define assignment for the benefit of creditors

assignment for benefit of creditors

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Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be transferred back to the debtor.

ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business.

ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations.

[Last updated in June of 2021 by the Wex Definitions Team ]

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assignments benefits creditors abcs basics california

Assignments for the Benefits of Creditors - "ABC's" - The Basics in California

An assignment for the benefit of creditors (“ABC”) is a contract by which an economically troubled entity ("Assignor") transfers legal and equitable title, as well as custody and control, of its assets and property to an independent third party ("Assignee") in trust, who is required to apply the proceeds of sale of the property to the assignor's creditors in accord with priorities established by law.

ABCs are a well-established common law tool and alternative to formal bankruptcy proceedings. The method only makes sense if there are significant assets to liquidate. ABCs are most successful when the Assignor, Assignee and creditors cooperate but can be imposed even if the creditors are not supportive.

Assignors - Rights and Duties

Generally, any debtor – an individual, partnership, corporation or LLC - may make an assignment for the benefit of creditors. Individuals seldom utilize ABCs, though, because there is no discharge of all debts as there would normally occur in a completed bankruptcy filing. Thus, the protection and benefit of the process is quite limited for any personal obligor.

ABCs can benefit individual principals who have personally guaranteed company obligations or have personal liability on tax claims. Once the Assignment Agreement has been executed, a trust is automatically put in place over the assets transferred. The Assignor can neither rescind the contract nor control the proceedings, but the Assignor may be consulted as necessary and appropriate by the Assignee during the liquidation process.

Assets to be Assigned

Assignor may assign any non-exempt real, personal, and/or general intangible property that can be sold or conveyed. Note that such assets as intellectual property, trade names, logos, etc. may be so transferred and sold. When a corporation makes an assignment, all corporate property, tangible and intangible is transferred including accounts, and rights and credits of all kinds, both in law and equity. The assets only can be sold, not the corporation or its stock. Thus the corporation remains existing, albeit without any significant assets left. It becomes, effectively, a shell.

Assets are typically sold without representations or warranties. The sale is free and clear of known liens, claims and encumbrances - with the consent or full payoff of lien holders. Generally, Assignee warrants only that Assignee has title to the assets.

Assignees - Rights and Duties

The Assignee is generally an unrelated professional liquidator selected by the Assignor. The Assignee gathers the Assignor’s assets and sells the Assignor’s right, title and interest in those assets, then distributes the proceeds to Creditors in accordance with statutory priorities.

The Assignee has a fiduciary duty to the Creditors. Assignee’s duties include protecting the assets of the estate, administering them fairly and representing the estate. Assignee is free to enter into contracts to recover assets or liquidated claims, e.g. filing suit or taking other action.

The Assignee may be removed by a court for violations of the Assignment contract or nonfeasance (failure to act appropriately). The Assignee may not give up his/her/its duties without liability or a superior court order until creditors receive distribution of the proceeds of sale of the assets transferred.

Assignee usually prepares the Assignment documents, though the attorney for the Assignor may draft them as well. Often the terms are negotiated at length.

Preferential Claims and Avoidance

Assignee has statutory avoidance powers, similar to those granted to a Chapter 7 bankruptcy trustee. [See Calif. CCP § 493.030 (termination of lien of attachment or temporary protective order), § 1800 et seq. (avoidance of preferential transfers); Calif. Civ.C. § 3439 et seq. (avoidance of fraudulent conveyances)]

Even so, courts may question this right outside a bankruptcy proceeding. There is also disagreement between the Federal Court (Ninth Circuit) and California state courts whether the Bankruptcy Code preempts the assignee's preference avoidance power under California statutory law.

Creditors - Rights and Duties

While not required to consent to an Assignment, secured creditors often must agree in advance since their cooperation frequently affects the liquidation of the assets. Secured creditors are not barred from enforcing their security by such an assignment. The acceptance of an Assignment by unsecured creditors is not necessary, since under common law the proceedings are deemed to benefit them through equality of treatment.

Note that all Creditors must file their claims within the statutory 150-180 day claim filing period.

