Publications > C & A News Alert - April 2011

Assignments for the Benefit of Creditors - A Liquidation Alternative

Illinois law provides a solution to those seeking to liquidate or sell financially troubled business enterprises with a minimum of cost, hassle, and oversight. This vehicle is the general assignment for the benefit of creditors (sometimes called an “ABC”). Unlike ABCs in some other states, in Illinois an ABC is not governed by statute, thus the rules governing their use are much less definitive and open to interpretation. This informality affords a great deal of flexibility to persons seeking to initiate an ABC.

An ABC is commenced when the financially distressed business transfers all of its property to an independent trustee - called an “assignee” - under a written trust agreement. If the assets of the business are encumbered by a lien – say, in favor of a bank that loaned money to the business – the secured party’s permission will be necessary. The assignee is then charged with the fiduciary duty of marshaling and liquidating those business assets, and distributing the resulting proceeds to the business’s creditors in the order of their priority. The assignee may be anybody, but we strongly recommend that he or she be completely independent from the assigning business -- called the “assignor” -- and ideally is an insolvency consultant of the assignor’s choosing who deals with ABCs on a regular basis. The assignee has a great deal of discretion in the assignment, tempered by his or her fiduciary duty to the assignor’s creditors.

In an ABC, the business typically – though not always – closes. So the restructure of its debts or the financial reorganization of its financial affairs is not an option. On the other hand, like formal bankruptcy, an ABC is a viable option for the sale of the enterprise. In addition, such a business sale is perfectly acceptable if made to insiders. So long as the assignee exerts his best efforts to attract willing buyers, and the sale is made for fair value, the former owners may participate in the purchase of the assets without a significant risk of successor liability as would be the case with a simple sale or transfer of assets from one enterprise to another where the two have common ownership.

An ABC enjoys a large number of advantages over other avenues to the sale or liquidation of a troubled business.

First, it is much less costly than a Chapter 11 bankruptcy proceeding. The assignee and the assignee’s attorney must be paid, and attorney's fees will be incurred by the assignor in setting up and conducting the assignment, but these costs are dwarfed by the extraordinary costs of taking a business through formal bankruptcy reorganization proceedings. While a Chapter 7 case might be even cheaper than ABC, the lack of strict bankruptcy and statutory provisions in the ABC setting has its own advantages.

Second, an assignee may not pursue "preferences." A bankruptcy trustee has the authority to sue to recover payments made to creditors who received payments from the debtor within 90 days of the filing of the bankruptcy case (one year for creditors who are insiders); an assignee has no such power. On the other hand, an assignee can attack fraudulent transfers made within four years of the ABC.

Third, an assignee is not subject to court oversight. If it is consistent with his or her fiduciary duty to creditors, an assignee will not be interested in investigating the owners of the assignor company in the same manner that a bankruptcy trustee would.

Fourth, an ABC takes much less time than a bankruptcy. The typical ABC will conclude within a month or two. A Chapter 11 bankruptcy can take years; a Chapter 7 case perhaps one year.

There are however, certain things that an ABC cannot accomplish:

Lawsuits filed by creditors of the troubled firm do not cease. That is, there is no automatic stay of legal process as is afforded to debtors in formal bankruptcy proceedings. On the other hand, the fact that an ABC has been undertaken is often enough to dissuade many creditors from suing because they will justifiably believe that the assignee is performing his fiduciary duties for their benefit and distributing the liquidated assets of the debtor equitably. Some of this sanguinity is based on the identity and reputation of the assignee, so it is important to select one with care.

It is important to know that an ABC will not discharge the company from its debts and will not absolve the debtor’s insiders of their guaranty liability. Then again, a bankruptcy will not do the latter either, and a Chapter 7 case does not result in a business discharge. So this drawback is not particularly significant.

In short, an assignment for the benefit of creditors can provide a cost-effective way to liquidate or sell business assets that avoids some of the inconvenience and hassle inherent in formal bankruptcy proceedings while affording maximum flexibility. Your Coman & Anderson, P.C. attorney can explain ABCs and their advantages, disadvantages, and features in greater detail. Please call or write to us at any time.

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