Assignment For The Benefit of Creditors Is Easy As ABC

Assignment For The Benefit Of Creditors Is As Easy As ABC

Assignment For The Benefit Of Creditors is a little-known alternative to Chapter 7 or a liquidating Chapter 11 bankruptcy that is emerging as an important tool in this state.

This Assignment for the benefit of creditors is a way to that allows a business to end its debt obligations while avoiding the costs, time and stigma associated with bankruptcy.

Assignment for the benefit of creditors in many ways is as easy as ABC.

A key benefit  of the ABC process, which has become increasingly popular in Washington since a new receivership bill was enacted by the Legislature in 2004, is that the debtor company is allowed to pick the assignee.

Unlike a bankruptcy trustee, who is selected at random from a pool of trustees, the business itself may select someone who has experience with the selected process and the sale of business assets when utilizing the ABC alternative.

Why Is The Assignment For The Benefit Of Creditors Important?

Assignment for the benefit of creditors is important assignment because all of the assets previously belonging to the assignor become the property of the assignee until liquidation.  To better understand how this benefit, consider the following scenario:   The owner or shareholders of a private corporation have made multiple investments in the company as its sales and profitability declined during the past couple of years.

They have reached a point where no more money is to be had.    The company has maxed out its line of credit with the bank in order to support the company through the period of losses and the bank has declined to renew the credit line.  Accounts payable are aging and key lenders are demanding payment.

“With an ABC assignment, owners seeking an exit from troubled businesses have alternatives that don’t carry the costs and stigma of bankruptcy.

A Chapter 11 bankruptcy is problematic because of the expense and the lack of cash to fund the operations.   Debtor in Possession financing is unavailable, especially to this size company.  While a Chapter 7 bankruptcy or liquidation is an option, the owners do not want to incur the expense or publicity associated with a bankruptcy filing.

While the ABC procedures in states like California and Oregon are without state court supervision, and the Civil Code outlines the procedures, they do not allow for an automatic stay preventing  lender judgments from attaching assets. Nor can assets be sold “free and clear” of security liens and interests without the consent or full payoff of lien-holders.  Other claims may be negotiated, but do not have the weight of state court backing.

Assignment For The Benefit of Creditors In Washington State

In Washington state, the assignment for the benefit of creditors process is court supervised and is more like a structured bankruptcy process.  The debtor company is the “assignor” who transfers its assets to the “assignee,” who acts as a fiduciary on behalf of all of the creditors. Here is a snapshot of how the process works:

In an ABC assignment proceeding in Washington State, the assignee and assignor enter into an agreement, the form of which is specified by state statutes, in which the assignee agrees to accept the assets and liquidate them on behalf of the company’s creditors.

These assets may be liquidated as “a going concern” or sale of the company; or piecemeal as in a classic liquidation. Once agreement is reached between the assignor and assignee, the court is requested to appoint the assignee as a General Receiver under Washington state law and its receivership statutes.

The ongoing supervision of the court allows for many of the benefits of a bankruptcy, including the ability to stay collections and the ability to sell assets “free and clear” upon court approval.  This is a major advantage of an ABC assignment alternative.

Generally, claims are treated as in a bankruptcy, with certain taxes and employee claims having priority, followed by secured and unsecured creditors.    While an ABC assignment is not the solution for every troubled company, it often has the benefit of  an orderly and quiet exit from a difficult business situation.  And it is gaining additional attention in Washington state at a time when the economy is placing increasing numbers of companies into financial turmoil.  benefit, benefit

ALAN DAVIS is a principal at Revitalization Partners LLC in Seattle, and can be reached at 206.903.1855 or and can help you with an assignment for the benefit of creditors or many other debt restructuring options.