ABCs in California do not require a public court filing, but most corporations require both board and shareholder approval. Costs and expenses, including the assignee’s fees, legal expenses and costs of administration, are paid first, just as in a Chapter 7 bankruptcy . Because an assignee’s fee is often based on a percentage value of the assigned assets, it can be difficult to procure assignees for smaller estates.

Assignment Agreement is executed and ratified. Assignor turns over and assigns to Assignee all right, title and interest in the assets being assigned.
Assignor gives Assignee a complete, certified list of creditors, including addresses and amounts owed.
Assignee notifies Creditors within 30 days of execution that assignment has been made, provides an estimate of the probable distribution, and provides a claim form for each Creditor to file a claim in the Assignment estate.
Creditors have 150-180 days from the date of written notice of the assignment to file their claims.
After claim forms are returned and/or the Bar Date has passed, Assignee reconciles the claims and/or objects to any improper claim amounts.
After liquidation, Assignee determines distribution amounts. Claim priority is determined first by state statute, then by Bankruptcy Code. First are secured creditors, then follow tax & wage claims.
Assignee generally informs the IRS that assignment has been made and files notice with local Recorder.
Assignee immediately searches for any previously undisclosed liens (UCC or real estate) to ensure complete notice to all creditors and interest holders.
Assignee secures all assets. In limited situations where the business has enough cash, Assignee may continue to operate the business to maintain going-concern value - if no further debt will be incurred.

It normally takes about 12 months to conclude an ABC.

Effects of ABC

An ABC generally is faster and less costly than a bankruptcy proceeding. Parties can often agree and determine what is going to happen prior to execution of the assignment.

However, ABCs do not discharge individual Assignors from their debts, and do not provide for the reorganization of the business. There is no automatic stay, though in practice an ABC results in an informal and/or incomplete automatic stay if the creditors determine that the assets are beyond their reach.

Creditors are able to continue to pursue the Assignor. ABCs often block judgment creditors from attaching assets because the Assignor no longer has title to or interest in the assigned assets. Sometimes the Assignee is willing to allow the judgment if the judgment creditor submits its claim as described above. The assignee may also defend against a claim if the plaintiff is seeking a judgment which is unjustified and not fair to other creditors.

An ABC also provides grounds for filing an involuntary bankruptcy petition within 120 days of assignment.

The Statutes: California Code of Civil Procedure

§§493.010-493.060 “Effect of Bankruptcy Proceedings and General Assignments for the Benefit of Creditors”

§§1800-1802 “Recovery of Preferences and Exempt Property in an Assignment for the Benefit of Creditors”

A Chapter 11 Reorganization can cost hundreds of thousands of dollars and even a business Chapter 7 Liquidation bankruptcy can easily cost tens of thousands or more. The Assignment method, which pays the Assignee normally by a percentage of the assets sold, is cost-efficient but limited in the protection it may afford the Assignor, as described above. Before this method is attempted, competent legal counsel and certified public accountants should be consulted.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

Assignments for the Benefit of Creditors – an often-overlooked state law alternative to Chapter 7 bankruptcy

For some folks the three letters ABC are a reminder of elementary school and singing a song to learn the alphabet. For others, it is a throw back to the early 70’s when the Jackson Five and its lead singer Michael, still with his adolescent high voice, sang a catchy love song. Then there is a select group of people in the world of corporate workouts, liquidations and bankruptcies, who know those three letters to stand for the A ssignment for the B enefit of C reditors – a voluntary state law liquidation process that may arguably offer a hospitable and friendly alternative to federal bankruptcy. This article is a brief summary of this potentially attractive alternative to bankruptcy.

The Assignment for the Benefit of Creditors (“ABC”), also known as a General Assignment, is a state law procedure governed by state statute or common law. Over 30 states have codified statutes, and the remainder of states rely on common law. See Practical Issues in Assignments for the Benefit of Creditors , by Robert Richards & Nancy Ross, ABI Law Review Vol. 17:5 (2009) at p. 6 (listing state statutes). In some states, the statutory authority and common law can coexist. At its most basic, the ABC process involves the transfer of all assets by a financially distressed debtor (the assignor) to an individual or entity (the assignee) with fiduciary obligations who then liquidates the assets and pays creditors. The assignment agreement is essentially a contract involving the transfer and control of property, in trust, to a third party. In some states that have enacted a statute, state courts may supervise the process (and at different levels of involvement depending on the statute). The statutory scheme in other states such as California and Nevada, and in states where common law govern, do not provide for judicial oversight..

