An important silver lining behind the
looming and evidently expanding cloud
of economic turmoil and uncertainty in
the marketplace may be the increase in
opportunities for acquiring distressed businesses and assets at highly attractive valuations. Although purchasing assets through a
bankruptcy may be a viable option, the bankruptcy process is expensive, time-consuming, complicated and unpredictable, which
can potentially increase the risk of a busted
or failed transaction. As an alternative to
bankruptcy, parties may be able to use an
Assignment for the Benefit of Creditors
(ABC) proceeding to increase the likelihood
of completing a successful transaction.
Smart Business learned more from Albert
P. Asatoorian and Jonathan R. Hodes, partners at Stubbs Alderton & Markiles, LLP,
about how buyers and sellers can use ABCs
to their benefit during tough times.
What is an ABC?
An ABC is a type of insolvency proceeding
available under state law. California, Delaware, Florida and many other states have
statutes governing ABC proceedings. In
other states, ABCs are regulated by common
law. The seller in an ABC will make an assignment for the benefit of its creditors to a third-party assignee (or trustee), and the buyer will
purchase the assigned assets from the
assignee. The assignee in an ABC acts as a
fiduciary for the creditors. The assignee takes
custody and control of the assigned assets
and administers the liquidation of assets and
distribution of proceeds to creditors.
The law and procedures governing ABCs
vary from state to state. For example, in
California, the seller and the assignee are
required to enter into a written agreement,
but a court filing is not required. Other states
require court filings to commence the proceeding and complete a sale transaction.
The seller is generally entitled to select the
assignee, although in most cases the assignee
will require consent of secured creditors usually because they will finance the cost of the
ABC. The assignee typically is a troubled
company professional with significant experience in handling liquidations and ABC
sales. Creditors will be required to follow
specified claims procedures to be eligible for
distributions. Unlike a bankruptcy filing, the
commencement of an ABC proceeding usually will not automatically bar creditors from
pursuing claims, although creditors will be
unable to attach assets while the assignee is
in the process of liquidating the assets.
Additionally, the commencement of an ABC
typically requires shareholder approval because the assignment involves the transfer of
all or ‘substantially all’ of the debtor’s assets.
What are the primary advantages of an ABC?
In general, an ABC is a faster and less
expensive alternative to a bankruptcy.
Bankruptcy is a time-consuming process and
a sale can take between 45 to 60 days or more
to complete. By comparison, an ABC sale is
usually preplanned and may be completed
within a matter of days. This could significantly reduce the risk of employee departures, and enable the parties to preserve the
‘going concern’ value of the enterprise. The
buyer, debtor and secured parties usually will
prenegotiate the terms of the sale and clear
them with the assignee in advance to ensure
the assignee is comfortable that the assets
are marketed fairly and the transaction
would withstand subsequent scrutiny. The
assignment can take place virtually at the
same time as the subsequent sale.
Bankruptcy actions can be expensive, and
the buyer may be required to finance the cost
of the proceeding if the seller does not have
the means to do so, which may be difficult to
obtain in today’s environment. The costs of
an ABC transaction are more predictable and
manageable. Assignee fees will be negotiated
and specified at the outset. These fees may
be a fixed amount or a percentage of the
gross proceeds derived from the ABC sale.
The services of attorneys, accountants, brokers and other professionals also will be
required in most cases.
The outcome in an ABC is significantly
more predictable than in a bankruptcy due to
the parties’ ability to control the process
upfront by selecting the assignee and prenegotiating the terms of the sale before initiating the ABC. Although the buyer can negotiate breakup fees and overbid protection in a
bankruptcy, the risk of higher offers can be
minimized in an ABC and practically eliminated after the sale contract with the buyer is
signed.
How can buyers and sellers best take advantage of ABCs and avoid pitfalls?
The decision to move forward with an ABC
or other type of transaction or process can
have significant economic implications on
both buyers and sellers, and careful planning
and preparation will be the key to ensuring a
successful outcome. Parties should engage
competent legal counsel and the services of a
professional liquidation firm with experience
in handling ABC transactions to properly
assess the viability of alternative approaches.
The assignee should be knowledgeable
with the debtor’s industry and the requirements for liquidating the debtor’s assets.
Legal counsel can help with due diligence
and prenegotiating the sale terms, and help to
explain important legal implications, such as
the effect of an ABC on debt covenants and
other contractual obligations, as well as
issues relating to successor liability, preferences and priorities, fiduciary obligations
and requirements under the federal Worker
Adjustment and Retraining Notification Act
(WARN Act) and similar state statutes.
ALBERT P. ASATOORIAN is a partner with Stubbs Alderton & Markiles, LLP. Reach him at (818) 444-4506 or [email protected].
