Legal leaders at companies considering bankruptcy might look at pursuing an assignment for the benefit of creditors (ABC) instead, Evelyn Meltzer, an insolvency specialist with Troutman Pepper, told Legal Dive.
If your company has run through its options for reorganizing financially and is ready to liquidate, it can be significantly faster and cheaper to do it through an ABC than a traditional bankruptcy. What’s more, the directors and officers can exit without having to shoulder the court responsibilities of a bankruptcy filing.
“Directors and officers are basically able to walk away from the financially distressed entity, knowing there’s someone there to ensure the company is properly wound down,” Meltzer said.
Given the rocky economy businesses are facing this year, ABCs could see an uptick as directors and officers look for the best way to wind down their company if it's especially hard hit.
ABCs are state-regulated contractual processes in which the distressed company chooses a third-party fiduciary to take control of its assets and transfer them to a buyer in a commercially reasonable sale.
Each state regulates the process differently, but generally, if everything goes smoothly, a buyer can be found and the company wound down in as little as a few weeks as opposed to the months that a traditional bankruptcy can take. And this is without the parties having to go through court filings and hearings.
“Time is a big factor in why you save money,” said Meltzer. “But also, in a bankruptcy, you can’t do anything without filing a motion with the court to get approval. The [fiduciary] can simply sell the assets, and you don’t have all the same parties; there’s no official committee of creditors, for example, or no U.S. trustee, which also keeps down the cost.”
Meltzer recommends the company work with outside insolvency counsel to identify a fiduciary, known as an assignee, in cooperation with their secured lender. The lender must be on board with the assignee and how the pricing is set, among other things, so it will release its lien, making the assets most attractive to buyers.
“No one is going to buy assets subject to someone else’s lien,” she said.
After entering into the contract, the assignee prices and markets the assets and sets up a data room so potential buyers can look at the numbers.
Companies could do all this themselves and hold a distressed asset sale but that would expose them to liability risk, including for fraudulent transfer claims, if the sale amount didn’t appear to be the highest and best offer for the assets.
“The fiduciary has the responsibility to maximize value,” she said.
In Delaware, where Meltzer’s practice is based, the assignee is required to solicit asset pricing estimates from two appraisers and post a bond for the amount of the highest appraisal. That reassures parties about the pricing and demonstrates that the assignee stands behind the deal.
Not every state requires the assignee to post bond, but there are other checks to make sure you’re working with a third-party that knows its way around the process and will get all parties the best deal.
“You’re looking for someone who has experience marketing assets, conducting a commercially reasonable sale for the assets and is familiar with the ABC process,” she said.
For all its speed and other benefits, there are pitfalls if the sale isn’t handled appropriately, starting with the lien the secured lender has on the assets, which is why you want to be sure the lender is on board from the start of the process.
Unlike in a bankruptcy, the sale isn’t free and clear of liens, so any creditor with a lien can go after the buyer after the sale, but if the deal is done right, there’s little chance of that happening.
Another pitfall is litigation. Because lawsuits aren’t automatically stayed as in a bankruptcy, litigation against the company for non-payment of bills remains a threat. But if the company reaches out to insolvency counsel early to identify an assignee and get the process rolling, you can reduce the likelihood of that.
“People often wait too long to call,” she said. “They’re really at the 11th hour, so there’s not a lot of time left for planning.”
What’s more, creditors can file a motion for a court to decide if the company should declare bankruptcy, but there’s little incentive for a creditor to do that.
“I’ve never had someone seek to put an ABC into an involuntary bankruptcy,” Meltzer said. “There would have to be some type of allegations of fraud or wrongdoing or concern about the assignee that would [induce] the court to say, ‘We’re going to convert this to a bankruptcy.’”
Fee structures are different in each state, but it’s not uncommon for assignees to earn a fee for managing the ABC and a percentage of the sale amount. It’s a business for them and it’s how they make their money.
“Every case is different depending on how complicated it is, what’s being sold, what state you’re in,” Meltzer said.
What’s more, directors and officers can avoid the dark mark that is often associated with bankruptcy.
“Even in places like Delaware, where there’s court supervision, and in states where there's no court supervision, ABCs are under the radar,” she said. “So, you don’t have that stigma of having filed a bankruptcy.”