When your business comes to an end, how you handle its closure is important to your personal assets, as well as its employees, creditors and others. Most states provide a quick and inexpensive method to close your business, terminate many personal liabilities and pay creditors through an Assignment for the Benefit of Creditors (“ABC”). While statutes exist in some states, an ABC in most states derives from the common law existing before the United States Constitution.
An ABC is an appropriate method to terminate your business by liquidating its assets, collecting receivables, and paying its debts without creating additional liability. Through an ABC, the owners turn over all of the business assets and liabilities to an assignee, who is charged to act in the best interest of all of the creditors by liquidating assets, collecting receivables, and paying creditors in a recognized order of preference. Generally, secured creditors will be paid first out of the proceeds of the assets subject to their security interest, then general unsecured creditors will be paid on a pro-rata basis. There are some priority payments such as wages, taxes and administrative costs. The assignee is charged with liquidating the business in an efficient manner, paying taxes, and generally ending the business in an orderly fashion. From the business owner’s prospective, the assignee performs the function of liquidating the corporation. While an ABC may not terminate all personal liability, such as loan guarantees, it allows the business owner, or his estate or family, to end the business in a fair and equitable way with less personal involvement. An assignee may retain former employees, shareholders or owners to assist.
A creditor’s response is primarily to allow the assignee to perform his duty, and to ensure that the assignee acts in the best interest of all creditors. After filing a notice of claim, creditors can suggest courses of action to the assignee, bid on the assets sold, help reduce liabilities and negotiate a payoff. While secured creditors normally have the upper hand, to the extent a creditor feels it is not being treated fairly by the assignee, it must take quick action in court to seek injunctive or other relief to protect its interests. While courts usually defer to the assignee’s business judgment, they can protect creditors from abuse.
Brooks, Tarulis & Tibble, LLC has long represented both business owners who enter into Assignments for the Benefit of Creditors and creditors who’s debtors have done so. If we can assist you in this regard or provide you with additional information, please contact me.
Douglas C Tibble