Assignments for the Benefit of Creditors as an Alternative to Bankruptcy Proceedings

Abstract

Many companies intending to close benefit from going through a formal dissolution procedure. The simplest method is to dissolve under state law, which can be done internally by the officers and directors or other responsible people in charge of the business. Dissolution under state law is a preferred method for companies without complicated debt structures or significant remaining assets. Instead of going through a dissolution handled internally by the company decision makers, companies may also consider retaining a third-party fiduciary who can notify creditors that the company has ceased doing business, sell any remaining assets, and distribute the proceeds to creditors. Involving a disinterested, professional third party with a duty to maximize returns to creditors provides legitimacy and optics to the process. The option involving a disinterested third-party in the dissolution of a business that most CEOs consider first is bankruptcy. However, bankruptcy has limitations that make it less attractive for certain debtors and creditors. Most states have adopted statutes governing assignments for the benefit of creditors, which is a process utilizing state courts and state law as an alternative to federal bankruptcy law. In most states the statutes have not been substantively updated in decades and are not regularly implemented. The article recommends that assignments for the benefit of creditors be more widely adapted and applied in jurisdictions where they are under-utilized, to allow debtors to address their creditors’ needs. The article provides a model statute that could be adopted in multiple states that do not have a well-developed statute concerning assignments for the benefit of creditors