assignment for benefit of creditors texas

Assignments for the Benefit of Creditors: Texas | Practical Law

Assignments for the Benefit of Creditors: Texas

Practical law state q&a w-035-5772  (approx. 26 pages).

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Assignments for the Benefits of Creditors: Texas

Practical Law

Deborah Williamson and Alexandria Rahn bylined the Practical Law article, “ Assignments for the Benefits of Creditors: Texas .” The article serves as a Q&A guide addressing the process by which assignments are generally administered in Texas, including the commencement and administration of the ABC, the duties and actions of assignees, creditor claims, and the jurisdiction of the court.

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Tex. Bus. & Com. Code Section 23.01 Definitions

Source: Section 23.01 — Definitions , https://statutes.­capitol.­texas.­gov/Docs/BC/htm/BC.­23.­htm#23.­01 (accessed Jun. 5, 2024).

Accessed: Jun. 5, 2024

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ABC: Assignments for the Benefit of Creditors

What’s an ABC? If you ask ChatGPT, “ABC” is an acronym that can have multiple meanings, depending on the context—for example, referring to the alphabet. But here we are talking about a type of business liquidation process in the United States known as an Assignment for the Benefit of Creditors (“ABC”). An ABC is governed by state law and has long been viewed as an alternative to a liquidation under Chapter 7 of the US Bankruptcy Code. Although the ABC process has existed for more than a century, it now has increased interest in certain market environments due to its speed, flexibility, and comparatively lower expense than a bankruptcy proceeding.

When Does an ABC Make Sense? As a potential buyer, you want to assess potential legal risks if a target’s liabilities exceed (or are reasonably expected to exceed) its assets. In such a situation, third parties may later seek to assert that the purchase price you paid for the assets of the target was below fair value and to unwind the transaction or impose continuing liability under successor liability and fraudulent conveyance theories, among others. Unlike a direct asset purchase in such circumstances, in an ABC it’s less likely that individual creditors will bring claims against you on fraudulent transfer, successor liability, or other theories because the assets are purchased from an independent fiduciary through a legally recognized wind-down process rather than directly from the distressed company. As a company in distress, you may want to avoid the length and expense of the federal bankruptcy process.

The Basics. The specifics of the ABC process vary by state, but it generally involves four main steps, as follows:

• A company authorizes (through board and any necessary shareholder consent) the shutdown of its operations and assignment of all of its assets to a third-party assignee for the benefit of the company’s creditors. The assignee, who is functionally similar to a bankruptcy trustee, is an independent fiduciary selected by the company and typically has experience in insolvency matters, the relevant industry, or both. In many states, such as California, Texas, and Illinois, the ABC process ordinarily is initiated and undertaken with little or no court involvement. Other states, such as Delaware and New York, provide for varying levels of court involvement with the ABC process, though generally substantially less than a bankruptcy proceeding. Once the ABC commences (which includes the appointment of the independent fiduciary), the company’s board has no further role in the ABC process.
• The assignee provides notice of the assignment to creditors and other parties in interest and requests submission of claims within a certain time. The time period in which notice must be given and claims must be filed varies by state and is based on specific statutory requirements (such as in California) or, in the absence of specific statutory requirements, may be based on local practice or custom (such as in Delaware and Illinois).
• The assignee liquidates the assets, seeking to maximize the value it obtains. In some cases, the assets are sold as a going concern shortly following commencement of the ABC, pursuant to definitive documentation that has been negotiated with the proposed buyer prior to commencement of the ABC. The liquidation may take other forms as well, such as by sale of certain key assets in bulk and sale of the remaining assets through auctions or other private or public methods.
• The assignee distributes the net proceeds of sale to the company’s creditors in accordance with priorities under applicable law.

