The ABCs of an Assignment for the Benefit of Creditors

Companies experiencing financial distress have a number of options available to them. If a business has the potential to continue as a going-concern despite a heavy debt load, reorganizing or conducting a sale process in a Chapter 11 bankruptcy proceeding may be the best route. At the other end of the distress-spectrum is the option to simply shut down and dissolve, and leave it to creditors to sort out the mess and fight over the scraps. But that’s messy, and can often leave a company’s key stakeholders exposed to liability. A better approach for a business that must shut down but doesn’t want to do so in an ad-hoc manner, is to utilize a legal process that enables it to maximize the value of its assets and wrap up its affairs in a more organized way.

A Chapter 7 bankruptcy or sale or liquidation process overseen by a court-appointed receiver are both viable wind-down options. However, both of these processes involve a business and its principals relinquishing control of the business and its assets to a fiduciary.

In many states, another option is an assignment for the benefit of creditors (“ABC”). An ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law. In some states, the right to pursue an ABC is rooted in the common law, in others it’s governed by statute. In Michigan, MCL § 600.5201 sets forth the procedural requirements for a company making, and an assignee accepting, an assignment for the benefit of creditors.

Generally speaking, in an ABC, a company (the assignor), transfers all of its rights, title, and interest in its assets to an independent fiduciary (the assignee). The assignee then liquidates the assets and distributes the net proceeds to the company’s creditors. While the process varies by state, in most jurisdictions board and shareholder approval are required to initiate an ABC.

So, why would a company pursue an ABC rather than another liquidation alternative? Some of the primary advantages of an ABC include:

While there are many advantages to ABC proceedings, they are not appropriate for every circumstance. One of the main disadvantages to ABCs is that, unlike in a bankruptcy proceeding, there is no automatic stay in place. In most receivership proceedings, the court order appointing a receiver also contains some form of automatic stay that limits litigation against the liquidating company. Accordingly, existing lawsuits may proceed and new ones may be filed against a company pursuing an ABC.

Determining the right path forward for an insolvent company depends on the specific facts and circumstances at issue, and such a determination should be made in consultation with legal counsel who understands the relative advantages and disadvantages of each liquidation alternative. For any company that is experiencing distress, an ABC can be an effective option to liquidate assets and wind-down affairs, particularly if speed is of the essence and less oversight of the process is desired. If you have any questions about the feasibility of the assignment for the benefit of creditors process for your business, please contact David Dragich at or 313.886.4550.