In lieu of filing for Chapter 7 liquidation bankruptcy, a business may wish to settle its debts by entering into an assignment for the benefit of creditors. An assignment is a streamlined liquidation procedure that allows a business to pay off its creditors while avoiding the costs, time, and stigma associated with bankruptcy.
How Does It Work?
While almost anyone can assign assets to an assignee, most assignors are corporations or partnerships. The business transfers control and title of its assets, include its accounts receivable, to an assignee. The business cannot rescind an assignment once it has been made.
The law of trusts applies to assignments. The assignee has the same duties and responsibilities to creditors as a trustee would have to the beneficiaries of a trust. The assignee liquidates the debtor's assets and distributes the proceeds to creditors. The creditors may require the debtor to satisfy any deficiencies, or accept the proceeds as full satisfaction of the debt, also known as a "composition with creditors." The costs of administering the assignment are paid first from the money generated by liquidation of the estate. Any surplus funds are returned to the business.
Secured and Unsecured Creditors, Consent, and Cooperation
A creditor does not need to consent to assignment of the asset. However, cooperation with securred creditors is generally sought to maximize the amount recovered from the sale or disposition of the asset. Likewise, while a secured creditor may choose to take back collateral, creditors often cooperate with the assignee to maximize returns on the asset.
Advantages and Disadvantages of Assignments
While business owners may also simply walk away from a failing business, this does nothing to protect the business's owners or investors. An assignment allows for the opportunity to pay off creditors and to obtain orderly estate administration. An assignee may often be able to sell an asset for a greater price or pursue litigation that a bankruptcy trustee is unable to pursue. Secured creditors consenting to assignment eliminate the costs and litigation associated with the foreclosure and sale of an asset. An assignment may generate less publicity than that of bankruptcy.
There is limited court oversight involved in an assignment, and the automatic stay that prevents creditors from collecting on debts during the pendency of a bankruptcy case does not apply to an assignment case. If the business is not satisfied with the assignment case, it can still file for voluntary bankruptcy. As well, creditors may seek to impose an involuntary bankruptcy under Chapter 11 if they are not satisfied with how the assignment case is proceeding.