The Buyer’s Perspective. As a potential buyer, you may already be in discussions with the target company prior to the ABC process or you may become involved through the assignee. Although there are some similarities with a Section 363 sale (like a shorter period for due diligence and the potential to lose key personnel through the process), the ABC process differs in several notable respects from a bankruptcy proceeding:

• The commencement of an ABC does not (i) give rise to an automatic stay of collection or enforcement actions against the company or its property, (ii) prevent creditors from attempting to commence an involuntary bankruptcy case against the company, or (iii) invalidate contractual provisions allowing for counterparties to terminate or modify a contract.
• Unlike a sale conducted under Section 363 of the Bankruptcy Code, the assignee generally cannot sell assets “free and clear” of liens and security interests—if you are buying assets subject to a security interest, the secured party will need to be paid in full or agree to release its lien. Some states that provide for judicial approval of a sale, such as Florida and Minnesota, may provide some ability for an assignee to obtain relief similar to a “free and clear” sale order in an ABC process.
• Anti-assignment provisions in leases or contracts cannot be overridden. So, any consents required under contracts that the buyer wants to assume will need to be obtained.

How We Can Help. We have successfully navigated the ABC process for our clients in a variety of states and industries, including technology, finance, chemicals, and manufacturing and maximized the advantages that acquiring assets through an ABC can provide to buyers. Although sales are usually done on an “as-is, where-is” basis, with limited ability to obtain operational or asset-level representations and warranties and without any indemnity rights in favor of the buyer, we have advised buyers in transactions where additional rights have been obtained (without the use of representation and warranty insurance).

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What Is an Assignment for the Benefit of Creditors and How Does It Differ From a Bankruptcy? - Creditor’s Rights Toolkit

An assignment for the benefit of creditors (ABC) is a process by which a financially distressed company (referred to as the assignor) transfers its assets to a third-party fiduciary (referred to as the assignee). The assignee is responsible for liquidating those assets and distributing the proceeds to the assignor's creditors, pursuant to the priorities established under applicable law.

Troutman Pepper's Creditor’s Rights Toolkit is a series that provides practical insights to help creditors confront the challenges of commercial bankruptcy.

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Assignment for the Benefit of Creditors

A symphony of wall street smarts … main street sense™, skillfully and judiciously maximizing value for all stakeholders, a symphony of wall street smarts … main street sense™ assignment for the benefit of creditors services (abc) general assignment | creditor assignment.

An Assignment for the Benefit of Creditors (ABC) or General Assignment/Creditor Assignment can be a prudent alternative to bankruptcy for maximizing value for troubled private and public companies and their creditors.

An Assignment for the Benefit of Creditors (ABC) is a legal process in which a debtor assigns all of its assets to an independent third party, called an assignee, that’s us, to liquidate the assets and pay off the creditors. This process is a bankruptcy alternative, and it allows a debtor to avoid the lengthy and costly bankruptcy process while still getting relief from creditors.

For over 40 years in assignments worldwide, Equity Development Systems, Ltd has brought A Symphony of Wall Street Smarts … Main Street Sense ™ in skillfully guiding and judiciously representing business owners, creditors, investors, attorneys and law firms, and myriad other stakeholders in the disposition of their troubled accounts and we have successfully managed and generated Billions of Dollars  for our global clientele in the conversion of their distressed assets to cash.

From National Priority List Superfund Sites—to a Decommissioned Nuclear-Powered Aircraft Carrier—to the Pencils-on-the-Desk—we handle it all, and we have successfully managed and generated Billions of Dollars  for our global clientele in the conversion of their distressed assets to cash.

Award-Winning Services Our award-winning Receivership Services have earned us the distinction of being the only Court-Appointed Receiver in the country that the United States Environmental Protection Agency (USEPA) allows to conduct Asset Recovery and Divestiture Services on active Superfund Sites. We are pleased to serve as Court-Appointed Keepers (Asset Recovery) for the U.S. Marshals Service for federal court seizures of assets under admiralty jurisdiction.

