What is an Assignment for the Benefit of Creditors (ABC) and is it an alternative to bankruptcy?
Takeaway: An Assignment for the Benefit of Creditors (ABC) is a state-law alternative to a Chapter 7 bankruptcy; it is a faster and more private process for liquidating a company's assets and distributing the proceeds to its creditors.
When your startup becomes insolvent and has no viable path forward, you must begin the process of winding down the business and liquidating its assets to pay back your creditors. The most well-known legal process for this is a federal Chapter 7 bankruptcy. However, for many startups, there is a faster, more flexible, and more private alternative available under state law: an Assignment for the Benefit of Creditors (ABC).
An ABC is a formal legal process where a struggling company voluntarily transfers all of its assets to a third-party fiduciary, known as an "assignee." The assignee then acts like a bankruptcy trustee, with the responsibility of selling off the company's assets and distributing the proceeds to the company's creditors in accordance with their legal priority.
How an ABC Differs from a Chapter 7 Bankruptcy
While the goal is the same—to liquidate the company's assets to pay its debts—an ABC has several key differences from a traditional Chapter 7 bankruptcy.
State Law vs. Federal Law: An ABC is governed by state law and is a non-judicial process. A Chapter 7 is a formal proceeding in a federal bankruptcy court, which is a public forum.
Speed and Cost: An ABC is generally much faster and less expensive than a bankruptcy. It can often be completed in a matter of months, whereas a bankruptcy can drag on for a year or more.
Flexibility and Control: In an ABC, the company has some say in choosing the assignee who will manage the liquidation. In a bankruptcy, a trustee is appointed by the court.
Privacy: Because it is not a public court proceeding, an ABC can be a much more private and less reputationally damaging process for the founders and directors involved.
When is an ABC a Good Option?
An ABC is often a good strategic choice when:
The company has a cooperative and relatively small group of creditors.
The primary goal is to conduct an orderly sale of the company's assets (particularly its intellectual property) to a known buyer. An ABC can be a very efficient way to conduct a "fire sale" of a company's technology assets in a way that is clean and free of most liens.
The company wants to avoid the stigma and public scrutiny of a formal bankruptcy filing.
An ABC is a powerful tool for managing the difficult end-of-life process for a startup. It is a sophisticated legal maneuver that requires the guidance of experienced counsel who specialize in corporate restructuring and insolvency. For the right company in the right situation, it can be a far more efficient and dignified way to wind down the business than a protracted public bankruptcy.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.