Shared by Gregg Yorkison of Clare York Group.
An Assignment for Benefit of Creditors (ABCs) transaction is an insolvency mechanism. It is often recommended for companies when a bankruptcy doesn’t make sense. Gregg Yorkison of Clare York Group Los Angeles walks us through how the process works. According to him, the company (called the assignor, in this case) with financial problems has an opportunity to transfer its title and custody. This includes control of all its assets, to a third party in-trust referred to as an assignee. Within the Assignment for Benefit of Creditors, the assignee then takes over the process of giving the proceeds of the sale to the assignor’s creditors. They make sure to follow laws in place regarding the priority of payments to make things go smoothly. According to Clare York Group’s Gregg Yorkison, for the right companies, it can be the quickest and least painful route to dissolve a company while avoiding bankruptcy.
“In many instances, an ABC can be the most advantageous and graceful exit strategy. This is especially true where the goals are (1) to transfer the assets of the troubled business to an acquiring entity free of the unsecured debt incurred by the transferor and (2) to wind down the company in a manner designed to minimize negative publicity and potential liability for directors and management.”
ABCs – a less expensive way forward
In addition to avoiding outright bankruptcy, an Assignment for Benefit of Creditors can be completed in California without the need for public court filing, cutting legal and court costs significantly. ABCs are a highly recognized common law alternative to avoid lengthy, damaging, and expensive bankruptcy. Gregg Yorkison of Clare York Group Los Angeles notes that it works best in cases where large assets can be liquidated to pay creditors.
The only major issue is that, for middle-market companies, finding an assignee can be difficult to manage. Assignees generally take a percentage of the liquidated assets, and many are unwilling to work for companies with fewer assets. However, there are still some exceptions to be found. CYG is a boutique advisory firm catering to middle-market companies. Headquartered in Los Angeles, California, the firm was set up to provide high-quality services without the high pricing that most firms demand.
Image credit: CQF-Avocat
A tangible path to follow
Once the initial paperwork has been done, and an assignee is named, the Assignment for Benefit of Creditors process is fairly straightforward, following the quickest path to resolution.
According to California law, to begin the process, the assignor must give the assignee certain information:
“The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equity holders, and other parties in interest, signed under penalty of perjury, which shall include the names, addresses, cities, states, and ZIP Codes for each person together with the amount of that person’s anticipated claim in the assignment proceedings.”
– California Code of Civil Procedure
After that information has been given to the assignee, things will progress rapidly in the following order:
- The assignor signs over assets to the assignee
- The assignee monetizes those assets (numerator)
- And creditors will go ahead and file proofs of claim (denominator)
- The assignee distributes pro rate funds to those creditors (numerator divided by denominator)
- The corporation is dissolved
Image credit: Matthias Zomer
