delaware assignment for the benefit of creditors statute

Delaware ABCs (Assignments for the Benefit of Creditors): No Longer as Easy as 1-2-3

Companies forced to wind down operations and liquidate their assets often choose a liquidation process known as an ABC (Assignment for the Benefit of Creditors). An ABC is usually more streamlined, requires fewer public disclosures and less court involvement, and is significantly less expensive than other formal liquidation processes such as federal bankruptcy proceedings. 1 However, recent rulings by the Delaware Court of Chancery, a popular forum for ABCs, suggest that ABCs may no longer be as easy as 1-2-3 — at least, not in Delaware.

An ABC is a liquidation process governed by state law by which a company (referred to as the assignor or the debtor) assigns all of its assets to an assignee (typically, a professional firm specializing in ABCs) that will manage the liquidation process and distribute the assets’ proceeds to the company’s creditors in accordance with the priorities dictated by state law. The assignee serves as a neutral, independent fiduciary whose duty is to maximize value for the company’s creditors and shareholders.

Certain states, such as Delaware, have enacted comprehensive statutory schemes that require various degrees of court oversight over the ABC process, including court approval of significant transactions, such as asset sales. Other states have less-developed ABC statutes and do not require any court supervision or approvals.

Recently, because of its “growing concern” regarding the “transparency and consistency” of ABC proceedings, 2 the Delaware Court of Chancery has begun requiring robust public disclosures at the outset of an ABC proceeding regarding the company and the assignee, akin to disclosures that a company typically makes within the first few days of a federal bankruptcy case. 3 At least one Vice Chancellor on the court has announced that he will require such disclosures in all future ABC cases assigned to him. 4 The purpose of these disclosures is to ensure that the court has sufficient information to evaluate the relief requested by the assignee. This is particularly important in ABC cases, which are handled ex parte — i.e., without notice to all parties who may be affected by the relief. 5

The Court of Chancery explained that the information that should be disclosed may vary from case to case. However, in at least three recent ABC proceedings, 6 the court has entered similar orders requiring assignees to make the following disclosures in a publicly filed affidavit in the early stages of the ABC proceeding:

• Description of the affiant and the affiant’s relationship with the debtor or assignee
• Description of the assignee, its experience, its principal or parent entity, and the events leading up to its creation
• Description of the debtor, its business prior to the assignment, and its corporate and capital structure
• Description of any debt obligation secured by all or substantially all of the debtor’s assets, including the purpose of the obligation at the time it was entered and its current status
• Description of events leading up to the assignment
• Description of any efforts to sell the debtor or its assets within the year prior to the date of the assignment
• Description of how the assignee was engaged
• Description of the terms of any agreement, arrangement, or understanding concerning the debtor or its assets between or among, on the one hand the assignee or its principal and on the hand any director, officer, employee, or creditor of the assignor, or any potential acquirer of the debtor or its assets
• If the assignee contemplates the disposition of any of the assigned assets prior to the submission of the appraisals required by 10 Del. C . §7382 and the bond required by 10 Del. C . §7383, a detailed explanation for doing so
• Description, if applicable, if any of the debtor’s known creditors are directors, officers, employees, or stockholders of the debtor or are otherwise affiliated with any of the foregoing persons

In addition, the affidavit must attach the following disclosures:

• Documents evidencing the debtor’s authorization to enter into the assignment
• Documents evidencing the terms of the assignee’s engagement, including the assignee’s fee schedule
• Documents evidencing the terms of any engagement of the assignee or its parent entity with the assignor, any of its directors, officers, employees, or creditors relating to the assignor or its assets at any time within one year of the date of the assignment
• Documents evidencing any agreement, arrangement, or understanding between the assignee or its parent entity and any person relating to the assignment or the assigned assets
• Documents evidencing any agreement, arrangement, or understanding between or among any director, officer, employee, or creditor relating to the assignment
• A list of all engagements for which the parent of the assignee or any of its affiliates has served as an assignee in an assignment proceeding filed in the Court of Chancery over the past three years
• A debtor’s balance sheet as of the date of the assignment or the most recent fiscal period available
• A list of all of the debtor’s known creditors, organized by the creditors’ status as secured or unsecured creditors, each creditor’s priority to the assigned assets, and the amounts owed to each creditor