We handle it all commercial | industrial | residential real estate developments | hoa and golf communities/resorts | environmentally impaired real and moveable property | hospitality/gaming | shipyards/admiralty/maritime | aviation (fixed and rotor) | automotive (manufacturing and retail) | heavy industrial manufacturing | oil & gas/minerals | and more..., 24/7/365 onsite crisis / interim / turnaround management teams our turnaround management and restructuring teams marshal onsite 24/7/365 throughout the world to provide the complete spectrum of crisis/interim and turnaround management services., testimonials, the actions undertaken on behalf of signal capital have established a level of confidence that has resulted in epa allowing signal to dispose of movable property on the facility in a way that most secured creditors would ordinarily not enjoy. in fact, i know of no other analogous situation where the epa region 6 removal program has cooperated with a secured creditor to the extent it has due to your efforts., senior attorney.

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Such a relationship generally does not develop whereby EPA would permit a secured creditor to liquidate uncontaminated movable property due to the realistic concern that such actions would aggravate existing environmental problems or would interfere with EPA’s removal action. It is not at all unusual that in EPA’s proper exercise of its CERCLA responsibilities such accommodations are flatly rejected.

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Assignment for the Benefit of Creditors Services

Maximizing value for all stakeholders.

An Assignment for the Benefit of Creditors (ABC) is a legal process in which a debtor assigns all of its assets to an independent third party, called an assignee, to liquidate the assets and pay off the creditors. This process is a bankruptcy alternative, and it allows a debtor to avoid the lengthy and costly bankruptcy process while still getting relief from creditors.

The debtor will appoint an assignee, that’s us, who will take possession of all the assets of the debtor and will be responsible for liquidating them and distributing the proceeds to the creditors according to the priority of their claims. We will then be responsible for identifying, collecting, and liquidating all assets, and for making payments to the creditors.

The ABC process is usually faster than bankruptcy and it allows the debtor to have more control over the liquidation process. It also provides a way for the debtor to avoid the negative impact of a bankruptcy filing on its credit rating. However, there are also some limitations to the ABC process, such as a lack of protection from certain types of claims and a lack of automatic stay to halt litigation against the debtor.

It’s important to note that the laws regarding ABC vary state by state, and the process may have different names depending on the location.

The process of an Assignment for the Benefit of Creditors is initiated by the distressed entity (assignor) entering into an agreement with the assignee responsible for conducting the wind-down and/or liquidation or going concern sale in a fiduciary capacity for the benefit of the assignor’s creditors. The assignment agreement is a contract under which the assignor transfers all of its right, title, interest in, and custody and control of its property to the assignee in trust. The assignee divests the property and distributes the proceeds to the assignor’s creditors.

Our award-winning services have earned us the distinction of being the only Court-Appointed Receiver/Assignee in the country that the United States Environmental Protection Agency (USEPA) allows to conduct such services on active Superfund Sites.

We are pleased to serve as Court-Appointed Keepers (Assignees) for the U.S. Marshals Service for federal court seizures of assets under admiralty jurisdiction.

An Assignment for the Benefit of Creditors requires highly-trained—highly skilled—highly credentialed—highly experienced special assets and special situations transitional management, valuation, and disposition experts with decades of proven experience and unimpeachable credibility.

For over 40 years in hundreds of assignments worldwide, Equity Development Systems, Ltd. has skillfully guided and judiciously represented business owners, creditors, investors, attorneys and law firms, and myriad other stakeholders in the disposition of their troubled accounts.

We specialize in handling the disposition of complex and highly-contentious special assets and special situations: Environmentally Impaired Real and Moveable Property (Superfund and Brownfields Sites), Hospitality, Gaming, Resorts,  Shipyards /Admiralty/Maritime, Aviation (Fixed and Rotor), Automotive (Manufacturing and Retail), Heavy Industrial, Oil & Gas/Minerals, Commercial and High-Value Residential Real Estate.

No assignment is too small or too large for EDS.