ABCs are promoted as less expensive and more flexible than a chapter 7 liquidation and may proceed substantially faster than bankruptcy liquidation. See generally Practical Issues in Assignments for the Benefit of Creditors , ABI Law Review Vol. 17:5 (2009) at p. 8 (citations omitted). In addition, the ABC process may provide four other noteworthy benefits not available in a bankruptcy. First, the liquidating company chooses the assignee, there is no appointment of a random trustee or formal election required like in a bankruptcy. This freedom of choice allows the assignor to evaluate the reputation and experience of proposed assignees, as well as select an assignee with familiarity in the nature of the assignor’s business and/or with more expansive contacts in the industry to facilitate the sale/liquidation. Second, the ABC process generally falls under the radar of the media (particularly in states that do not require court supervision), and the assignor may avoid publicity, often negative, that can be associated with bankruptcy proceedings. Third, with an ABC, the assignee has the ability to sell the assets without the imposition of potentially cumbersome requirements of Section 363 of the Bankruptcy Code, and in some cases, can conduct a sale the same day as the general assignment. Finally, the ABC process generally authorizes the sale of assets free of unsecured creditor debt. In essence, in an ABC, a company buying assets from a distressed business does not acquire the debt of the assignor.

On the down side, ABCs do not provide the protection of the automatic stay that is triggered upon the filing of a bankruptcy petition. In some situations, the debtor entity needs to stop the pursuit of creditors immediately, and a bankruptcy proceeding will supply this relief. Unlike bankruptcy, the sale through an ABC: i) is not free and clear of liens; ii) unexpired leases cannot be assumed and assigned without the consent of the contract counter-party; and iii) insolvency can trigger a default under an unexpired lease or executory contract. See generally Practical Issues in Assignments for the Benefit of Creditors , ABI Law Review Vol. 17:5 (2009) at p. 20. In general, an ABC is not a good choice for debtors that have secured creditors that do not consent because there is no mechanism for using cash collateral or transferring assets free and clear of liens without the secured creditors’ consent. In cases where junior lienholders are out of the money, there is no incentive for those creditors to voluntarily release their liens. In addition, while unsecured creditors do not have to consent to the general assignment for it to be valid, choosing this alternative forum may cause concern for creditors (particularly those used to the transparency of a court-supervised bankruptcy or receivership proceeding) and invite the filing of an involuntary bankruptcy. Therefore, it is prudent to involve major creditors in the process, and perhaps even in the pre-assignment planning. In addition, if an involuntary petition is filed, the assignee could request that the bankruptcy court abstain in order to proceed with the ABC.

Using the ABC state process in lieu of filing for bankruptcy in federal court may result in a more streamlined, efficient liquidation process that is less expensive and likely completed quicker than a federal bankruptcy proceeding. In some jurisdictions, such as New Jersey, workout professionals note anecdotally that corporate clients fare better under this state law alternative rather than the lengthy, more complicated federal bankruptcy proceedings.

Many bankruptcy professionals are unfamiliar with the procedures of ABC and are reluctant to recommend it as a method for liquidating assets and administering claims. This lack of familiarity may be a disservice to potential clients.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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Simple English definitions for legal terms

assignment for the benefit of creditors

Read a random definition: de minimis

A quick definition of assignment for the benefit of creditors:

An assignment for the benefit of creditors is when a person who owes money to many people gives their property to someone else to sell and use the money to pay back the people they owe. If there is any money left over, it goes back to the person who owed the money. This is like a different way to handle money problems instead of going to court for bankruptcy. But, the person who owed the money still has to pay back what they owe because the people they owe did not agree to let them off the hook.

A more thorough explanation:

An assignment for the benefit of creditors is a legal process where a debtor's property is transferred to another person, who then sells the assets to pay off the debtor's debts. This process is an alternative to filing for bankruptcy and is governed by state law .

For example, let's say a small business owner is struggling to pay off their debts. They may choose to make an assignment for the benefit of creditors, which means they transfer ownership of their assets to a trustee. The trustee then sells the assets and uses the proceeds to pay off the business's debts. Any remaining funds are returned to the business owner.

