What is Assignment for the Benefit of Creditors?
A New Jersey assignment for the benefit of creditors (an “ABC” or “assignment”) is a liquidation under statute.
Unlike a Chapter 11 bankruptcy, an assignment for the benefit of creditors is not a reorganization process, and the business does not emerge from insolvency. Rather, the subject business is liquidated through this state court process.
How Does An Assignment For The Benefit Of Creditors Work in NJ?
Assignments for the benefit of creditors have become increasingly well known. Many insolvency professionals prefer liquidation of businesses through assignment for the benefit of creditors in lieu of liquidation through a Chapter 7 bankruptcy. While individuals (people) can technically use assignment for the benefit of creditors for an individual liquidation, the vast majority of assignments for the benefit of creditors are commenced on behalf of corporate debtors.
An assignment for the benefit of creditors is commenced by the execution of a Deed of Assignment by the liquidating company, referred to as the “assignor.” This deed is executed on behalf of the assignor with the express consent and authority to take that action, whether that’s a sole member of a limited liability company, several principals of a corporate, a board of directors and/or shareholders.
In either instance, the company’s governing documents must be reviewed, and corporate counsel, if any, must be consulted to ensure that a decision to make an assignment is done with proper corporate authority. In the instance of publicly traded companies, an assignment for the benefit of creditors can be utilized, but the potentially lengthy process of obtaining corporate approval from shareholders must be taken into consideration in advance.
Once corporate authority has been obtained, a Deed of Assignment is executed by a corporate officer. This Deed effectively transfers all of the rights, title and interests of the assignee to an independent, third-party fiduciary referred to as the “assignee.”
The assignee in an assignment for the benefit of creditors is analogous to a trustee in a Chapter 7 bankruptcy. If the assignee appointed by the assignor accepts the Deed of Assignment, the assignee has the duty to collect and account for all of the assignor’s assets, sell those assets, and to distribute the net proceeds for the benefit of the business’ creditors.
The assignee must ensure that the assignor has attached to the Deed of Assignment a list of assets and a list of creditors. The assignee then records the Deed of Assignment in the way real estate deeds are recorded. The assignee must also obtain a bond.
Many assignments for the benefit of creditors involve the sale of the debtor company’s assets by the assignee. One significant benefit of an assignment for the benefit of creditors is that asset sales are generally faster than in Chapter 7 bankruptcy or Chapter 11 bankruptcy.
If the assignee has collected funds for distribution to creditors, the assignee must distribute those funds to creditors which have filed timely claims in the assignment proceeding. Creditors receive distributions from the assignee pursuant to a priority schedule under applicable state law, including but not limited to a statute establishing the priority of one creditor over another.
About Middlebrooks Shapiro
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