The process of an Assignment for the Benefit of Creditors

The basic process in an Assignment for the Benefit of Creditors is that the business (Assignor) turns over its assets, both real and moveable, to an independent third-party neutral (Assignee [EDS]) who is the responsible fiduciary for divesting the assets and settling with creditors.

An Assignment for the Benefit of Creditors is a voluntary and arms-length transaction that provides a speedy, orderly disposition and equitable liquidation of the firm’s assets and subsequent distribution to its creditors. It is similar to a Chapter 7 liquidation process but is far quicker and much less expensive and, therefore, generally derives a larger distribution to all creditors.

EDS experts marshal on-site 24/7/365 throughout the nation to secure and operate troubled accounts facing operational or financial challenges. Our experts work diligently with all stakeholders to preserve, protect, maintain, and enhance the enterprise value of the business and business assets that might otherwise be lost during costly and fruitless bankruptcies.

Assets Held in Trust:  By operation of law, all assets are held in trust upon acceptance of the Assignment. These assets and the funds realized therefrom are protected against creditor claims. The assets are then liquidated, and the proceeds, less administrative expenses, are distributed to all creditors according to their lawful priority class. The order of priority is very similar to that used by the Trustee in a bankruptcy proceeding.

Duties of the Assignee:  The Assignee has similar duties to a Trustee in Bankruptcy. The Assignee is charged with acting in a business-like manner in the disposition of the assets. The Assignee has considerable flexibility in the methods used and does not have to obtain consent or have a hearing to ratify his or her actions.

Fees:  Unlike Bankruptcy, no upfront fees are required. The fee amount is determined before signing the documents and becoming part of the General Assignment agreement. The fees for the Assignee are paid as an administrative expense from the proceeds recovered.

Advantages of an Assignment for the Benefit of Creditors or Creditor/General Assignment:  An Assignment does not require court adjudication or consent in most states, nor does it require the consent of creditors. It does not have the stigma of bankruptcy and frequently benefits the company’s principals, who nearly always guarantee the lender obligations of the company. Because an Assignment avoids the administrative procedures that govern bankruptcy, there is a considerable reduction in the cost of disposition and the time necessary to sell the assets. The consequence is greater flexibility in divestiture methods and options, resulting in greater returns for creditors. An Assignment for the Benefit of Creditors is an option that should always be considered as an option to bankruptcy.

EDS’s unparalleled level of Assignment for the Benefit of Creditors expertise is recognized and appreciated nationwide.        

EDS’s unparalleled level of expertise is recognized and appreciated in boardrooms and courtrooms throughout the world. How may we be of service to you?

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The ABCs of Assignments for the Benefit of Creditors (ABCs)

General assignments for the benefit of creditors (ABCs) have been and continue to be a popular business liquidation device for the orderly wind down of corporations, limited liability companies, and even nonprofit corporations and general partnerships. Just as in bankruptcy, an ABC can also be used to facilitate a going-concern sale of the debtor’s assets to a third-party.

August 11, 2020 at 09:29 AM

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Assignment For The Benefit Of Creditors: An Overview

Contributor.

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.

Insolvency/Bankruptcy/Re-Structuring

United states.

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ABC: Assignments for the Benefit of Creditors

• Nina L. Flax ,
• Paul C. de Bernier ,
• Tyler R. Ferguson ,
• Sean T. Scott

What’s an ABC? If you ask ChatGPT, “ABC” is an acronym that can have multiple meanings, depending on the context—for example, referring to the alphabet. But here we are talking about a type of business liquidation process in the United States known as an Assignment for the Benefit of Creditors (“ABC”). An ABC is governed by state law and has long been viewed as an alternative to a liquidation under Chapter 7 of the US Bankruptcy Code. Although the ABC process has existed for more than a century, it now has increased interest in certain market environments due to its speed, flexibility, and comparatively lower expense than a bankruptcy proceeding.

