An assignment for the benefit of creditors (ABC) is a state law-based process where a financially distressed company (assignor) transfers its assets to a third-party fiduciary (assignee) for liquidation and distribution to creditors. This process differs significantly from a bankruptcy case, with key distinctions including the lack of court supervision in certain jurisdictions, enforceability of ipso facto clauses and anti-assignment contract provisions, absence of an automatic stay, and potential nonexistence of preference claims.

In ABCs, creditors may face challenges in obtaining information due to the absence of a court docket in some jurisdictions. Contract counterparties can terminate contracts upon the commencement of an ABC, as ipso facto clauses are enforceable. Unlike in bankruptcy, there’s generally no automatic stay in an ABC, although some states have incorporated a version of Section 362 of the Bankruptcy Code into their laws. Anti-assignment provisions in contracts remain valid in ABCs, giving contract counterparties more leverage. Also, assets cannot be sold “free and clear” of liens without the consent or full payoff of lienholders in an ABC.

Furthermore, different states have varying rules regarding the assignee’s ability to reclaim funds paid to creditors prior to the ABC, similar to a preference claim in a bankruptcy case. Creditors may seek to put the company into an involuntary bankruptcy case under certain circumstances, despite the commencement of an ABC. However, this carries risks for creditors who improperly seek an involuntary bankruptcy. Lastly, the assignee establishes a deadline for creditors to file claims in an ABC, with any untimely claim not sharing in the proceeds. Given the complexities and variations in ABCs, it’s crucial for creditors to consult with experienced counsel.

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