These are not the only disclosures that may be required in an ABC. Depending on the circumstances of the case and the relief requested by the assignee, the Court of Chancery may require additional affidavits and reports, which the assignee may be required to serve upon all creditors and other parties in interest.

Key Takeaways

In light of the Court of Chancery’s focus on additional disclosures, the ABC process in Delaware may no longer be as streamlined and efficient as it once was. A company considering winding down and liquidating its assets through an ABC in Delaware should be prepared at the outset to provide significantly more information about its business, financial affairs, and events leading up to the ABC. Although these additional disclosures may add time and expense to the process, an ABC—whether in Delaware or elsewhere—is still a viable and cost-effective alternative to a federal bankruptcy proceeding that should be considered by companies facing liquidation.

[ 1 ] A bankruptcy or other proceeding may, in certain circumstances, be necessary or preferable to an ABC. A company facing financial distress should consult with experienced counsel to advise on the company’s specific situation and options. [ 2 ] See In re Theonys, Inc. , C.A. No. 2023-0195-PAF, Letter (Del. Ch. May 22, 2023) (the “Theonys Letter”). [ 3 ] See In re Glob. Safety Labs, Inc. , 275 A.3d 1278, 1284 (Del. Del. Ch. 2022) (“What the Petition lacks, and what the court invariably needs, is context. The bankruptcy courts and their practitioners have developed a vehicle for providing that context through a submission known as a ‘First-Day Declaration’ or a ‘First-Day Affidavit.’ . . . This case calls out for a comparable declaration, tailored by skilled counsel to provide the information that the court needs to evaluate the Petition. . .”). The Global Safety decision examined a petition by a company seeking to dissolve under Delaware law. However, the court explained that its concerns regarding the lack of transparency in that case also applied to ABC proceedings. See id . at 1279-80 (“The Petition is a bare-bones four-page document consisting principally of conclusory averments. It is not an outlier. It is representative of petitions that the court sees regularly in cases involving defunct or dissolved entities and in proceedings involving assignments for the benefits of creditors.”). [ 4 ] See Theonys Letter. [ 5 ] See Glob. Safety , 275 A.3d at 1280 (“Many of these proceedings are handled ex parte , so the court never has the benefit of an interested party that can provide a different perspective or ask probing questions.”). [ 6 ] In re Theonys Inc . C.A. No. 2023-0195-PAF, Order (Del. Ch. May 22, 2023); In re Boston Security Token Exchange LLC , C.A. No. 2023-0494-PAF, Order (Del. Ch. May 22, 2023); In re Secure Transfusion Solutions, Inc. , C.A. No. 2023-0463-PAF, Order (Del. Ch. May 22, 2023).

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.

Barry Z. Bazian

Kizzy Jarashow

Artem Skorostensky

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Last month the Delaware Chancery Court sent a clear message to Delaware companies that failure to strictly comply with the Delaware Assignment for the Benefit of Creditors (“ABC”) statute will result in severe consequences, including  dismissal .

On December 27, 2023, WMT (an ABC) LLC (the “Assignee”) filed an assignment petition which provided that it had entered into an assignment agreement on March 13, 2023 with WindMIL Therapeutics, Inc. (the “Assignor”). The petition noted that the assignment agreement was attached—it was not. The assignment agreement was only provided to the Chancery Court in response to a scheduling order (the “Initial Order”) entered on January 3, 2024. The Assignee also filed an affidavit in response to the Initial Order and provided two purported valuation opinions that had been obtained by the Assignee. The first was an appraisal stamped “draft” from Redwood Valuation Partners (“Redwood”) dated November 21, 2023, which valued the intellectual property assigned to the Assignee at $409,000 based on a fair market value analysis. The second was an appraisal prepared by Braun Co. (“Braun”) dated November 22, 2023, with a valuation date of October 31, 2023, which offered a speculative $100 value on the intellectual property. 

