Businesses face financial hardships and insolvency in any economy. As unsettling as the thought may be, the indisputable fact is that most businesses fail. Some struggling businesses may turn to bankruptcy courts for the protection. For a variety of reasons, the better practice may be for a company to pursue formal insolvency proceedings - as opposed to a true out of court workout - other than bankruptcy. Florida state law gives businesses an option called an Assignment for the Benefit of Creditors ("ABC").
Why Use Assignment for the Benefit of Creditors?
Sometimes filing for a Chapter 11 bankruptcy is difficult because the business does not have sufficient cash flow to operate, or the ability to obtain financing while operating in Chapter 11. Alternatively, the company simply may not be able to continue as a going concern, or if it can, only for a short period of time, and cannot obtain a buyer for its assets, in which case a Chapter 11 case is usually not appropriate.
Directors of an insolvent company owe their fiduciary duty to creditors (unlike Directors of a solvent company, who owe their fiduciary duty to Shareholders). Filing for Chapter 7 bankruptcy may not create the best return possible from the liquidation of assets, and therefore may not be in the best interest of creditors.
ABCs are generally used in two scenarios. In the first, assets are liquidated, accounts receivable collected, and a distribution made to creditors. In the second scenario, people opt to use an ABC over a bankruptcy case is when there is a potential buyer for the business as a going concern, but there is not enough cash available to continue to justify the time and expense attendant to a Chapter 11 case. Some believe that purchasing business assets through the ABC process, from an "Assignee" (discussed below), as opposed to purchasing directly from the business, adds a level of protection from creditors who may claim that the transfer was fraudulent after the sale.
The Assignment for the Benefit of Creditors Process in Florida
Chapter 727 of the Florida Statutes describes and governs the ABC process. In an ABC, the debtor chooses an Assignee who liquidates the debtor's assets for the purpose of satisfying claims made by the debtor's, or Assignor's, creditors. The Assignee is an independent person who owes a fiduciary duty to the company's creditors, and is required to post a bond. The debtor and the assignee execute a statutory written assignment, wherein the debtor lists all known creditors and their claims. A proceeding in state court is then commenced.
Creditors have an opportunity to file claims or risk having the court bar them forever if they fail to act. The court has the power to determine the priority of creditors based on the scheme set forth in the statute.
Differences Between Assignment for the Benefit of Creditors and Bankruptcy
There are notable differences between the ABC process and bankruptcy. Primarily, a debtor is allowed to choose the assignee in an ABC, unlike in a Chapter 7 case where a panel trustee is appointed, or a Chapter 11 case where the debtor usually is in control of its operations on a day to day basis.
An ABC lacks the full protections of the bankruptcy process. In an ABC there is no automatic stay preventing foreclosure proceedings against consensual liens like there is in a bankruptcy case.
Finally, one of the biggest benefits for debtors utilizing an ABC is that it is often less time consuming and less expensive than filing a petition for relief in a bankruptcy case. Thus, the ABC may be in the best interest of creditors. This may provide comfort to Directors that potential breach of fiduciary claims against them will fail.
Consult with an Attorney
Every business' situation is unique, and the best way to know if an Assignment for the Benefit of Creditors is the right choice for a particular company is to speak with an experienced bankruptcy attorney.