When Does an ABC Make Sense? As a potential buyer, you want to assess potential legal risks if a target’s liabilities exceed (or are reasonably expected to exceed) its assets. In such a situation, third parties may later seek to assert that the purchase price you paid for the assets of the target was below fair value and to unwind the transaction or impose continuing liability under successor liability and fraudulent conveyance theories, among others. Unlike a direct asset purchase in such circumstances, in an ABC it’s less likely that individual creditors will bring claims against you on fraudulent transfer, successor liability, or other theories because the assets are purchased from an independent fiduciary through a legally recognized wind-down process rather than directly from the distressed company. As a company in distress, you may want to avoid the length and expense of the federal bankruptcy process.

The Basics. The specifics of the ABC process vary by state, but it generally involves four main steps, as follows:

• A company authorizes (through board and any necessary shareholder consent) the shutdown of its operations and assignment of all of its assets to a third-party assignee for the benefit of the company’s creditors. The assignee, who is functionally similar to a bankruptcy trustee, is an independent fiduciary selected by the company and typically has experience in insolvency matters, the relevant industry, or both. In many states, such as California, Texas, and Illinois, the ABC process ordinarily is initiated and undertaken with little or no court involvement. Other states, such as Delaware and New York, provide for varying levels of court involvement with the ABC process, though generally substantially less than a bankruptcy proceeding. Once the ABC commences (which includes the appointment of the independent fiduciary), the company’s board has no further role in the ABC process.
• The assignee provides notice of the assignment to creditors and other parties in interest and requests submission of claims within a certain time. The time period in which notice must be given and claims must be filed varies by state and is based on specific statutory requirements (such as in California) or, in the absence of specific statutory requirements, may be based on local practice or custom (such as in Delaware and Illinois). 
• The assignee liquidates the assets, seeking to maximize the value it obtains. In some cases, the assets are sold as a going concern shortly following commencement of the ABC, pursuant to definitive documentation that has been negotiated with the proposed buyer prior to commencement of the ABC. The liquidation may take other forms as well, such as by sale of certain key assets in bulk and sale of the remaining assets through auctions or other private or public methods. 
• The assignee distributes the net proceeds of sale to the company’s creditors in accordance with priorities under applicable law.

The Buyer’s Perspective. As a potential buyer, you may already be in discussions with the target company prior to the ABC process or you may become involved through the assignee. Although there are some similarities with a Section 363 sale (like a shorter period for due diligence and the potential to lose key personnel through the process), the ABC process differs in several notable respects from a bankruptcy proceeding: 

• The commencement of an ABC does not (i) give rise to an automatic stay of collection or enforcement actions against the company or its property, (ii) prevent creditors from attempting to commence an involuntary bankruptcy case against the company, or (iii) invalidate contractual provisions allowing for counterparties to terminate or modify a contract. 
• Unlike a sale conducted under Section 363 of the Bankruptcy Code, the assignee generally cannot sell assets “free and clear” of liens and security interests—if you are buying assets subject to a security interest, the secured party will need to be paid in full or agree to release its lien. Some states that provide for judicial approval of a sale, such as Florida and Minnesota, may provide some ability for an assignee to obtain relief similar to a “free and clear” sale order in an ABC process. 
• Anti-assignment provisions in leases or contracts cannot be overridden. So, any consents required under contracts that the buyer wants to assume will need to be obtained. 

How We Can Help. We have successfully navigated the ABC process for our clients in a variety of states and industries, including technology, finance, chemicals, and manufacturing and maximized the advantages that acquiring assets through an ABC can provide to buyers. Although sales are usually done on an “as-is, where-is” basis, with limited ability to obtain operational or asset-level representations and warranties and without any indemnity rights in favor of the buyer, we have advised buyers in transactions where additional rights have been obtained (without the use of representation and warranty insurance).

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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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Assignment for the Benefit of Creditors: An Overview

By Kyriaki Christodoulou

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. Contact KI Legal’s experienced Bankruptcy and Restructuring team to find out which option is right for you.

