happens to a principal who has guaranteed debt of the Assignor after the General Assignment is commenced?

  • The principal remains liable on the personal guarantee
  • However, in our experience the participation of a principal in the process of liquidation is very helpful because of their knowledge of the industry and the assets to be liquidated
  • Secured creditors often encourage the participation of principles in the liquidation process and offer incentives, such as forgiveness on guarantees in the event that assets are liquidated for pre-agreed values

19. What happens to license and franchise agreements in a General Assignment?

  • Generally, license and franchise agreements have provisions that prohibit their transfer, except upon the consent of the franchise or license holder
  • To accomplish a transfer of a license or franchise agreement through an ABC, the prior written consent of the license holder or franchisor is required
  • If the sale of the franchise or license agreement is arranged prior to the making of the ABC, it is our experience that franchisor or license holders will consent to the ABC and the transfer of the license to a third-party buyer

20. What are the risks to a buyer of assets from a Assignee under a Assignment for the Benefit of Creditors?

  • If the sale of the assets is properly conducted, the risks to a buyer with respect to the creditors of the Assignor is very remote
  • However, it is our practice to request that the purchaser retain their own counsel to advise them on the best ways to be protected against the claims of the creditors of an Assignor once the sale is completed.

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