Assignment for benefit of creditors

A general assignment or assignment is a concept in bankruptcy law that has a similar meaning, due to common law ancestry, in different jurisdictions, but wide dispersion in practical application. The "assignment for the benefit of creditors", also known as an ABC or AFBC is an alternative to bankruptcy, which is a "general assignment"/"assignment" concept.

In the United states, a general assignment or an assignment for the benefit of creditors is simply a contract whereby the insolvent entity ("Assignor") transfers legal and equitable title, as well as custody and control of its property, to a third party ("Assignee") in trust, to apply the proceeds of sale to the assignor's creditors in accord with priorities established by law.

An assignment for the benefit of creditors is a relatively well-established common law tool and is one alternative to a bankruptcy. An assignment for the benefit of creditors is designed to save time and expense by concluding the affairs of a bankrupt company. The assignment for the benefit of creditors is a state form of bankruptcy action versus a federal form of bankruptcy action. The assignment for the benefit of creditor’s process is similar in character to a Chapter 7 bankruptcy and parallels some of the same procedures, but is not an actual "bankruptcy" in the form the word is used in the United States.

The assignment for the benefit of creditors is a common law contract between the board of directors and the assignee in which the board "assigns" the assets and liabilities of the company to the assignee, a third party. The assignment for the benefit of creditors contract is usually recorded the public record at a town, a city, a county or a state level. Each state will differ on recording requirements for the assignment for the benefit of creditors contract.

The physical filing of the assignment usually occurs after: the board of directors has spoken with local insolvency counsel; a board of directors authorization of some nature has been enacted; an appropriate assignee chosen; and the contract has been written. The assignee's primary goal is to try to make the creditors whole. The assignee performs duties similar to a trustee under federal bankruptcy. The assignee has a similar, if not equivalent, fiduciary role as the bankruptcy trustee. The assignee has the primary responsibility to: liquidate the assets of the company; vette creditor claims; and issue a dividend to the creditors. The creditors are the assignee's top priority, not shareholders. Shareholders by definition have a residual claim on assets once all creditors are satisfied.

The assignee, once the assignment process is completed, issues a dividend. The dividend is derived from the sale of assets, collection of receivables, recovery of the bankrupt company’s assets and cash. Certain creditors may or may not receive a dividend. The assignee's hope is to provide a one-to-one redemption of the creditor’s claims; however, this depends on the amount of cash an assignee can marshal in the liquidation process.

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