Another example could be an individual who owes a large amount of money to various creditors. They may choose to make an assignment for the benefit of creditors, which means they transfer ownership of their assets to a trustee. The trustee then sells the assets and uses the proceeds to pay off the individual's debts. Any remaining funds are returned to the individual.

Overall, an assignment for the benefit of creditors is a way for debtors to pay off their debts without going through the formal bankruptcy process. However, it's important to note that the debtor is not discharged from their unpaid debts through this process.

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Assignment For The Benefit Of Creditors: An Overview

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What is an assignment for the benefit of creditors? An assignment for the benefit of creditors ("ABC") is an alternative to a chapter 7 bankruptcy proceeding. As in a chapter 7, the debtor's assets are shepherded and liquidated for the benefit of the debtor's creditors. An ABC is governed by statute and can either be court-supervised or conducted out of court. In New York, an ABC is governed by Article 2 of the Debtor and Creditor Law.

In an ABC proceeding, the debtor is referred to as an assignor, because it makes a transfer of all its assets to an assignee who serves as a trustee. The assignee is charged with placing all the assets in trust in order to liquidate and distribute the proceeds to creditors. While an ABC has many similarities with a chapter 7 liquidation, the two do differ in two important regards:

an ABC does not afford a debtor an automatic stay from creditor collection; and
a sale does not provide the purchaser with the right to purchase the assets free and clear of liens – unlike a 363 sale in Bankruptcy.

To commence an ABC, an assignor executes an assignment conveying all its assets to the assignee, who becomes a fiduciary on behalf of the assignor and its creditors. The assignee then collects and liquidates assets by collecting accounts receivable, conducting an auction sale, sometimes to a stalking horse bidder who starts the bidding, or through a going out of business sale.

An assignor also has powers under state law to recover fraudulent pre-ABC transfers of assets and preferential payments made to creditors. In New York, the "look-back period" for recovering these transfers is four years.

When it comes to distribution of the assets collected by the assignee, an ABC proceeding follows an established order of priority, which is set forth in either the state's unique ABC laws or in the deed of assignment. The assignee tallies the proofs of claim that were filed by the creditors in the proceeding and pays the claims, either in full or on a pro rata basis in accordance with the priority scheme.

After the assignor's assets have been liquidated and creditors have been paid out, the assignee must prepare an accounting detailing the flows of monies in and out of the estate during the case, which may have to be filed with the court supervising the proceedings. As part of the accounting process, the assignee asks the court to close the estate, which notifies all interested parties that (i) the estate has been fully administered, (ii) that the assignee's work is complete, (iii) that no further distributions need be made, and (iv) that the assignment is terminated.

An ABC is a useful, cost-effective alternative to a traditional chapter 7 bankruptcy liquidation, and may suitably serve liquidation requirements in some situations.

Originally published 03/07/2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Receiverships, ABCs and Bankruptcy: A Comparison

Introduction

For the past several decades, when commercial borrowers, their partners and creditors have faced a deadlock or a default, they have preferred resolution of disputes in the Bankruptcy Courts. The Bankruptcy System has provided extraordinary remedies, specialized commercial judges, and an expedient, cost-effective forum for relief.

However, the Bankruptcy System has become expensive, with Bankruptcy attorneys charging hourly rates near the upper end of all lawyers’ fees. The system has become bureaucratized; the advent of the United States Trustee’s system has increased the number and cost of required filings, meetings, and court hearings. The bankruptcy statute, with its unique remedies, has been expanded with special interest sections and marginalized by a hostile Congress. Relief for debtors — consumers, individuals beset by commercial problems, single asset real estate entities, and small businesses — no longer seems to be the focus of a system more intent on procedure and suspicion.

A review of the recent case law reveals an institution, refocused by the Executive Branch, Congress, and the Supreme Court. The Court and its trustees seem to no longer be able to serve their traditional responsibility of providing a “fresh start.” Instead, as the credit industry has convinced Congress, the Bankruptcy System is left to raise the bar, and the cost, for relief, while a populace of financially troubled consumers and businesses look elsewhere.

This outline examines two debtor-creditor procedures: receiverships and assignments for the benefit of creditors .

