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The 1, 2, 3s of ABCs

An assignment for the benefit of the creditors (ABC) has become an increasingly well-known insolvency process. While an ABC may have certain advantages for a particular company over other insolvency alternatives (e.g., a bankruptcy filing, foreclosure), the facts of each situation should be well understood and assessed by a company’s board of directors and officers before deciding which insolvency option to pursue. The benefits and limitations of an ABC are important to understand before effectuating one.

This article explains the ABC process, including advantages and disadvantages, to assist boards and their advisors in assessing whether it may be the appropriate process for their situation. It also describes the ABC sale process for buyers and the distribution process for creditors.

An ABC is a business liquidation device governed by state law that is available to an insolvent debtor. The ABC procedure has long existed in law and is sometimes addressed in state statutes.1 In an ABC, a company, referred to as the assignor, transfers all of its rights, title, and interest in its assets to an independent fiduciary known as the assignee, who liquidates the assets and distributes the net proceeds to the company’s creditors. The assignee in an ABC serves in a capacity analogous to a bankruptcy trustee in a Chapter 7 or a liquidating trustee in a Chapter 11.

Board and shareholder consent is typically required to effectuate an ABC. The necessary percentage of shareholders who must consent is governed by a company’s corporate governance documents. An assignee generally relies on the corporate counsel of the assignor to clarify the required shareholder percentages as part of the vetting process to confirm proper effectuation of an ABC. If a company is venture-backed, it may be required to seek specific consent from both preferred and common shareholders. It is possible to enter publicly traded companies into an ABC; however, the shareholder proxy process increases the difficulty of effectuating the ABC and results in a much longer pre-ABC planning process.

Once the necessary consents have been secured, an officer of the company executes the general assignment agreement, which initiates the ABC and transfers title of the assets from the assignor to the assignee. The state law under which an ABC occurs should generally be the state of the company’s incorporation, the state in which it is domiciled, or the state where it has a substantial portion of its assets or business.

Key Drivers for ABC Consideration

An ABC is a liquidation vehicle. It is not a process by which a company can reorganize, obtain a discharge, or otherwise emerge from insolvency. Thus, the company’s board of directors, officers, and investors need to accept that their control over the company and its assets will cease following commencement of an ABC. In addition, shareholder equity will have no value unless there is money left to distribute after the costs of the ABC are funded and all creditors have been paid in full.

The following are examples of fact patterns involving companies that could be a good fit for an ABC:

  • A software company with a history of material cash burn, no financing options, and no further support from its venture investors. The continued maintenance and support for key customers is necessary for a purchaser of the company’s intellectual property to offer a meaningful purchase price. The continued support also keeps key engineers and developers associated with the product on board, allowing the purchaser to quickly relaunch the product when the sale closes. A sale process must occur quickly, and the ABC budget needs to be minimal and funded from collateral. Little money is available for administrative or winddown costs.

  • A brick-and-mortar company for which continued servicing of customers helps liquidate inventory in an organized manner while incentivizing customers to pay outstanding accounts receivable within normal terms. Continued operations provide customers with some runway to seek alternatives for continuity in their businesses.

As in most insolvency proceedings, a lack of liquidity and an increasingly upside-down balance sheet eventually force a company to confront the reality of its financial condition. Key factors that drive a company to consider an ABC typically include:

  • Negative cash burn coupled with an inability to raise additional debt financing or equity investment

  • An unwillingness by current lenders to extend loan/forbearance periods and confirmation that no further loan advances will be made

  • Increasing risk for board members and officers that cash will be insufficient to handle key fiduciary items at winddown (i.e., accrued payroll, vacation, taxes, etc.)

  • A more realistic assessment of the lack of value of the company and/or its assets, particularly relative to its debt or ability to continue to function as an operating entity (i.e., an unsuccessful M&A process has occurred)

There are many other potential causes that may drive an ABC, but a lack of liquidity and strategic options is the overarching theme.

Benefits and Limitations

While every situation must be evaluated independently, an ABC offers many strategic benefits to companies, boards, and other stakeholders. For one thing, it allows the company to select an assignee with appropriate industry expertise to conduct the liquidation process, resulting in a greater opportunity to maximize the value of the assets.