On March 6, 2024, several months after filing the petition and four-and-a-half months after receiving the appraisals, the Assignee filed a motion (the “Appraiser Motion”) seeking entry of an order retroactively appointing Redwood and Braun as appraisers. In the Appraiser Motion, the Assignee failed to provide any explanation why it chose to obtain appraisals from Redwood and Braun months before asking the Chancery Court to appoint them as appraisers. That same day, the Assignee also filed a motion (the “Bond Motion”) asking the Chancery Court to fix a bond for the value of the assets (as required by 10 Del. C. § 7383) at $152,000, which represented amounts due for tax refunds that the Assignee has collected and the value of intellectual property. As part of the Bond Motion, the Assignee requested that the Chancery Court ignore Redwood’s draft appraisal of the intellectual property on the basis that the licensor of the intellectual property indicated that it would not consent to an assignment of the license rights.

This case, like most other ABC cases, proceeded  ex parte , which the Chancery Court found “[h]istorically. . . provide[s] little transparency to creditors, [provides] limited and incomplete information about the initiation of the ABC, and, frequently, fail[s] to comply with the statutory requirements.”[1] The Chancery Court also noted that while practice under the Delaware ABC statute is often referred to as “the wild west of Bankruptcy,” the court has previously encouraged counsel to address shortcomings and to comply with the statute.[2] To bring more transparency to the ABC process, the Chancery Court has issued orders requiring assignees to provide more detailed information and establishing firm deadlines to the extent not otherwise contained in the ABC statute. The Initial Order issued in this case was one such order. 

The Delaware ABC statute is short and consists of only seven sections, and the Chancery Court found that the Assignee had violated at least three of these sections, including:

• 10 Del. C. § 7381 – Requiring the filing of an affidavit of inventory within 30 days of the execution of the assignment agreement. Here, the affidavit was required to have been filed by April 12, 2023, but the Assignee filed the affidavit more than eight months later, on December 27, 2023.
• 10 Del. C. § 7382 – Requiring court appointment of two appraisers before obtaining the appraisals. Here, the Assignee purported to retain appraisers and procure appraisals without first seeking authorization. In fact, the Redwood appraisal was issued one month before the ABC was initiated, had a valuation date of two months before the ABC was initiated, was unsigned and marked as a draft. The Braun appraisal was issued one month before the ABC was initiated and had a valuation date of two months before the ABC was initiated. It offered a “speculative value” of $100 for the Assignor’s patents and intellectual property. 
• 10 Del. C. § 7383 – Requiring the court to fix a bond after the appraisers submit their appraisals. Here, the Assignee sought approval of a bond contemporaneous with the appointment of appraisers who are tasked with appraising the assets subject to the bond.

The Assignee provided no explanation for any of these statutory violations. Because the Assignee failed to comply with the statutory requirements under the Delaware ABC statute, the Appraiser Motion and Bond Motion were both denied, and the petition was dismissed. Vice Chancellor Fioravanti presided over the WindMIL Therapeutics case, and his ruling here followed his recent ruling in  Aeolus Pharmaceuticals, Inc.  where he also dismissed the petition for failure to comply with the ABC statute.[3] 

Parties contemplating a Delaware ABC proceeding should take note. Although arguably less detailed and onerous than the statutory requirements of a liquidation under Chapter 7 of the Bankruptcy Code, the ABC statute has its own set of requirements. And, as evidenced by the dismissal of the WindMIL Therapeutics petition, compliance with the statue is being enforced. Failure to comply with the statute may result in serious consequences, including dismissal of the assignment petition, potentially leaving Chapter 7 as the only liquidation alternative. 