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Assignment for the Benefit of Creditors: Alternative to Business Bankruptcy

A look at an alternative to bankruptcy with a step-by-step guide that gets your assets sold and creditors paid..

When you go out of business , you often have a mountain of debt and many known and unknown creditors to pay. Especially if the business doesn't have enough money or assets to cover these liabilities, it can be a daunting task trying to negotiate settlements with your creditors and liquidate the business yourself. While some business owners choose bankruptcy in these circumstances, opting for the bankruptcy trustee to liquidate assets and pay off debts, there's a third choice.

• What Is an Assignment for the Benefit of Creditors?
• Why Choose an Assignment for the Benefit of Creditors?
• How Does Assignment for the Benefit of Creditors Work?
• Example of Assignment for the Benefit of Creditors

The third alternative to liquidating your own business or filing for bankruptcy is to follow a procedure called an "assignment for the benefit of creditors," or ABC. An ABC, as the name would suggest, is an assignment with the purpose of liquidating assets to benefit creditors by getting them paid.

Here you, the assignor, work with one of the many ABC companies or law firms that specialize in liquidating insolvent businesses. Basically, the ABC company, called the "assignee," will liquidate your assets and pay off your creditors (for a percentage of what it is able to sell your assets for), while you and your co-owners move forward with your lives.

An ABC generally works well if your business is a corporation or LLC with a lot of debts and assets. A large liquidation can take months or years to wind up—something you probably can't afford to spend your time doing—so it makes it worth selling your assets to a third party in one fell swoop.

Benefits of an ABC

This option has many advantages that make it an attractive alternative for businesses ready to close shop:

• Saves time. Though it could take more than a year if a business has a lot of assets and complicated creditor claims, usually businesses finish with the winding up process within months. This is a great benefit when you want to put your business behind you as quickly as possible.
• Less publicity. While going through an ABC in the courts is public information, these records are typically harder to access. You probably don't want to advertise your financial woes–it can be embarrassing and also scare off potential buyers when liquidating assets. ABCs are usually done quickly and quietly, minimizing any unwanted exposure.
• Transfer is simpler. There's only one transfer in an ABC from the assignor business to the assignee company. The assignor transfers all of its assets and liabilities to the ABC company in a single business deal. Not only do you not have to find a buyer—perhaps multiple buyers—for all of your assets, but you also don't have to deal with each creditor's claims. Instead, you pass on the many tasks required to wind up a business to the assignee.
• Business chooses the assignee. In an ABC, the assignor business can choose the assignee. You can do your research to select the best assignee for your interests, giving you more agency. For example, a computer equipment business can choose to assign its assets and liabilities to an ABC company that has worked with other computer equipment businesses in the past. The ABC's experience with previous computer equipment businesses means it already has contacts in that industry and it better understands each asset's worth.
• Cost-effective. Winding up a business can be expensive, and the value of assets can diminish quickly. By the time you're done paying creditors, lawyers, accountants, and advisers, you might not have any money left from selling off your assets—or worse, you could be in serious debt. With the ABC alternative, your assignee will use its contacts or an auctioneer to get top dollar for your assets and its expertise to lower administrative costs.

ABC vs. Bankruptcy

If you're considering an ABC, you might also be considering bankruptcy. While bankruptcy might be a useful and more familiar option for some, ABCs are usually the better alternative.

An ABC company will almost always get more for your assets than a bankruptcy trustee will. It also might be able to sell any intellectual property you own to help pay debts, something a bankruptcy trustee usually will not do.

Businesses can also choose an ABC company to take over their business whereas in a bankruptcy proceeding, the court would assign a trustee. You can choose to work with an assignee that is more closely tailored to your interests and industry-specific needs, which can then result in a higher return on assets and an easier transition.

Again, going the ABC route is also usually faster and more private than a bankruptcy. The U.S. has an entire federal system dedicated to only bankruptcy cases. But this dedicated system doesn't translate to quicker conclusions; it only makes it easier for others to find information about past and present cases. Instead, businesses are caught up in a long, burdensome legal proceeding where their name will be on record alongside the word "bankruptcy."

