Sandor Jacobson
Plante Moran

An unfortunate byproduct of the COVID-19 crisis is the failure of some businesses due to the loss of a key customer, an unsustainable expense structure, unexpected litigation or some other misfortune. Whatever the cause, these companies are going out of business, and their affairs have to be wound down. In these situations, lenders are concerned about recovering as much as they can on their secured loans, and owners are worried about their personal guarantees on the failed company’s debt.

For the benefit of all concerned, it’s critically important to choose the best method to wind down a company’s affairs. For many small- and medium-sized companies, the best choice may be the least well known.

Options For Winding Down a Company

There are three common ways to wind down and liquidate a business:

  • A Chapter 7 federal bankruptcy case: Bankruptcy is often the first option to come to mind when winding down a distressed business. Proceedings are initiated under Chapter 7 of the Bankruptcy Code and, upon filing of a bankruptcy petition, a U.S. Trustee is appointed to marshal and liquidate the debtor’s assets and distribute the proceeds to the creditors. The bankruptcy process is governed by complicated statutory requirements and can take many months or even years to resolve. The process is expensive and can result in less money for creditors than other liquidation methods.
  • Receivership: This remedy is often afforded to secured lenders within their loan and security agreements. The agreement enables a lender to petition the court for oversight of the business by a court-appointed receiver, usually as the result of a loan default and subsequent dispute. In this scenario, the lender has usually lost confidence and trust in the debtor, resulting in an adverse relationship between the two parties. In these situations banks usually prefer receiverships over bankruptcy because they avoid an automatic stay, provide a mechanism to get a third party appointed by the court that the bank selects, gain an understanding of the debtor’s financial and operational position, report to the court and determine what is in the best interest of the creditors. The end result is often a sale or liquidation of the debtor’s assets.
  • Assignment for the Benefit of Creditors (ABC): When a company that’s headed for liquidation is free of significant legal problems or disputes that require court oversight, one of the most efficient ways to wind down is through an ABC. In some states, an ABC is an out-of-court common law remedy that enables a debtor — with support from its lender — to select a third-party assignee to liquidate the distressed company’s assets and distribute the proceeds to creditors. The assignee operates in a fiduciary capacity for the benefit of the assignor’s creditors.

How an ABC Works

  1. The parties execute a trust agreement: The ABC starts with the distressed company (called an assignor) executing a trust agreement with the assignee — a third-party trustee such as a restructuring expert — to handle the wind-down. The company transfers title, custody and control of its assets to the assignee in trust. The distressed company generally needs to obtain authorization from its board of directors and shareholders. If shareholder approval cannot be easily obtained — as may be the case with a public company — bankruptcy may be the only alternative. It is also necessary to get the secured lenders’ consent to use the proceeds of its collateral to fund the liquidation process. For example, as customers make payment on their receivables or the assignee sells a piece of equipment, the assignee will need to use that money to pay expenses like professional fees, retained employees, rent and other administrative expenses.
  1. Notify creditors: Once the agreement is in place, the assignee takes control of the assets and operations and notifies the company’s creditors of the liquidation event and provides them with an opportunity to file a claim against the estate 
  2. Create an ABC plan and budget: Next, the assignee works with the secured creditor to create an ABC plan. Most plans outline how the company will be shut down and the best process to  liquidate the assets.. In some cases they may decide on a “going concern sale,” where the assignee operates the business for a limited period of time to maintain enterprise value while the assets are sold to a strategic or financial buyer as a functioning unit. The plan will address sale of inventory, collection of accounts receivable, and how assets will be packaged and sold. It will include a budget that specifies expenses such as rent, utilities, insurance, and which staff will be retained for sales, shipping, accounting, HR etc. It also includes provisions for assignee and associated attorneys’ fees.
  1. Liquidate the assets: The assignee liquidates the property according to the plan. The assignee will often reach out to competitors and strategic investors that may be interested in buying the assets in bulk. Ideally a buyer will emerge that wants to take over the existing machinery, equipment and facility with an eye to restarting it. In this scenario the assets are usually worth more than if they are liquidated through an auction on a piecemeal basis. This is a win-win situation for the bank and the owner, and staff may be retained by the purchaser. Liquidation is conducted through a publicly-advertised sale process to ensure the best price for the assets.
  1. Distribute the proceeds and notify creditors: Finally, the proceeds are distributed to the creditors in accordance with priorities established by law. Once the secured and priority creditors are paid in full, any money left over is paid pro rata to the unsecured creditors. If unsecured claims are paid in full, equity holders will receive distribution in accordance with their liquidation rights.

To end the ABC, the assignee sends out a final letter to all creditors explaining what occurred within the assignment.

Note that ABCs are subject to state law, and the viability of this option to wind down a company must be considered on a state-by-state basis. For example, in Illinois, ABCs are guided by the rules of common law and can be handled out of court. But each state has different rules, so you’ll need to work with an attorney in your state.

Advantages of an ABC

The ABC can be a better liquidation mechanism for small- and medium-sized companies than court-supervised procedures such as receiverships or formal Chapter 7 bankruptcy liquidation due to multiple factors.

  • Better recovery: Without the uncertainty and complications of the judicial process, ABCs can be more efficient to administer and generate a higher recovery. The fees are usually a fraction of what they would be in bankruptcy and owners are frequently the best people to help collect receivables and monetize other assets.. Their ability to leverage existing relationships and industry knowledge aligns with the secured lender’s goals. Cooperation from owners can also help get the lender’s agreement to release personal guarantors if certain milestones are achieved.
  • More owner control: With an ABC the owner chooses the assignee instead of a bankruptcy court. Having an assignee that is easy to work with and personally committed to maximizing the recovery is a major benefit during a high-stress period for an owner.
  • Faster and more flexible: ABCs are a simpler, faster and more flexible liquidation process. The size of the company and sophistication of the sales process are determining factors, but a typical ABC can be completed in three to four months.
  • Avoids unwanted scrutiny: An owner’s business actions aren’t typically examined in the ABC process, whereas in bankruptcy the owner’s decisions will be examined very closely, and in certain circumstances, previous salaries and distributions forcibly will be clawed back from the owner.
  • Avoids negative publicity: A wind-down through an ABC can minimize negative publicity and the stigma of bankruptcy for directors and management.

From a buyer’s perspective, acquiring a going concern business or specific assets of a distressed entity from an assignee in an ABC transaction offers some protection from the risk of acquiring a business or assets by private sale that may be subject to future claims.

Potential Drawbacks

Under an ABC there is no ability to sell assets free and clear of liens, so it is not possible to do an ABC if the lender isn’t on board. Similarly, leases and other executory contracts cannot be assigned in an ABC without the consent of the counter party to the contract. Therefore, if consent is not forthcoming in these situations, federal bankruptcy proceedings may be the only option.

In some cases buyers may need the clarity of a court order approving the sale of the distressed assets before they’re comfortable purchasing them. In states where an ABC is a nonjudicial process, this could negate the ABC option.


The ABC is a proven  liquidation option that has stood the test of time and has been used for many different types of businesses. As a liquidation vehicle, it provides the type of quick and flexible action that is often necessary to unlock and maximize the value of a distressed company’s assets. It also can be the most compassionate choice out of a set of bad options during what can be one of the hardest times in a business owner’s life.

Sandor Jacobson, CPA, is a principal at Plante Moran, leading the firm’s Chicago restructuring and transformation team.