Most people understand the concept of “bankruptcy,” but aren’t necessarily familiar with bankruptcy alternatives – especially with the concept of an assignment for the benefit of creditors (“ABC”). An ABC is a well-established New Jersey state law alternative to federal bankruptcy. This article will give you an understanding of why ABCs, as far as bankruptcy alternatives go, can be a great option and some of the ways that ABCs are used to preserve valuable business assets.
Bankruptcy Alternatives – What is an ABC?
An ABC is one of the more cost-effective bankruptcy alternatives. ABCs are New Jersey state court proceedings used primarily to liquidate businesses and to sell their assets with the approval of the Chancery Division of the Superior Court of New Jersey (the “Court”). In an assignment, a distressed company (the “Assignor”) transfers its assets to a trusted, third-party fiduciary (the “Assignee”). The Assignee then liquidates the business assets through the court-supervised proceeding.
In considering bankruptcy alternatives, ABCs are used for a variety of different reasons. Some Assignors just want to be “done” with their company. They’re overwhelmed with financial and legal issues, and want a streamlined process to wind down the business. Other Assignors have valuable business assets, but the business itself is saddled with debt or litigation. These Assignors may seek to have the business assets sold for maximum value through the court-supervised ABC. This may be accomplished by an auctioneer hired by the Assignee. Other Assignors may be running valuable “turnkey” businesses and wish to sell the entire running operation through an ABC rather than just sell off individual assets. In this situation, the Assignee may obtain court approval for the Assignor to continue to run and operate the Assignor business through sale.
Who is the Assignor?
Just about any person, partnership or company can use an ABC. However, ABCs are primarily used by companies because, unlike in bankruptcy, no discharge is granted in an ABC. Instead, the Assignor is a liquidating company which will no longer exist after the ABC. So generally Assignors are companies that want to wind down and sell their assets off to buyers, or to sell their entire operating business to buyers. Note that an Assignor can file an ABC even if it believes that it has “no assets” to liquidation, as there is no requirement that an Assignor have any specific amount of assets to liquidate through an ABC.
Who is the Assignee?
The Assignee is the person chosen by the Assignor to liquidate the business. The Assignee takes on a fiduciary duty to the Assignor company and to its creditors. The Assignee must obtain court authority to take on this role. Once the role of Assignee is assumed, the Assignee must act in the best interests of the Assignor’s creditors, and has many statutory obligations under New Jersey law. These obligations include to collect all of the Assignor’s assets, which include preferential payments made by the Assignor in advance of the ABC. Once all assets are collected, the Assignee has the obligation to sell them for maximum value, and to disburse the net proceeds to creditors.
Bankruptcy vs. Bankruptcy Alternatives – Why Not Just File Bankruptcy?
Bankruptcy is not the best option for everyone and bankruptcy alternatives should be considered in the quest for a debt-free life. First and foremost, unlike bankruptcy, the Assignor can actually choose their Assignee, while in bankruptcy a trustee is assigned to a case. Also, bankruptcy is federal law, and may come with more stigma for owners of distressed businesses, while ABC is a lesser-known and potentially less stigmatizing liquidation under New Jersey state law. Bankruptcy is very highly regulated, overseen by the U.S. Department of Justice, and has fairly high filing fees to be paid to the Bankruptcy Court. Meanwhile, bankruptcy alternatives, like ABCs are handled in the relatively “sleepy” Chancery Division of the New Jersey Superior Court, and generally there are no filing fees due by the Assignor to commence the ABC as the Assignee generally handles all administrative matters. Bankruptcy Courts also maintain dockets that are much more easily accessible to the general public, while dockets in ABCs are less accessible and have lower visibility, which may be valuable to Assignors who would like a little less attention drawn to the winding down of their business.
What Assets are Assigned in an ABC?
Assignors assign to the Assignee all of their right, title, and interest in their real, personal and intangible assets. In short, the Assignor transfers all asses to the Assignee. These assets include the right for the Assignee to sue other businesses as if it were the Assignee. Once the assets are assigned to the Assignee, the Assignor has no further right to operate the business or to take any action with the assets. Later, once those assets are sold, the Assignor becomes a shell of a company that has no ability to operate and, for all intents and purposes, does not exist.