Second, the assignee is responsible for the sales process and any risks associated with it. Board members and officers are not parties to the sale of the assets from an ABC. Any such sale or liquidation is conducted by the assignee, an independent fiduciary for the benefit of creditors who takes no direction from the assignor’s board or officers. Therefore, any attempted attack or claim by a creditor of the assignor or other interested stakeholder concerning the process or ultimate terms should lack merit and be dismissed by the court.

Third, ABCs tend to have lower administrative costs than Chapter 11 filings due to less extensive court filings (or no filings, depending on the venue) and the lack of a creditors’ committee.2 Fourth, certain investor groups or board members may prefer an ABC to a federal bankruptcy filing due to the lower visibility of an ABC.

Finally, secured creditors generally support an ABC if they believe that the budget for the process is reasonable (less than alternatives) and that the assignee will return proceeds in a timely manner post-ABC after investigating and validating the creditors’ secured position.

In sum, the increased value of the monetization of the assets coupled with lower costs will hopefully result in a distribution to unsecured creditors at a higher rate in an ABC process as compared to other alternatives, such as a bankruptcy liquidation.


Once a company enters into an ABC, the marketplace understands that value expectations have changed and that a completely motivated seller who is an independent fiduciary for the benefit of creditors is in charge of the sale process.


An ABC does have challenges and limitations that should be understood by the board of directors and officers of a company as they consider the most appropriate insolvency process to undertake. While ABC law varies from state to state, there are a few common limitations.

First, an assignee cannot use the collateral of secured creditors without their consent. Therefore, secured creditors have significant leverage in an ABC in regards to the budgeting process. While the budgeting process may be similar to a Chapter 11 cash collateral process, there may be no judge to hear disputes in an ABC. Therefore, the assignee may be more accommodating to secured creditors in an ABC than a debtor might be in a Chapter 11.

Second, a buyer cannot assume any of the secured debt in an ABC sale without the consent of the secured creditor. Similarly, there is no cramdown opportunity (or forced loan extension) of secured debt in an ABC, as is possible in a confirmed plan of reorganization in Chapter 11.

Third, with limited exceptions, there is no automatic stay in an ABC. While the ABC transfers the assets out of the assignor and therefore post-ABC judgments may have no practical value or impact, litigation can continue against the assignor, and the assignee typically has neither the funding nor the economic motivation to defend the assignor against any litigation. In addition, hostile creditors may decide to shift their focus to other stakeholders (i.e., board members or officers in their capacity as guarantors or fiduciaries) if they believe there will likely be no return for them from the ABC estate.

Fourth, an assignee has no rights to assign executory contracts or leases beyond those granted by the contract terms, as is possible in bankruptcy, and seeking consents of counterparties to assign contracts or leases to a buyer of assets from an ABC estate can be a laborious process. If such contracts are numerous or favorable to the assignor, the assignee may be unable to obtain the required consents. That, in turn, may reduce the purchase price or prevent a sale from closing because an ABC does not provide a mechanism to capture the above-market value of any executory contract or lease for the benefit of creditors, absent consent of the counterparties, as Chapter 11 does.

Finally, assignees in most states cannot provide free-and-clear sale orders. What a buyer of assets in an ABC typically obtains, along with the sale documents, is a bill of sale from the assignee. A bill of sale, particularly from an assignee who is a well-known and well-regarded fiduciary, is a very powerful document from the perspective of creditor protection, successor liability, etc., but it does not have the same force and effect as a free-and-clear sale order from a bankruptcy court.

Sales Process

Most ABCs conclude with a sale of assets. An ABC sales process tends to be faster than even an expedited Chapter 11 sales process conducted under Section 363 of the Bankruptcy Code (i.e., 30-45 days as opposed to 45-60 days), though specific circumstances of any matter can result in a longer process. Typically, the length of the process is directly correlated to available liquidity and runway.

If an assignee accepts assignment of the assets and then conducts its sale process, the time frame is likely somewhat similar to that of a bankruptcy sale process because both are designed to obtain the highest and best price under the circumstances—recognizing that the ABC sale does not require the prior consent of the court.

However, if a sale process was conducted beforehand and is ready to close at the time of the commencement of the ABC, then it is possible—and, in fact, is frequently the case—that the assignee consummates the asset sale to the buyer immediately following commencement of the ABC. A similar sale process in bankruptcy cannot close as quickly and efficiently, which is one of the primary reasons that buyers of assets from insolvent companies frequently require as a condition of the purchase that the sale occur through an ABC rather than through a bankruptcy case.