If you have questions about whether an ABC or bankruptcy is the right choice for your business or you need guidance on which ABC company is best suited for your business, you can consult with a business attorney. They can help you understand your state's ABC laws and what your particular business can expect.

Many states have laws—either statutes or common law (law made by the courts)—that control the process for an ABC. Depending on the state, an ABC might be done with court oversight or outside the court. For example, Delaware and New Jersey involve the courts but Georgia and California don't.

Although states have different requirements, an assignment for the benefit of creditors generally follows this procedure:

1. Your Business Votes to Approve the ABC

State law and your company's governing documents will determine

• whether the ABC needs to be approved
• who must approve the ABC—for example, the Board of Directors and shareholders could both need to vote, and
• how many votes are required—for instance, the vote might need to be unanimous.

For corporations, the governing documents are the articles of incorporation and bylaws . For LLCs, the governing documents are the articles of organization and operating agreement .

For instance, a corporation's bylaws might require that an ABC be unanimously approved by the Board of Directors and by two-thirds of the voting shareholders.

2. Your Business Selects an Assignee and Makes the Assignment

You should research and compare different companies and firms that specialize in ABCs in your state. You might find that one has experience in your particular industry or has better reviews.

It might also make sense for the assignee to continue with business operations after the assignment so your business's assets don't lose their value. In this case, you'll want to make sure you choose an assignee that has familiarity with running your kind of business.

Once you choose a company, you should make the assignment. The ABC assignment agreement is sometimes called a "general assignment agreement" or "deed of assignment." Some states require assignment agreements to follow certain terms. Generally, the agreement should be in writing, list out the assets to be assigned and the known creditors, and be fair to each creditor.

After signing the agreement, your business assigns (transfers) all of its assets and debts to the ABC company or law firm, meaning that liability for the business's debts moves to the ABC company or firm. You might still be liable for debts with personal guarantees (or all debts if you're a sole proprietor or partner ), however, so you want to discuss with the ABC company paying these debts first.

Also, you might need permission from the other party to assign any ongoing agreements or leases. For example, your lease might require you to get written permission from your landlord before assigning your leasing obligations to someone else.

If you're in a state where the ABC is done through the court, you might need to file certain paperwork for the court to approve your ABC. That paperwork could include:

• a petition asking the court to approve the ABC and assignee
• a copy of the assignment agreement
• a list (or "schedule") of assets
• a list of creditors and what is owed to each, and
• an attestation verifying that the list of assets and creditors are accurate.

Typically, the assignee will file this paperwork for you. But you'll need to provide the assignee with a list of creditors and assets—usually in the assignment agreement—along with general access to your financial records. If the court approves your ABC, the assignment becomes official. Your assignee can then begin to fulfill its duties, which include selling your assets and paying your creditors.

3. Assignee Notifies Creditors

The assignee will then publish a public announcement that the transfer has been made and that any creditors that have a claim against the assignor should submit that claim before a certain date. State law typically lays out when notice should be given and how long creditors have to make their claims. The assignee should give individual, direct notice to known creditors.

The assignee should also investigate the assignor's books to determine whether there are any creditors, previously unknown, that can be identified and if there are any debts that have gone unnoticed.

4. Assignee Sells Assets

The assignee should keep all transferred assets in a trust account, if possible. It has a duty to make a reasonable effort to get the best price for the assets. The ABC company might decide to liquidate assets through a public or private auction, a private sale, or some combination of the three.

The company will sell any real property (like, office buildings or land) and personal property (like, equipment, furniture, supplies, inventory, and vehicles). It might hire an auctioneer to encourage higher bids for the assets and increase profits or an appraiser to assess a property's value prior to a sale.

