Weighing Assignment for the Benefit of Creditors as a Debt Remedy

Companies facing severe financial distress have more than one relief option to consider. An assignment for the benefit of creditors (ABC) is a less commonly known alternative to bankruptcy proceedings like Chapter 11. An ABC involves a transfer of the debtor company’s assets to an assignee, who assumes responsibility for liquidating the assets and distributing the proceeds to creditors.

An ABC may be a suitable option in situations where a company wishes to avoid the complexity, expense and time associated with a Chapter 11 reorganization. There are few administrative costs and the process usually can be completed in months rather than years. The company gets to choose the assignee who will carry out the process. Small to medium-sized businesses with substantial assets may find ABCs advantageous. So might companies needing to liquidate rapidly due to market conditions.

The ABC process is governed by state law rather than federal bankruptcy law. California Code of Civil Procedure 493.010 sets these requirements for an ABC:

• It must transfer all the company’s assets that are not exempt from enforcement of a money judgment.
• It must be for the benefit of all the company’s creditors.
• It must not create a preference for any creditor or class of creditors, though it may recognize the existence of preferences to which creditors are otherwise entitled.

To create an ABC, the company owner and the assignee execute an assignment agreement, acknowledged before a notary public. The assignment is recorded with the county recorder in the county where the company’s principal place of business or the majority of its assets is situated. Creditors must be given prompt notification that includes information about the assignment, the identity of the assignee and instructions for filing claims. The assignee takes control of the company’s assets, conducts an inventory and then proceeds to liquidate the assets in a manner that aims to maximize the return from them. After the assets are sold and valid claims are settled, the assignee distributes remaining proceeds to creditors. Secured creditors are typically paid first, followed by unsecured creditors.

ABCs do have some disadvantages, however. One major drawback is the lack of a formal automatic stay, which a bankruptcy proceeding provides. This means creditors can continue collection actions against the debtor until the ABC process is recognized and the assets are transferred to the assignee. Furthermore, because ABCs are governed by state law, their effectiveness and the protections they offer can vary, potentially complicating interstate business operations.

An experienced business bankruptcy attorney can analyze your situation and help you determine whether an ABC or a Chapter 11 bankruptcy is the right method for winding down your business.

Located in the heart of downtown Beverly Hills, the Law Offices of Michael Jay Berger provides a wide range of services for California businesses suffering from the weight of excessive debt. Call us at 310-271-6223 or contact us online to schedule a free consultation.