Many ABCs occur after an unsuccessful M&A process that targeted a much higher valuation, one intended to return money to equity. An assignee runs a similar process, albeit with different terms and conditions. The assets are sold on a “where-is, as-is” basis, with limited or no representations or warranties. The assignee focuses interested parties solely on the asset side of the balance sheet. It is the assignee’s responsibility to seek required consents from known secured lienholders for releases of their liens on the assets in connection with the closing of any sale.

Once a company enters into an ABC, the marketplace understands that value expectations have changed and that a completely motivated seller who is an independent fiduciary for the benefit of creditors is in charge of the sale process. This seller does not have to answer to a board of directors or satisfy the desires of shareholders, which may be unrealistic in an insolvency situation. This typically results in buyers that had previously passed on the buying opportunity to reconsider their interest in the assets.

The assignee bears responsibility for the sales process and choosing the winning bidder (in conjunction with the secured creditor if there are insufficient funds to pay the secured creditor in full). The assignee also must be prepared to defend both the process and its outcome to creditors of the ABC estate.

An assignee’s sale process should include:

  • Clear terms and conditions of the sale and deadlines in a sale memorandum

  • A robust target list of potentially interested buyers, including competitors of the assignor and other companies and investors in the industry

  • A data room providing similar diligence information to all interested parties that have executed a nondisclosure agreement3

  • An asset purchase agreement form that requires that minimal and nonmaterial changes accompany submission of an offer

  • A requirement that an interested buyer supply evidence of financial wherewithal to support any offer

An assignee can operate a business post-ABC to maximize the value of the assets. Similar to a Chapter 11 estate, the ABC must have sufficient liquidity to pay post-ABC expenses to avoid administrative insolvency. An assignee may retain key employees of the assignor as temporary employees of the ABC estate to assist with the sales process or otherwise maintain value through operations.

In certain states, such as California, there is no court supervision in an ABC, which places an increased burden on the assignee to defend against any challenges to the sales process and its outcome. In states with court supervision, such as Minnesota, the assignee seeks court approval of the sale process and a sale order approving the winning bidder’s purchase, free and clear of liens.

Distribution and Administrative Duties

The goal of every ABC process is to maximize distributions to creditors. An assignee handles the administrative tasks associated with:

  • Noticing creditors of the commencement of the ABC and the deadline for filing claims against the ABC estate

  • Distributing funds to creditors

  • Winding down the assignor

Shortly after the commencement of the ABC, the assignee sends a notice of the ABC to all creditors, shareholders, and other interested parties, accompanied by a proof of claim form that allows any person or entity to submit a claim to the assignee. The assignee is responsible for reviewing submitted claims and verifying their validity, and may also object to unsupported claims.

If funds are available for distribution to creditors, the assignee is required to distribute them in accordance with the priority schedule established under applicable state law, which is a similar concept to the creditor priorities in a bankruptcy proceeding. If disputes arise between two creditor classes or within a single creditor class, then the assignee attempts to resolve them in a manner that is cost efficient for the ABC or through a declaratory relief lawsuit in state court. Certain state laws may impact the distribution priority scheme and should be reviewed as part of the distribution process.

The assignee generally handles winddown tasks, such as retention of accountants to prepare final tax returns of the assignor, closing 401(k) plans, storage of books and records, cleanup and return of facilities to landlords, and return of leased equipment. These are tasks that the company’s officers and board are often not well-suited to handle.

  1. CA Civ Pro Code Section 493.010 (California ABC statute); Minn. Stat. Section 577.11 (Minnesota ABC statute); Fla. Stat. Section 727.01 (Florida ABC statute).
  2. However, an assignee may decide that it is prudent and appropriate in certain larger ABCs to support the formation of an ad hoc committee that serves a similar role.
  3. The assignee may have additional requirements for the company’s most sensitive information, such as submission of an offer for a minimum purchase price.
Andrew De Camara

Andrew De Camara

Sherwood Partners Inc.

Andrew De Camara is a senior managing director of Sherwood Partners Inc. and is based in the firm’s Los Angeles office. He joined Sherwood in 2001 and has successfully restructured companies through out-of-court restructurings and Chapter 11 reorganizations. De Camara has served as a receiver in both state and federal courts and has helped maximize the value of assets through assignments for the benefit of creditors (ABCs) under various state laws.

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