An Assignment for the Benefit of Creditors (ABC) allows a financially distressed company (the assignor) to transfer its assets to a third-party fiduciary (the assignee) for liquidation and distribution to creditors under applicable law. While ABCs are a faster, cheaper alternative to bankruptcy, there is currently not a straightforward framework for an assignment. From a creditor’s perspective, there are many important distinctions between an ABC and bankruptcy.
Key Differences from Bankruptcy
- Court Oversight: The process for carrying out an assignment varies widely from state to state. In some states, such as Florida, New York, and New Jersey, assignments are governed by statute. In other states, including California and Illinois, assignments are primarily or completely governed by the common law. Several states have little to no law governing assignments; in some, existing laws date back several decades or more. Furthermore, the process of an assignment varies from state to state. In some states, such as Florida, assignments are carried out under the supervision of a court. In other states, an assignment occurs with little or no court supervision.
- No Automatic Stay: Immediately upon filing for bankruptcy, an automatic stay goes into effect pursuant to Section 362 of the Bankruptcy Code. The automatic stay is intended to give the debtor breathing room and prevents creditors from taking action against the debtor to collect on amounts owed to them. In general, there is no automatic stay in an ABC, although some states do have a version of Section 362 incorporated into their state law.
- Asset Sales and Liens: Unlike a bankruptcy sale, the assignee cannot sell assets “free and clear” of liens without the consent or full payoff of lienholders. Thus, secured parties must agree to the sale if they are not going to receive full payment from the sale proceeds. Otherwise, the purchaser takes the assets subject to the secured parties existing liens.
- Deadline to File Claims: Like bankruptcy, the assignee will establish a deadline for creditors to file claims. Any claim not timely filed will not share in the proceeds of the ABC. Unlike a bankruptcy, there are no schedules in an ABC so any creditor who is owed money by the assignor must file a claim.
Uniform Assignment for Benefit of Credits Act: Purpose and Features
The Uniform Law Commission (ULC) recently approved the Uniform Assignment for Benefit of Creditors Act to standardize ABC procedures, enhance clarity, and modernize outdated laws. The Act outlines debtor and assignee duties, creditor notification requirements, and distribution priorities, while also addressing interstate complexities.
Distribution Priority Under the Uniform ABC Act
After satisfying obligations to protected secured creditors (unless otherwise agreed), distributions follow this hierarchy:
- Administrative expenses, including fees and taxes.
- Claims entitled to priority under federal law.
- Wage claims earned within 180 days prior to the assignment date, subject to statutory limits.
- Unsecured claims with state-law priority.
- General unsecured claims.
Next Steps?
Alabama has already introduced a bill to adopt the Uniform ABC Act. And that’s what happens next: The ULC doesn’t have the power to enforce anything. Its role ends with drafting and approving. Now, it’s up to individual states to decide whether to introduce the Uniform ABC Act into their legislative sessions. That means committee hearings, amendments, debates, and perhaps adoption. This is worth watching. If more states adopt the Uniform ABC Act, it will offer distressed businesses a faster, more cost-effective alternative to bankruptcy. We also recommend consulting experienced counsel whenever a customer initiates an ABC.
