If you do not want to file a bankruptcy petition and cannot get creditors to agree to a workout, you might want to look to the state courts for some relief. In most states (including New York and New Jersey), companies look to a set of statutes governing the assignment for the benefit of creditors or an “ABC”. However, this option is only used in the event the company has a lot of creditors and the company managers have decided to wind up the business.
In an ABC, the company’s board of directors makes the decision to liquidate through the ABC process and authorizes an officer to commence that proceeding. That officer prepares and signs a written assignment of all of the company’s assets and debts to a third party. The assignment contents must comply with very specific state requirements.
Once the assignment is complete, the assignee will look to see if the company can be sold as a going concern. The assignee will also send each creditor a claim form to assert their claim against the debtor. If the assignee cannot sell the company as a going concern, the assignee will put each individual asset up for sale. The assignee will use his/her contacts to find buyers for assets and use publication notices specific to the industry to find buyers and generate cash to pay creditors.
This process almost always yields more for creditors than a chapter 7 bankruptcy because the administrative expenses of a chapter 7 bankruptcy are much higher than they are in state court, and the sale process is usually less cumbersome than it would be under a bankruptcy filing. Once all of the assets are sold and there is nothing left to liquidate, the assignee will pay creditors in the order of their priority, which is set under the state’s statute. The entire process usually takes about 6 months.
It should be noted that to the extent any of the company’s managers have personally guaranteed debt, unless the debt is paid in full through an ABC, the guarantor will not be relieved of his/her guaranty obligations.