[1]  See In re WindMIL Therapeutics, Inc., To: WMT (an ABC) LLC, C.A. No.  2023-1294 at 6 (Del. Ch. March 13, 2024).

[3]  In re Aeolus Pharmaceuticals, Inc.,  C.A. No. 2018-0212-PAF, at 5-6 (Del. Ch. Oct. 20, 2023) (dismissing ABC proceeding for failure to comply with the statutory requirements of Delaware’s ABC statute). 

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Assignments for the Benefit of Creditors: Delaware

Finance and restructuring partners Patrick Jackson and Ian Bambrick co-authored a Q&A guide for Thomson Reuters Practical Law to approaching an assignment for the benefit of creditors (ABC) in Delaware.

The authors outline 26 questions and answers that address the process by which assignments are generally administered in Delaware, including:

• Commencing an ABC proceeding
• Selecting an assignee
• Duties and actions of the assignee
• Administration of the ABC
• Creditor claims
• Compensation of assignee and professionals
• Closing the ABC
• Jurisdiction and power of the court
• Bankruptcy considerations

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Determining Whether or Not to Seek Court Approval of a Sale in a Delaware Assignment for the Benefit of Creditors Case

• March 20, 2023
• / Alternatives to Business Bankruptcy  •  Business Bankruptcy
• / Russell C. Silberglied
• Tags: Asset Sale , Assignment for the Benefit of Creditors ,

Is Court Approval Necessary for a Sale in a Delaware ABC Case?

For many small insolvent companies, an assignment for the benefit of creditors (ABC) can be more attractive than a federal bankruptcy case to maximize value and sell or liquidate a business. Depending on the state—this article will focus on Delaware ABCs—special rules may apply that can make an ABC more or less preferable, especially in an asset sale.

Why Use an Assignment for the Benefit of Creditors?

In an ABC, the company enters into a contract with an assignee that is usually a reputable financial advisor or (less frequently) attorney. The assignee agrees to act as a fiduciary to monetize the company’s assets and pay the company’s creditors according to the creditors’ relative priorities and pro rata among other same-level priority creditors.

Companies may choose this process because boards of directors and management typically are not experienced at selling distressed assets and winding down a company. Further, board members appointed by private equity firms often lack the time to oversee the process, especially when their equity stake is out of the money. Creditors also often prefer an ABC because it usually costs significantly less than a bankruptcy, therefore resulting in more value that can be distributed to creditors. Additionally, they trust the assignee to maximize value more than they would trust the company to do so due to the assignee’s expertise and independence.

The Delaware Assignment for the Benefit of Creditors

The law and procedures for ABCs vary significantly by state. In some states, an ABC is accomplished entirely out of court. In others, the assignee must commence a procedure in state court with requirements that can mirror a federal bankruptcy case. Delaware—the state of incorporation of so many companies—is somewhere in the middle. The assignee commences a case in the Delaware Court of Chancery and must meet certain statutory requirements, such as obtaining a bond to protect the assets, filing an affidavit of the company’s inventory, and obtaining two independent appraisals of the company’s assets .

Factors to Consider for Seeking Court Approval

There is no requirement in Delaware that the Court of Chancery approve a sale of the company’s assets prior to closing, as is done in a bankruptcy case. However, in many cases, the assignee has asked the court to do just that, and the Court of Chancery has frequently entered such orders. 1 Thus, whether or not to seek court approval of a sale is an important strategic decision. The following are some of the factors that must be considered:

Seeking court approval entails legal fees for drafting a motion, attending a court hearing, and possibly preparing a reply if anyone objects to the motion. While these fees typically are not large, ABC budgets tend to be thin, so any additional legal costs must be considered.

