Assignment for the benefit of creditors: salvaging value from a sinking ship. (Selected Topic).(bankruptcy)

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. Of course, businesses in mature industries may also reach a point where they are no longer viable going concerns. Many businesses face hard choices when 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); (5) streamlining the company and focusing on a core business or technology; or (6) making an assignment for the benefit of creditors. Depending on the circumstances, any one of the above alternatives may be the be st 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.

The assignment is a contract under which the assignor (the debtor) transfers all of its right, 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 expense and are a substantially faster and more flexible liquidation process. In addition, unlike a Chapter 7 liquidation, where generally an unknown trustee will be appointed to administer the liquidation process, in a common law assignment for the benefit of creditors, the assignor can select an assignee with appropriate experience and expertise to conduct the wind-down of its business and liquid ation of its assets.

In situations where a company is burdened with debt that makes a merger or acquisition infeasible, an assignment for the benefit of creditors can be the most ...