Both you and your creditors benefit from higher profits. The more money the assignee can get for your assets, the more money they'll have to pay off your creditors. A happy creditor is less likely to petition the court for involuntary bankruptcy—the very option you're trying to avoid—or to resist the ABC process, which could cost your assignee time and raise the assignee's fees. Also, if it's able to make a high enough profit from selling your assets, the assignee might have some money left over to distribute to you after paying your creditors' claims.

If any of the property is secured , the creditors usually have to consent to its sale. Property is secured when it's used as collateral for a loan. If you don't make payments on the secured loan, the creditor can take your collateral. Because secured creditors are entitled to the collateral, they have an interest in where that property ends up. It's easier to get a secured creditor's consent when the assignee can assure the creditor that they'll get the best price for the secured property, doing the creditor's work for them.

5. Assignee Pays Off Creditors

At this point, assume all assets have been sold off and the deadline has passed for creditors to make their claims. It's now time to pay creditors with the proceeds from the sales. If any money is left over after paying creditors, administrative costs, and the assignee's fee, the assignor can collect the remaining amount.

Many states have requirements for how money should be distributed to creditors, and states differ on which claims have priority over others. The assignee is responsible for following the correct order of claims.

Generally, money will be distributed in the following order:

• secured creditors' claims
• assignee's fees and expenses—for instance, the fees of any professionals hired by the assignee
• federal government's claims
• unpaid wages and benefits
• any taxes owed (income, property, and excise) along with any associated penalties, and
• general unsecured claims.

6. Assignee Closes Out the Business

Once the assignee has liquidated the assets and paid off all creditor claims, its job is basically done. All that's left to do is to take a final account of all the money that went in and out during the assignment, including everything sold and distributed.

If the assignment is under court supervision, the assignee will notify the court that its job is done and give the court a final account of the assets sold and the creditors and fees that have been paid. The assignee will also notify you, as the assignor, of the conclusion of the matter. The ABC company might also be required to notify creditors that the assignment has finished and all claims have been satisfied.

At this point, if you haven't done so already, you should dissolve your business. If your state law requires you to get a tax clearance certificate before you can dissolve, then you'll have to wait until your state taxes are paid up to file for dissolution. But you should dissolve your business sooner rather than later to avoid the liabilities of an ongoing business if:

• you don't have to wait to obtain tax clearance, and
• your assignee continuing your business throughout the ABC process doesn't benefit you—as where your business still being active is making your assets more valuable for an eventual sale.

Angelo's Meatpacking, Inc., in California, has been suffering from poor sales for the past year, and now its accounts payable list is growing, creditors are demanding payment, and the company will be out of cash within a few months.

Angelo consults with two ABC companies and finds that one has experience liquidating meatpacking companies, meaning that this company is more likely to get top dollar selling Angelo's business equipment. Angelo signs a contract with the ABC company (which is now the assignee) and provides a list of the company's creditors as well as all of the business assets to be assigned. Because California law doesn't require court involvement, the ABC company can start the assignment process right away.

First, the ABC company investigates whether Angelo's company can be sold as is—as an operating business—or whether it'll need to shut down and be liquidated. If it can't be sold as an operating business, the ABC company will send a letter to all creditors notifying them of the fact that the assignment has been made and providing a claim form for each creditor to submit a claim to the ABC company.

At the same time, the company advertises the assets for sale in industry publications and, using its contacts, searches for another company to take over Angelo's lease, for a fee. It also publishes a press release simply stating that it has acquired the assets of Angelo's Meatpacking, Inc.

After all of the assets have been liquidated, the ABC company takes a percentage of the proceeds as its fee and distributes the rest based on the creditors' claims. There's no need to file any documents with the court to close out the process.

With all state taxes paid, Angelo obtains a tax clearance certificate from California and files a certificate of dissolution. Within six months of Angelo signing with the ABC company, it's all done.

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In Re Siluria (assignment for the benefit of creditors), LLC Appeal from 284th District Court of Montgomery County (memorandum opinion per curiam)

Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

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