There is a quicker, less expensive and more flexible alternative to a business bankruptcy and liquidation that most business owners have never heard of — the Assignment for the Benefit of Creditors, or ABC.
More than 13,000 businesses in the United States, including 210 businesses in Arizona, filed for bankruptcy between March 2021 and March 2022, many of which could have benefitted from an ABC.
What Is an ABC?
An ABC is a trust created by a contract between a distressed business that is ready to wind down, known as the assignor, and an independent third party known as the assignee.
The assignor assigns its assets to the assignee, who holds those assets in trust for the benefit of the assignor’s creditors.
The assignee is then responsible for monetizing those assets and distributing the proceeds to secured and unsecured creditors.
This process follows state law, rather than federal bankruptcy law.
Why Choose an ABC?
There are several reasons why companies should choose an ABC instead of a traditional bankruptcy or receivership.
- The cost of an ABC is usually less than half the cost of a bankruptcy.
- The company, rather than a court, appoints the assignee to oversee the liquidation of assets and satisfaction of creditor claims. This allows the company to interview multiple candidates for the position of assignee, determine which candidate is the most qualified and experienced, and which one is the most cost effective.
- Court procedures and oversight in an ABC are not as complex as those in a bankruptcy or receivership. This means fewer administration costs and a substantially quicker process.
As a result, creditors can typically expect to receive their distributions in an average of about one year. Creditor distributions in a bankruptcy case, on average, take place three years after the bankruptcy begins.
An ABC also gives management and board members the opportunity to move on more quickly to their next endeavor. The liquidation of a business can take months or, in some cases, years to complete. Most business owners cannot afford to, or simply do not want to, spend months or years selling off what remains of their business. Because the assignee liquidates the business’s assets and pays creditors on behalf of the business, owners can move forward with their lives almost immediately.
Finally, the ABC process minimizes negative publicity, embarrassment and potential liability for management. Unless sealed by federal law, all documents filed during a bankruptcy become public record. Because an ABC process does not go through the federal court system, records can be kept private.
Who Qualifies for an ABC?
With so many benefits, it seems like all businesses should choose an ABC instead of a bankruptcy liquidation.
However, to move forward with the ABC process, a company will need authorization from its board of directors and approval from its shareholders. Securing that shareholder approval can sometimes be an obstacle to moving forward with an ABC and is one of reasons an ABC may not be appropriate for a public company.
The ABC process is also not recommended for distressed companies with significant wage claims, large tax issues or important contracts that may not be assignable outside of bankruptcy.
When Should Businesses Consider an ABC?
Each of the following warning signs may indicate that a company is in financial distress:
- Four to six months of cash, or less, left on hand;
- Loss of a major source of revenue, such as a major customer;
- A significant judgment rendered against the company;
- Failure, or a delay, in obtaining governmental approval of a product;
- Breach of a major contract;
- Breach of financial covenants; and
- Fraudulent activity by management or board members.
- A business experiencing any of these symptoms should meet with a business advisory firm or an attorney to see if an ABC or other alternative could be the right next step. To make the most of the meeting, company representatives should prepare the following information:
- A cash flow forecast, because a consultant will need to understand the organization’s cash flow and projections for the next six months in order to make the best recommendations for a company;
- A list of liabilities, including tax claims, wage claims and contingent claims;
- Information about whether the company is able to raise additional capital; and
- Information about whether the company or its assets can be sold.
A good consultant will review legal issues and options with legal counsel and will work with management to evaluate alternatives to an ABC or bankruptcy so that management can make an informed decision about next steps.
Steve O’Neill has been one of the leading national experts on Assignment for the Benefit of Creditors (ABC) for the last 20 years. O’Neill’s most recent ABCs include the infamous Theranos, Imax, Allume, Hired, Gigster, Common Networks, Teradact and Sutter Gold Mining.
O’Neill currently serves as a senior advisor to Phoenix-based independent business advisory firm Resolute Commercial Services.