Time Needed to Close the Transaction

If a sale must close very quickly ( e.g. , the buyer’s offer will expire or the budget will run out if there are delays), the assignee must consider the fact that a sale without court approval can be accomplished more quickly than one in which court approval is sought. If the assignee files a motion, the Court of Chancery naturally will want to make sure that notice of the motion has been sent to key parties and that ample time is permitted for objections. The Court of Chancery will entertain a motion for expedited proceedings in appropriate circumstances, but if time to close the transaction is of the essence, seeking an order in advance could significantly delay the closing due to Court schedules or otherwise.

Purchaser Preference

The assignee must consider what process the proposed purchaser will prefer, because a purchaser’s comfort with the process might affect its willingness to pay the highest price. This could cut in either direction.

Sometimes, buyers prefer a court order approving the sale, because such orders could include provisions that protect the buyer, such as:

• A finding that the sale constitutes reasonably equivalent value and was the highest and best offer (thereby shielding the sale from fraudulent transfer or related claims);
• A finding that the buyer is not the successor to the assignor’s business (thereby eliminating the possibility of successor liability); or
• A holding that the sale is free and clear of liens.

Having a court order with such attractive provisions could entice certain buyers to increase their offer.

On the other hand, certain buyers prefer not to seek a court order for various reasons, including that:

• Such sales typically are subject to higher and better offers, so there is a risk of a bidding war and/or being outbid;
• Seeking a court order requires public filings, whereas a buyer might prefer to keep information confidential; and
• The buyer, like the seller, might desire to close more quickly, and as mentioned above, seeking court approval usually means a longer process.

Thus, the assignee and the buyer have a strategic choice to make.

The Court of Chancery recently made clear that if court approval is not sought before a sale closes, the assignee and buyer should not seek relief from the court after the fact.

Recent Court Cases

In ACPI (Assignment for the Benefit of Creditors), LLC v. Cantillo & Bennett LLP 2 , the assignee and the buyer elected not to seek court approval of the sale of substantially all of the assignor’s assets. Subsequently, the buyer was sued in state courts in Georgia and California by creditors and a landlord of the assignor. The assignee and the buyer filed a complaint in the Court of Chancery, seeking findings that the buyer was not a successor and paid reasonably equivalent value, and seeking an injunction against the Georgia and California plaintiffs.

While court approval of the sale had not previously been sought, the assignee and buyer contended that the Court of Chancery nevertheless had strong interest, because the Georgia and California plaintiffs’ lawsuits would “threaten and/or implicate the ABC proceedings because [they] call into question the bona fides of the [ABC] acquisition.” 3 The court disagreed, holding that:

In another recent case, In re Elsen Inc. 5 , the assignee sought approval of a sale to a newly formed entity whose equity holders included certain insiders of the assignor. The assignee had run a competitive bidding process and no one else bid. Moreover, the assignee noted that it needed to close on the sale by the day after the hearing, because it was out of cash to pay employees, and the buyer would not go forward with the purchase if the assignee had to terminate the employees before the sale closed.

Nevertheless, one of the creditors objected and asked the court to order that the sale not close. The Court of Chancery denied the motion to approve the sale, noting concerns with the process and certain disclosures in the record. However, the Court of Chancery also held that there was no basis to enjoin the closing and noted that nothing in the statute requires court approval of the sale. Thus, the Court of Chancery permitted the assignee to close the sale without a court order if it believed that doing so was in the best interests of the estate.

The Verdict on Seeking Court Approval

Together, ACPI and Elsen stand for the propositions that court approval of a sale in a Delaware ABC is not necessary, but a sale might be approved if the court is satisfied that full disclosures are made. However, if the assignee and seller decide not to seek court approval at the outset and someone sues later, the Court of Chancery will not assert jurisdiction to enjoin such a lawsuit.

We think you’ll also like:

• Selling Distressed Assets: The Assignment for the Benefit of Creditors Alternative
• The Road to an Assignment for the Benefit of Creditors (ABC): A Case Study
• Location, Location, Location – How to Choose a Bankruptcy Venue
• Bad Debtor Owes Me Money!
• Representing Asset Purchasers in Bankruptcy
• Help, My Business is In Trouble!