The laws are less comprehensive and local in nature; they are however cheaper, often working with alternative dispute resolution procedures, and are largely administered by the parties and their attorneys with the imprimatur of a laissez-faire judicial system. Bankruptcy remedies are, in certain situations, still unique and this article details situations where the Bankruptcy Court is still preferable to other remedies.

Receiverships

Receiverships are most common in real property foreclosure situations. Pending trustee’s sales or judicial foreclosures, mortgage lenders may at times desire their collateral be placed in the hands of independent caretakers. Provisions for receivers are routinely included in trust deeds and mortgages. Some states’ laws now make clear that the remedy of receivership can be the subject of a court complaint, without the plaintiff needing to include substantive counts for judicial relief. This permits the appointment of a receiver, while a party seeks non-judicial relief, e.g., a non-judicial foreclosure like a trustee or UCC sale.

Receivers can also play a valuable role in deadlocked or dissolving business entities. Complaints seeking dissolution or division of assets often include a second count praying for the appointment of a receiver to hold the assets being liquidated or divided or to even accomplish the monetization and distribution of assets.

Private, as well as public parties, may use receiverships where there are allegations of fraud, breach of fiduciary duties, or Ponzi schemes. Receiverships can assist victims in preserving assets while criminal or civil fact-finding is on-going.

Receiverships have been used increasingly in the recent downturn in the economy, both in real estate and business cases. Lenders are allowing borrowers additional time to raise capital or sell assets, so long as the collateral is being overseen by a fiduciary. Defaulting borrowers and their lenders are agreeing to receiverships so that feasibility studies and appraisals can be accomplished by industry experts, feasibility consultants, brokers and valuation experts. Equipped with independent analysis, the parties can proceed cooperatively or adversely as they choose.

Receiverships are not bound by the timelines imposed by the bankruptcy laws or judges. Cases may remain pending while the parties evaluate a turbulent market, allow the market to steady, or while the parties search for a business solution. Bankruptcy relief remains an option should the parties’ interests diverge precipitating foreclosure, litigation, or funding termination.

Assignment for the Benefit of Creditors (ABC)

An assignment for the benefit of creditors (ABC) is a voluntary transfer by a debtor of all of the debtor’s non-exempt property to an assignee in trust to apply the property for, or (more usually) to liquidate the property and pay its proceeds to, the debtor’s creditors. The assignment procedure is treated much like a probate/receivership, and the assignee has the same relationship with the court as a court-appointed receiver. The assignee may bring actions on behalf of the assignor and creditors for fraudulent conveyances, and can have the status of a lien creditor, generally entitling the assignee to avoid unperfected security interests in the debtor’s property .

An ABC provides that an insolvent debtor may assign all of his assets to a third party designated as an ‘assignee’ for the benefit of his creditors. Any attempted preference, in the assignment, of one creditor or creditors of the assignor, is fraudulent and without effect. Any creditor who consents to the assignment is entitled to share in the assets so assigned, and by so consenting agrees to take his proportional share of the assets and thereby discharge the debtor from all further liability.

However, only consenting creditors are allowed to share in the assets and non-consenting creditors retain their cause of action for their total indebtedness against the debtor but are not allowed to share in the distribution of assets. An assignment for the benefit of creditors may be effective only to a portion of the debtor’s creditors, or to all. The benefits of the assignment flow only to those creditors who consent to the arrangement, and they must release their claims when paid their proportionate share of the estate. Where a debtor executes an assignment for the benefit of creditors, creditors retain the right to file an involuntary bankruptcy petition after the assignee was appointed or took possession.

A debtor’s petition for Assignment for Benefit of Creditors is sometimes filed with the Court of the county where the debtor’s principal place of business is conducted and the Court has the same jurisdiction over the insolvent estate and the assignee as that of a receiver appointed by the court. Following the filing of Creditor’s Consent and Claims, the assignee is empowered to reduce the debtor’s assets to cash, pay the consenting creditors’ proven claims proportionately, receive discharges from these creditors and terminate the assignment ABC’s have application in small business settings when the creditor body is generally aware of the debtor, its assets, and the reason for failure.