What are Preference and Avoidance Claims in an ABC?
Assignees are given powers under New Jersey law. These powers include the right and obligation to “claw back” payments made by the Assignor in advance of the ABC that preferred one creditor over another. An Assignee’s action to “claw back” these payments is called a preference action. These powers also include the right and obligation of the Assignee to “unwind” certain transfers of assets from the Assignor to others. An Assignee’s action to “unwind” transfers is called an avoidance action.
What are the Rights of Creditors in an ABC?
Just as in bankruptcy, creditors in ABCs have different rights. Secured creditors have the right to obtain payment from certain collateral, such as a mortgage on a building gets first payment from the value of the building. Priority creditors have the right to get paid before lesser general unsecured creditors, such as the right of a taxing authority to receive money from an Assignor’s assets before a credit card receives anything at all. Creditors like the credit card receive what’s left over, but are still ahead of the Assignor’s owners, its equity holders, which only receive a distribution if there is a surplus of funds after everyone else is paid. Creditors should, in all instances, file a claim in the ABC to alert the Assignee to their rights and interest in the value of the Assignor’s estate.
What is the ABC Procedure?
- As one of the more prominent bankruptcy alternatives, an ABC in New Jersey starts with the Assignor signing a deed of assignment for the benefit of creditors naming the Assignee as the assignee (the “Deed”). This Deed explicitly states that the Assignor assigns all of its rights, title and interest in the Assignor to the Assignee. The Deed must include a list of the Assignor’s asses and its debts.
- The Deed is then recorded in the county by the Assignee’s office, and is transmitted internally by the Court to commence the ABC with the Chancery Division. A case number is assigned to the ABC.
- The Assignee makes a number of initial motions to the Chancery Division, including a motion for authorization to act as the Assignee. The Assignee also moves for authorization to retain and pay other professionals, including auctioneers and accountants.
- If the Assignor intends to operate the business through the ABC, on an interim basis, in order to preserve the value of the business pending sale, the Assignee will also obtain authorization from the Chancery Division.
- The Assignee gives notice of the ABC to all creditors, who are given a deadline to file a standard proof of claim with the Assignee’s office.
- The Assignee and their professionals conduct due diligence on all matters affecting the ABC, including locating assets and pursuing claims. The Assignee also moves to sell assets and to hold the proceeds in trust pending further court approval. The Assignee will normally seek the assistance and cooperation of the Assignor throughout this process.
- Once the Assignee has undertaken all of their duties, motions will be filed with the Chancery Division to close out the ABC.
This process, from start to finish, generally takes a number of months. If there is a lot of work to do, it can sometimes take years. However, once the ABC is commenced, the Assignor has minimum involvement in the ABC, and mainly has a duty to provide cooperation to the Assignee. The benefit of the process is that the Assignor is no longer in charge of the business, and has handed off that duty to the Assignee. In exchange, the Assignee has the right to a court-approved commission based upon the liquidation of assets of the Assignor’s ABC estate.
Bankruptcy Alternatives with Middlebrooks Shapiro
Liquidating bankruptcies can cost a company many thousands of dollars in legal fees and court costs. ABCs, on the other hand, are normally considerably less expensive to the Assignor, as the Assignee, who is chosen by the Assignor, is generally paid through liquidation of assets. This makes ABCs the most cost effective method of liquidation, as far as bankruptcy alternatives go. Moreover, an ABC is simply not a “bankruptcy,” which may be important to the principals of a company in future contexts. However, as with any legal matter, the pros and cons of ABC versus bankruptcy, or other bankruptcy alternatives, must be carefully considered on a case by case basis with competent counsel.
Middlebrooks Shapiro is prepared to provide the competent counsel you deserve. Our dedicated attorneys have over 30 years of experience in bankruptcy, bankruptcy alternatives, like ABCs. If you have found yourself dealing with overwhelming financial hardships due to the pandemic or other extenuating circumstances, schedule a consultation and we can help decide which is the best avenue for you.