©2023. DailyDAC TM , LLC d/b/a/ Financial Poise TM . This article is subject to the disclaimers found here .

• See , e.g. In re Bluefly Holdings, Inc. , C.A. 2017-0041-AGB (Order) (Del. Ch. Feb. 17, 2017); In re Folica, Inc. , C.A. No. 2017-0213-AGB (Order) (Del. Ch. Apr. 10, 2017); In re Indigen Armor, Inc. , C.A. 9626-CB (Order) (Del. Ch. Jan. 26, 2015).
• C.A. No. 2019-0577-AGB (May 8, 2020) (Transcript).
• C.A. No. 2021-0325-PAF (May 21, 2021) (Transcript and Order).

About Russell C. Silberglied

Russell Silberglied practices both bankruptcy litigation and core chapter 11 work. Examples of Russ' bankruptcy litigation matters include breach of fiduciary duty suits, equitable subordination and recharacterization litigation, first and second lien litigation, valuation fights, and contested plan confirmation and DIP financing hearings. In core bankruptcy matters, Russ represents debtors and creditors in chapter 11…

Read Full Bio »   •   View all articles by Russell C. »

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The Business Bankruptcy Blog

Assignments For The Benefit Of Creditors: Simple As ABC?

Companies in financial trouble are often forced to liquidate their assets to pay creditors. While a Chapter 11 bankruptcy sometimes makes the most sense, other times a Chapter 7 bankruptcy is required, and in still other situations a corporate dissolution may be best. This post examines another of the options, the assignment for the benefit of creditors, commonly known as an "ABC."

A Few Caveats . It’s important to remember that determining which path an insolvent company should take depends on the specific facts and circumstances involved. As in many areas of the law, one size most definitely does not fit all for financially troubled companies. With those caveats in mind, let’s consider one scenario sometimes seen when a venture-backed or other investor-funded company runs out of money.

One Scenario . After a number of rounds of investment, the investors of a privately held corporation have decided not to put in more money to fund the company’s operations. The company will be out of cash within a few months and borrowing from the company’s lender is no longer an option. The accounts payable list is growing (and aging) and some creditors have started to demand payment. A sale of the business may be possible, however, and a term sheet from a potential buyer is anticipated soon. The company’s real property lease will expire in nine months, but it’s possible that a buyer might want to take over the lease.

• A Chapter 11 bankruptcy filing is problematic because there is insufficient cash to fund operations going forward, no significant revenues are being generated, and debtor in possession financing seems highly unlikely unless the buyer itself would make a loan. 
• The board prefers to avoid a Chapter 7 bankruptcy because it’s concerned that a bankruptcy trustee, unfamiliar with the company’s technology, would not be able to generate the best recovery for creditors.

The ABC Option . In many states, another option that may be available to companies in financial trouble is an assignment for the benefit of creditors (or "general assignment for the benefit of creditors" as it is sometimes called). The ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law.

California ABCs . In California, where ABCs have been done for years, the primary governing law is found in California Code of Civil Procedure sections 493.010 to 493.060 and sections 1800 to 1802 , among other provisions of California law. California Code of Civil Procedure section 1802 sets forth, in remarkably brief terms, the main procedural requirements for a company (or individual) making, and an assignee accepting, a general assignment for the benefit of creditors:

1802.  (a) In any general assignment for the benefit of creditors, as defined in Section 493.010, the assignee shall, within 30 days after the assignment has been accepted in writing, give written notice of the assignment to the assignor’s creditors, equityholders, and other parties in interest as set forth on the list provided by the assignor pursuant to subdivision (c).    (b) In the notice given pursuant to subdivision (a), the assignee shall establish a date by which creditors must file their claims to be able to share in the distribution of proceeds of the liquidation of the assignor’s assets.  That date shall be not less than 150 days and not greater than 180 days after the date of the first giving of the written notice to creditors and parties in interest.    (c) The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equityholders, and other parties in interest, signed under penalty of  perjury, which shall include the names, addresses, cities, states, and ZIP Codes for each person together with the amount of that person’s anticipated claim in the assignment proceedings.

