Bankruptcy Versus ABC’s
An Assignment for the Benefit of Creditors (“ABC”) has several similarities to a corporate bankruptcy proceeding. However, one of the major differences between a bankruptcy proceeding and an ABC is that a bankruptcy proceeding is governed by federal bankruptcy law, whereas ABCs are governed by state statutory or common law. In Florida, ABCs are governed by Chapter 727 of the Florida Statutes.
What are some of the advantages of an ABC?
- An ABC is typically faster and less costly than a bankruptcy proceeding, allowing creditors to oftentimes enjoy a larger and more expedited recovery. Why would the owner of a company be interested in how much the creditors receive and how quickly they receive it? The directors of an insolvent company owe a fiduciary duty to the company's creditors, so they have a vested interest in seeing the largest and quickest recovery possible. Furthermore, oftentimes the principal of a company will continue working in the industry and will want to do everything possible to ensure the maintenance of professional relationships.
- Although the "stigma" of bankruptcy is becoming less and less over the years, the principals, officers and directors of some companies may still want to avoid the negative connotations that come with a corporate bankruptcy filing.
- The assignor selects the third-party assignee in an ABC, whereas a Chapter 7 bankruptcy trustee is appointed by the Office of the United States Trustee from an approved panel. This allows the assignor and the assignee to work together on a comprehensive liquidation plan prior to the actual commencement of the ABC proceeding.
- Sometimes filing for a Chapter 11 is difficult because the company does not have sufficient cash flow to operate, or the ability to obtain financing while in a Chapter 11.
- If there is a potential buyer for the business as a going concern readily available, but there is not enough cash available to continue to justify the time and expense of a Chapter 11, an ABC would preserve the going concern value of the business while cutting off creditor claims in a much quicker, simpler and less expensive process than a Chapter 11.
- Furthermore, for an entity interested in purchasing the assets of a distressed company, an ABC provides an added level of protection from fraudulent transfer or other claims, compared to purchasing the assets directly from an insolvent company.
- The liquidation plan in an ABC is oftentimes a collaborative effort, where the assignee can sell the assets of the company by any number of means, including public auction sale, private sale, going-concern sale or bulk sale of certain components of the company. An assignee often enjoys greater flexibility and less oversight with respect to selling assets of the company, as opposed to a Chapter 7 bankruptcy, which results in a greater recovery for the creditors.
- Assignees enjoy a streamlined procedure for operating a business while trying to sell the business as a going concern to a third party, whereas a Chapter 11 may be cost-prohibitive and require debtor-in-possession financing.
- Principals of a company who received repayments from the company in the last year could possibly face more liability in a Chapter 7, as opposed to an ABC.
What are some of the disadvantages of an ABC?
- There is no "automatic stay" in an ABC, so a company that is facing an imminent foreclosure sale or execution of assets by a judgment creditor, and that is interested in remaining in business, would likely require a Chapter 11 bankruptcy filing. However, once a company executes an ABC, other than a consensual lienholder, no creditor can execute, levy or attach any asset in the possession, custody or control of the assignee, which oftentimes serves as similar protection to the bankruptcy "automatic stay".
- Creditors may still attempt to commence an involuntary bankruptcy proceeding against an insolvent company.
Assignments for the Benefit of Creditors law is a highly specialized area of law. The attorneys at Leiderman Shelomith Alexander + Somodevilla, PLLC have considerable experience representing assignors, assignees, creditors, shareholders and purchasers of assets in ABC proceedings. Our experience can help you navigate through the ABCs of ABCs and come to a successful resolution of your company's financial issues.