ABCs have a far longer history, dating back to the late 1800s, and were initially intended to apply to debtors facing insolvency. Back then, there were two common choices for the insolvent debtor: debtor prison or an ABC. If they chose the latter, the owners would turn over their rights, title, and interest in the company’s assignable assets to an independent assignee, who would liquidate the assets for the benefit of the creditors.

While the use of ABCs faded over the ensuing years, the proceeding regained popularity in the early 2000s during the dot-com bust, given the need to rapidly and strategically sell assets, particularly intellectual property. The assignee of an ABC acts as a fiduciary to creditors by monetizing assets, handling creditor communications, and distributing the net proceeds to creditors in a manner similar to that in a federal bankruptcy proceeding. A majority of states currently have ABC statutes; however, their use is more widespread in certain states than others.

ABCs are often compared to Chapter 7 liquidations, but they have some beneficial differences. A knowledgeable assignee generates value and maximizes recoveries for creditors by executing a robust and expedited marketing and sale of the debtor’s assets—the quasi-investment banking function of its process. Assignees of ABCs can often facilitate sale transactions without many of the time-consuming delays, complications, or added costs associated with the federal bankruptcy process. Historically, this has been beneficial in preserving asset value.

Furthermore, an ABC often affords buyers many of the protections of a formal insolvency proceeding. Today, ABCs have gained favor with buyers who are wary of the risks of acquiring assets (i) directly from a distressed entity, which may offer less protection against creditors, liabilities, or possible successor liability claims, and/or (ii) through a bankruptcy process, given the judicial steps and public disclosures required.

As mentioned, a significant drawback of Chapter 7 is that it requires the debtor and creditors to cede control to a court-appointed trustee. These trustees are typically lawyers or accountants who are assigned cases in large numbers. Their offices are usually lean and often lack staffs of professionals with the industry expertise to operate businesses or the bandwidth to acquire industry-specific knowledge or expertise if the need arises. The result can sometimes resemble a “fire sale” of the assets, which is usually not an ideal outcome for creditors.

In contrast, specifically in an operating ABC, if the secured creditor consents to the use of its cash collateral, some level of operations may be continued, as opposed to an immediate shutdown, resulting in greater proceeds for creditors. While a Chapter 7 filing can destroy going concern value and often veers toward liquidation-level recoveries, a qualified assignee in an ABC will try to retain as much strategic or going concern value as possible. When a business is headed toward the zone of insolvency, maximizing value and minimizing risk are key.

ABC (liquidations)

Speed and Simplicity

  • Effective immediately upon execution of a general assignment agreement
  • In many states, process overall is typically less judicial given state law governance, so assignee can act and make decisions faster
  • In many states, court approvals are not necessary for asset sales nor are overbid time periods required, so transactions can be facilitated more efficiently

Control and Risk Mitigation

  • Assignee is selected by the debtor, not assigned by a court
  • Debtor relinquishes risk by releasing control and assigning assets to the assignee
  • Board members and officers are not party to the ABC or post-assignment assets
  • Assignee notices the ABC to all creditors shortly following the assignment
  • Assignee distributes proceeds to creditors in similar priority to that of a bankruptcy filing
  • Lower visibility minimizes negative publicity

Cost and Value

  • Typically lower administrative costs, given minimal court filings and oversight
  • Higher chance of retaining remaining strategic value of assets
  • Assignee has ability to close asset sales more quickly to stem deterioration of value
  • Assignee can structure an operating ABC or co-opt some of debtor’s team in the planning or sale processes (consent required from secured creditor to use cash collateral)

Disadvantages and Other Considerations

  • Personal liabilities and guarantees remain with the guarantors
  • Executory contracts cannot be assigned or transferred to the assignee without consent of the counterparty
  • No automatic stay; however, ABC mitigates effects thereof, given creditor claims are typically against an asset-less debtor entity
  • Cannot sell assets “free and clear;” however, ABC often provides sufficient protection for buyers
  • Requires board and shareholder approval; hence, may be impractical for public companies