In California, the company and the assignee enter into a formal "Assignment Agreement." The company must also provide the assignee with a list of creditors, equityholders, and other interested parties (names, addresses, and claim amounts). The assignee is required to give notice to creditors of the assignment, setting a bar date for filing claims with the assignee that is between five to six months later.

ABCs In Other States . Many other states have ABC statutes although in practice they have been used to varying degrees. For example, ABCs have been more common in California than in states on the East Coast, but important exceptions exist. Delaware corporations can generally avail themselves of Delaware’s voluntary assignment statutes , and its procedures have both similarities and important differences from the approach taken in California. Scott Riddle of the Georgia Bankruptcy Law Blog has an interesting post discussing ABC’s under Georgia law . Florida is another state in which ABCs are done under specific statutory procedures . For an excellent book that has information on how ABCs are conducted in various states, see Geoffrey Berman’s General Assignments for the Benefit of Creditors: The ABCs of ABCs , published by the American Bankruptcy Institute .

Important Features Of ABCs . A full analysis of how ABCs function in a particular state and how one might affect a specific company requires legal advice from insolvency counsel. The following highlights some (but by no means all) of the key features of ABCs:

• Court Filing Issue . In California, making an ABC does not require a public court filing. Some other states, however, do require a court filing to initiate or complete an ABC.
• Select The Assignee . Unlike a Chapter 7 bankruptcy trustee, who is randomly appointed from those on an approved panel, a corporation making an assignment is generally able to choose the assignee.
• Shareholder Approval . Most corporations require both board and shareholder approval for an ABC because it involves the transfer to the assignee of substantially all of the corporation’s assets. This makes ABCs impractical for most publicly held corporations.
• Liquidator As Fiduciary . The assignee is a fiduciary to the creditors and is typically a professional liquidator.
• Assignee Fees . The fees charged by assignees often involve an upfront payment and a percentage based on the assets liquidated.
• No Automatic Stay . In many states, including California, an ABC does not give rise to an automatic stay  like bankruptcy, although an assignee can often block judgment creditors from attaching assets.
• Event Of Default . The making of a general assignment for the benefit of creditors is typically a default under most contracts. As a result, contracts may be terminated upon the assignment under an ipso facto clause .
• Proof Of Claim . For creditors, an ABC process generally involves the submission to the assignee of a proof of claim by a stated deadline or bar date, similar to bankruptcy. (Click on the link for an example of an ABC proof of claim form .)
• Employee Priority . Employee and other claim priorities are governed by state law and may involve different amounts than apply under the Bankruptcy Code. In California, for example, the employee wage and salary priority is $4,300, not the $10,950 amount currently in force under the Bankruptcy Code.
• 20 Day Goods . Generally, ABC statutes do not have a provision similar to that under Bankruptcy Code Section 503(b)(9) , which gives an administrative claim priority to vendors who sold goods in the ordinary course of business to a debtor during the 20 days before a bankruptcy filing . As a result, these vendors may recover less in an ABC than in a bankruptcy case, subject to assertion of their reclamation rights .
• Landlord Claim . Unlike bankruptcy, there generally is no cap imposed on a landlord’s claim for breach of a real property lease in an ABC.
• Sale Of Assets . In many states, including California, sales by the assignee of the company’s assets are completed as a private transaction without approval of a court. However, unlike a bankruptcy Section 363 sale , there is usually no ability to sell assets "free and clear" of liens and security interests without the consent or full payoff of lienholders. Likewise, leases or executory contracts cannot be assigned without required consents from the other contracting party.
• Avoidance Actions . Most states allow assignees to pursue preferences and fraudulent transfers. However, the U.S. Court of Appeals for the Ninth Circuit has held that the Bankruptcy Code pre-empts California’s preference statute , California Code of Civil Procedure section 1800. Nevertheless, to date the California state courts have refused to follow the Ninth Circuit’s decision and still permit assignees to sue for preferences in California state court . In February 2008, a Delaware state court followed the California state court decisions , refusing either to follow the Ninth Circuit position or to hold that the California preference statute was pre-empted by the Bankruptcy Code. The Delaware court was required to apply California’s ABC preference statute because the avoidance action arose out of an earlier California ABC.

