Technology and Dot-Com Dispositions.

It is inevitable that a significant portion of companies in new or emerging industries will come to a point where they are no longer viable and must pursue an ultimate disposition strategy. Many businesses face hard choices in 2001 as the economy slows down and debt builds up. Not infrequently, the stark reality is that these companies' realistic alternatives are limited to the following: (1) merging with or being acquired by a qualified candidate; (2) commencing a formal bankruptcy proceeding (chapter 11 reorganization or a chapter 7 liquidation); (3) engaging in an out-of-court debt restructuring or workout; (4) shutting down their business, and simply closing their doors (an informal death); or (5) making an assignment for the benefit of creditors. Depending on the circumstances, any one of the above alternatives may be the best choice. However, in many instances, where the goal is to transfer the assets of the troubled business to an acquiring entity free of the unsecured debt incurred by the transferor, and wind down the company in a manner designed to minimize negative publicity and potential liability for directors and management, the most advantageous and graceful exit strategy can be an assignment for the benefit of creditors.

With the meltdown currently taking place in the dot-com sector, assignments for the benefit of creditors are being used with increasing frequency. In recent months, in assignments for the benefit of creditors, Sherwood Partners, Inc., for example, sold the assets of, among others, iChristian.com to Christianbook.com, drDrew.com to drkoop.com, CareAssured.com to carebid.com, and Spinway, Inc. to BlueLight.com.

An assignment for the benefit of creditors is a business liquidation device that is an alternative to a formal bankruptcy proceeding. The assignment is a contract under which the assignor (the debtor) transfers all of its rights, title, interest in, custody and control of its property to a third-party assignee in trust. The assignee liquidates the property, and distributes the proceeds to the assignor's creditors. The common law assignment by simple transfer in trust, in many cases, is a superior liquidation mechanism when compared to using the more cumbersome statutory procedures governing a formal chapter 7 bankruptcy liquidation case or a liquidating chapter 11 case. Compared to bankruptcy liquidation, assignments may involve less administrative expenses and are a substantially faster and more flexible liquidation process.

Chapter 7 bankruptcy provides a procedure for the orderly liquidation of the assets of the debtor and the ultimate payment of creditors in the order of priority set forth in the Bankruptcy Code. Upon the filing of a chapter 7 petition, a trustee is appointed who is charged with marshalling all of the assets of the debtor, liquidating the assets and ultimately distributing the proceeds of the liquidation to the debtor's creditors.

Chapter 11 of the Bankruptcy Code provides a framework for a formal, court-supervised business reorganization. While the primary goals of chapter 11 are rehabilitation of the debtor, equality of treatment of creditors holding claims of the same priority and maximization of the value of the bankruptcy estate, chapter 11 can also be used to implement a liquidation of the debtor. Unlike the traditional common law assignment for the benefit of creditors (assignments are governed by state law and may differ from ...