In the spectrum of business finance, bankruptcy is often seen as the final straw. However, there are numerous alternatives to declaring business bankruptcy that can assist in resolving business debt issues. This article aims to shed light on two common alternatives: Assignment for Benefit of Creditors and Out-of-Court or Corporate Workouts.
A. Alternatives to Declaring Business Bankruptcy
I. Understanding the Need for Alternatives
While filing for bankruptcy may appear to be the easiest solution when faced with overwhelming debts, it’s crucial to remember it also comes with its share of drawbacks. Therefore, considering other debt relief strategies can prove to be beneficial in certain circumstances.
Some popular alternatives to declaring business bankruptcy include an assignment for the benefit of creditors and out-of-court debt restructuring, also known as a corporate workout. Let’s delve deep into these alternatives.
B. Assignment for Benefit of Creditors
II. The Basics of Assignment for Benefit of Creditors
An assignment for the benefit of creditors, or ABC, is a mechanism designed for debt-ridden businesses to liquidate their assets and pay off creditors instead of filing for bankruptcy.
The proceedings of an ABC are typically governed by state laws and supervised by state courts, which is a departure from the federal bankruptcy courts that oversee bankruptcy filings. However, it’s important to note that an ABC is not a strategy for business rehabilitation or reorganization.
III. The Role of Assignee in an Assignment
In an ABC, the debtor, also known as the assignor, transfers control and ownership of the business’s property and assets to an independent entity called the assignee. Comparable to bankruptcy trustees, assignees have the responsibility of selling the business assets and distributing the sales proceeds to the creditors according to legal stipulations.
After settling the debts and the assignee’s fees, any remaining funds are returned to the business owners and shareholders.
IV. The Process of an Assignment for Benefit of Creditors
The initial step in an ABC involves the assignor formally expressing their intention to assign their assets to an assignment estate. This entity is usually chosen by the business, but creditors can also influence the assignee’s selection.
As part of the process, the business has to provide a list of assets and liabilities, which includes the names and contact information of the creditors. Subsequently, the assignee notifies the creditors about the assignment and sets a deadline for them to file claims.
Unlike bankruptcy filings, there is no automatic stay injunction in ABCs. This means creditors cannot harass the business to recover their assets, as they have already been transferred to the assignment estate.
V. Pros and Cons of Assignment for the Benefit of Creditors
The primary advantage of an ABC is the efficiency with which the assets are sold. The assignee issues a bill of sale to potential buyers, indicating that the creditors have no claim over the assets being sold. Additionally, the assignee can sell the assets without a court order, which speeds up the process.
However, on the downside, transferring contracts or leases without the consent of the lessors or other parties involved can be challenging for the assignee. This is in stark contrast to a bankruptcy case, where such consent is not required.
C. Out-of-Court or Corporate Workouts
VI. The Basics of Out-of-Court Workouts
An out-of-court or corporate workout is a mutual agreement between a debtor and its creditors to resolve a debt issue without resorting to litigation. This approach is often more favorable than filing for bankruptcy.
However, success is contingent on all creditors accepting the proposed plan. A corporate workout may not proceed if even one or two creditors opt to not participate.
VII. Evaluating Business Recovery in a Workout Process
Before proposing a workout plan, it’s crucial to assess if the business can recover. In a corporate workout, the management is obliged to repay its creditors through an equity infusion, securing new financing, or allocating future cash flow.
VIII. Importance of Legal Advice in a Workout Process
Engaging an attorney experienced in business reorganizations is critical, especially when cash flow is limited and creditors are becoming intrusive. A business bankruptcy lawyer can navigate the entire process and act as a mediator between you and unsatisfied creditors.
Additionally, hiring a turnaround consultant can be beneficial. They can assist in preparing financial projections, formulating and implementing the workout plan, and communicating with your creditors.
IX. Pros and Cons of an Out-of-Court or Corporate Workout
A corporate workout can prevent creditors from initiating legal action, given they receive full or partial repayment of the outstanding debt. It also saves you from the expenses associated with bankruptcy proceedings.
However, a drawback of a corporate workout is that you cannot compel a creditor to accept your proposal. This is unlike bankruptcy, where a dissenting creditor can be forced to agree with a plan.
D. Licensed Insolvency Trustee
X. Role of a Licensed Insolvency Trustee
A Licensed Insolvency Trustee (LIT) is a professional, licensed and regulated by Canada’s Superintendent of Bankruptcy. They provide credit counselling and help individuals and businesses make informed decisions regarding their debt problems.
Engaging an LIT can help avoid business and personal bankruptcy. These professionals often recommend proposing a consumer proposal or debt settlement to your creditors, which can lower interest rates and monthly payments, and also protect your business or personal property from creditors.
E. Conclusion: Alternatives to Declaring Business Bankruptcy
When your business is under financial stress due to debts, immediately resorting to bankruptcy may not be the best course of action. There are viable alternatives to declaring business bankruptcy that can help you navigate your creditors’ demands more efficiently.
Consider an out-of-court workout plan or an assignment for the benefit of creditors.