The stigma of bankruptcy can be avoided; the parties can pick their own “Assignee”, eliminating the involvement of a trustee or bankruptcy judge. Disclosure of assets and creditors is necessary and specifically required, but the other documentation and requirements of a bankruptcy petition are avoided. The expense of an Assignee can exceed the cost of a bankruptcy filing, though the tradition of appointing an “industry elder” as the assignee can mitigate this administrative cost and maximize return to creditors in an insolvency.

While some state statutes specifically provide that actions taken pursuant to common law Assignments are void, they are still available to a debtor and a body of creditors who participate and where creditors accept “payment in full” upon distribution of proceeds.

Most debtors seeking bankruptcy relief have “corporate creditors” who are unlikely to participate in an ABC. Situations may arise in the construction industry or similar fields where familiarity between the Assignor and the creditors would allow an ABC, and permit a debtor to avoid the “means-testing” and other hurdles of a bankruptcy discharge.

Unique Bankruptcy Remedies

Automatic stay.

A bankruptcy filing results in the issuance of the automatic stay. This terminates all collection proceedings, all collection attempts and all litigation. When you absolutely, positively have to put a stop to litigation, a foreclosure or garnishment, there is nothing as effective as the automatic stay in bankruptcy.

Sales Free and Clear of Liens, Claims and Encumbrances

The Bankruptcy Code uniquely allows a bankruptcy court to sell a property, passing clean title with all liens, claims and encumbrances attaching to the proceeds. Again, where there is a sale of troubled property involved in litigation or property subject to title disputes, the Bankruptcy Court can order and approve the property’s sale with liens and claims against the property transferred to the proceeds of the sale.

Rejection of Leases or Burdensome Contracts

When a business is subjected to a burdensome lease or an executory contract that is interfering with its continued operation or its reorganization, the Bankruptcy Code uniquely allows such a lease/contract to be rejected. The non-debtor party is given a “pre-petition” claim against the business and the debtor is excused from performance on the lease or contract.

Plans of Repayment

The Bankruptcy Code permits reorganization plans that can restructure payment terms, interest rates and other loan provisions. A plan of reorganization is comprehensive, in that it can propose changes in repayment terms for one or all of the debtor’s obligations. The repayment terms must be voted on by the creditors, but can be approved by the court over the rejection of certain creditors, so long as the repayment plan is fair and equitable and does not discriminate unfairly against a particular creditor or creditors.

Debtor-in-Possession Financing

When a troubled business or project needs new financing, the provisions of the Bankruptcy Code permit this to be done in such a manner that provides comfort to “DIP Lenders.” The ability of the bankruptcy court to approve such loans and the security for such loans, including priming liens, even over creditor dissent, is a unique bankruptcy remedy.

Dealing with the Dishonest or Unscrupulous Debtor

Creditors or business partners dealing with an unscrupulous or dishonest individual often have greater comfort when operations are placed under the protection of the bankruptcy laws. The specter of federal, criminal prosecution and the oversight provided by the United States Trustee and bankruptcy judges can often normalize operations. Many lenders finding their borrowers in a default situation are more comfortable when their borrower is required to account to the bankruptcy court and obtain court authorization for all extraordinary actions.

Familiarity

To some extent, people, parties and businesses know what to expect from bankruptcy. Commercial entities generally have procedures and protocols to deal with bankruptcies. Workouts, receiverships, or assignments for benefit of creditors are often perceived as secretive, foreign proceedings. When dealing with large numbers of creditors, bankruptcy and its familiar procedures are also at times more manageable than other remedies.

Bankruptcy laws continue to provide certain remedies and procedures that cannot be found anywhere else. That being said, business parties may not always be willing to turn over their financial fates to a bankruptcy judge. A less intrusive receivership proceeding may, in certain instances, be more desirable. When a developer finds himself upside down in a project and a handful of creditors are owed money and can look to the build-out of the project, an assignment for the benefit of creditors may be a quicker, less expensive and more appropriate workout tool, than a bankruptcy case.

An informed and trusted commercial real estate broker can often serve as a receiver or as an Assignee in an assignment for benefit of creditors. Such state court remedies avail themselves of the expertise and local knowledge that a broker may have about a particular situation. In other instances though, a bankruptcy proceeding actively overseen by an independent judge may be preferable. This information is provided as a matter of information and education only. It is not intended to provide legal advice or counsel. Do not take action in specific cases without full knowledge of the facts, and competent legal advice from your attorney .

