As lawyers representing companies experiencing financial distress, our first mission is diagnosis. Like a physician, we have to first understand the nature of the disease before we can determine the best medicine to administer. There are instances where Chapter 11 is not the appropriate tool.
The company that cannot be restructured under Chapter 11 may also not be a good candidate for Chapter 7. This is because entities in Chapter 7 do not obtain a discharge under bankruptcy law, nor does a corporate Chapter 7 absolve the personal guarantors of liability. Where there are preferences and transfers, we remind the client that a Chapter 7 trustee will vigorously chase those dollars and we point out that they do not get to continue to operate their business in a Chapter 7 scenario.
This often leads us, in many cases, to the Assignment for the Benefit of Creditors (ABC). The ABC is a creature of Florida Statutes and can be a useful alternative when Chapter 11 or 7 are not attractive options.
How does it work?
The debtor appoints an individual who is not a creditor or adverse party to act as assignee, similar in nature to a trustee. A petition known as an assignment is filed with the clerk of court, with content defined in the statute (Florida Statute 727). Attached to it is a list of known creditors and a list of the liquidation value of the debtor’s assets.
The assignee must post a bond for the greater of $25,000 or double the net liquidation value of assets. Within 20 days of filing, the assignee must mail notice to all creditors and publish notice for four consecutive weeks. The assignee can continue to operate the debtor’s business for 45 days; longer upon court approval. The assignee must examine the debtor regarding its financial affairs within 30 days.
In many respects, the ABC then operates very much like a liquidating Chapter 11 bankruptcy. Many provisions of the ABC echo bankruptcy. There is a “stay” in effect: “There shall be no levy, execution, attachment, or the like in respect of any judgment against assets of the estate in the possession, custody or control of the assignee.” (§727.105). The assignee has many of the powers of the bankruptcy trustee, including the power to collect and liquidate assets, to abandon assets that are burdensome or of inconsequential value, to conduct discovery, to reject leases, to prosecute lawsuits, or to pursue other claims of the estate. The term “estate” is defined as all of the assets of the assignor. The assignee must file an interim report of receipts and disbursements within six months of the filing date.
In certain instances, the assignee must give 21 days notice to interested parties, such as a proposed sale of assets outside of the ordinary course of business, the settling or compromising of any controversy and the payment of fees and expenses to any professional. Unlike a bankruptcy proceeding, however, the assignee does not need court permission to retain professionals.
Creditors who wish to recover anything from the debtor have 120 days to file a claim. As in a bankruptcy proceeding, these are referred to as a “proof of claim.” A secured creditor has 60 days following the sale or disposition of its collateral by the estate to file a claim for a deficiency. There is very little offered in the way of specifics as to how the “proof of claim” should look other than that it must contain the name and address of the creditor and the nature and amount of the claim. The assignee or any party in interest may file an objection to any other party’s claim and the court will adjudicate the extent and validity of the claim: “all claims properly filed with the assignee and not disallowed by the court constitute all claims entitled distribution from the estate.” (§727.113)
Once all claims are resolved, the assignee files a proposed final report and there after all claims are paid in accordance with a priority scheme that again is a structure very similar to the scheme for claims distributions in a bankruptcy setting. Basically, priority and administrative claims are paid aft er secured creditors receive the proceeds from the disposition of their collateral and whatever is left goes to “unsecured claims.” There is no guidance on whether all unsecured creditors must receive a pro rata distribution or can be classified in distinct categories, affording the ABC flexibility that is not available in the bankruptcy setting.
There is not a preponderance of case law in the ABC world, so it oft en opens up new and creative opportunities for ending or perpetuating businesses and might be less cumbersome and expensive than a bankruptcy.