Advantages of Settling a Lawsuit | The Leviton Law Firm

The Advantages of Settling a Lawsuit

Proactively Resolving A/R Disputes

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Assignments for the Benefit of Creditors: Georgia | Practical Law

Assignments for the Benefit of Creditors: Georgia

Practical law state q&a w-030-4603 (approx. 14 pages).

Maintained • Georgia, United States

Assignment for the Benefit of Creditors Definition | Becker

Accounting dictionary, assignment for the benefit of creditors.

A transfer of some or all of a debtor's property to a trustee, who disposes of the property and uses the proceeds to satisfy the debtor's obligations.

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ABCs (Assignments for Benefit of Creditors) Are NOT Receiverships—And Should NOT Be Treated As Receiverships!

I’m serving on a Drafting Committee of the Uniform Law Commission for a uniform law on assignment for benefit of creditors (“ABC”). A draft of such a uniform law is coming together, with lots of input from many people and organizations. But we are always looking for more input. So, if you’d like to participate in the drafting process, let me know.

Assignments for benefit of creditors (“ABCs”) and receiverships have been around under the common law, as separate and independent . . . but complementary . . . procedures, for a very long time.

They’ve both been around for centuries, no less, dating back at least to the medieval days of Merry Olde England — and probably even beyond that.

Separate & Distinct

Each process (ABC and receivership) serves a separate and distinct purpose and function:

ABC is a voluntary process whereby a debtor agrees to have its assets liquidated, without court supervision, by an independent third person chosen by the debtor, often with creditor support, in an effort to maximize the value of those assets — for the benefit of all debtor’s creditors; whereas,
Receivership is an involuntary process whereby a creditor wrests control of assets away from its debtors, by compulsory court action, and places those assets in the hands of court-appointed receiver for liquidation — for the primary benefit of the creditor who files each receivership.

A Development with Momentum?

In more recent times (the last couple decades or so), a development has been gaining momentum among the legislatures of our various United States: i.e ., to blend, by statute, ABCs into receiverships.

The result is to make ABCs and receiverships one-and-the-same ( i.e ., indistinguishable and serving the same purpose and function).

The only difference is that a creditor initiates the one (a receivership), while a debtor initiates the other (an ABC). Otherwise, the two processes are identical: they no longer serve a separate or distinct or complementary purpose and function.

Unfortunate Result

The unfortunate result for a state that blends ABCs into receiverships by statute is this:

debtors, who are looking for a mechanism to liquidate their assets in a manner that is efficient and credible to creditors, won’t use such a statutory process;
so, ABCs largely go unused in states that enact such blending statutes; and
such blending statutes become, as a practical matter, a means to kill ABCs as a useful process in that state.

Each state enacting such a blending statute does so under the guise of improving ABCs in that state but, in reality, is doing exactly the opposite, either wittingly or otherwise.

Contrasts & Comparisons

What follows are some contrasting and comparing observations between ABCs and receiverships under the common law.

—ABC Contrasts with Receiverships

Here are some contrasts:

a receivership proceeds under heavy court supervision, while an ABC does not;
a receivership requires an expensive bond, while an ABC does not;
a receivership liquidation is delayed by lengthy court processes, while an ABC liquidation is not; and
a receivership requires extensive and expensive lawyer involvement, while an ABC does not.

—ABC Comparisons with Receiverships

Here are some comparisons:

a receiver can sell debtor’s assets—an assignee can too;
a receiver can pursue and collect on debtor’s claims against third parties—an assignee can too;
a receiver can settle or disallow disputed claims of creditors—an assignee can too; and
a receiver can distribute sale proceeds to debtor’s creditors—an assignee can too.

So, why would a debtor, or its creditors, prefer to use an expensive and time-consuming receivership, if a comparatively quick and inexpensive ABC is available? The answer is this: in the vast majority of circumstances, they wouldn’t.

ABCs are separate and distinct, and substantially different, from receiverships. Yet, both have been complementary processes for centuries.

The two should not be confused or combined or blended by state statutes!

Filed under

Insolvency & Restructuring
Koley Jessen PC
Receivership

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