The Scenario Revisited. With this overview in mind, let’s return to our company in distress.

• The prospect of a term sheet from a potential buyer may influence whether our hypothetical company should choose an ABC or another approach. Some buyers will refuse to purchase assets outside of a Chapter 11 bankruptcy or a Chapter 7 case. Others are comfortable with the ABC process and believe it provides an added level of protection from fraudulent transfer claims  compared to purchasing the assets directly from the insolvent company. Depending on the value to be generated by a sale, these considerations may lead the company to select one approach over the other available options.
• In states like California where no court approval is required for a sale, the ABC can also mean a much faster closing — often within a day or two of the ABC itself provided that the assignee has had time to perform due diligence on the sale and any alternatives — instead of the more typical 30-60 days required for bankruptcy court approval of a Section 363 sale. Given the speed at which they can be done, in the right situation an ABC can permit a "going concern" sale to be achieved.
• Secured creditors with liens against the assets to be sold will either need to be paid off through the sale or will have to consent to release their liens; forced "free and clear" sales generally are not possible in an ABC.
• If the buyer decides to take the real property lease, the landlord will need to consent to the lease assignment. Unlike bankruptcy, the ABC process generally cannot force a landlord or other third party to accept assignment of a lease or executory contract.
• If the buyer decides not to take the lease, or no sale occurs, the fact that only nine months remains on the lease means that this company would not benefit from bankruptcy’s cap on landlord claims. If the company’s lease had years remaining, and if the landlord were unwilling to agree to a lease termination approximating the result under bankruptcy’s landlord claim cap, the company would need to consider whether a bankruptcy filing was necessary to avoid substantial dilution to other unsecured creditor claims that a large, uncapped landlord claim would produce in an ABC.
• If the potential buyer walks away, the assignee would be responsible for determining whether a sale of all or a part of the assets was still possible. In any event, assets would be liquidated by the assignee to the extent feasible and any proceeds would be distributed to creditors in order of their priority through the ABC’s claims process.
• While other options are available and should be explored, an ABC may make sense for this company depending upon the buyer’s views, the value to creditors and other constituencies that a sale would produce, and a clear-eyed assessment of alternative insolvency methods. 

Conclusion . When weighing all of the relevant issues, an insolvent company’s management and board would be well-served to seek the advice of counsel and other insolvency professionals as early as possible in the process. The old song may say that ABC is as "easy as 1-2-3," but assessing whether an assignment for the benefit of creditors is best for an insolvent company involves the analysis of a myriad of complex factors.

Delaware Assignment for the Benefit of Creditors Services

Wall street smarts … main street sense™, a symphony of wall street smarts … main street sense™ delaware assignment for the benefit of creditors (abc) | general assignment | creditor assignment.

A Delaware Assignment for the Benefit of Creditors (ABC) or General Assignment/Creditor Assignment can be a prudent alternative to bankruptcy for maximizing value for troubled private and public companies and their creditors.

An Assignment for the Benefit of Creditors (ABC) is a legal process in which a debtor assigns all of its assets to an independent third party, called an assignee, that’s us, to liquidate the assets and pay off the creditors. This process is a bankruptcy alternative, and it allows a debtor to avoid the lengthy and costly bankruptcy process while still getting relief from creditors.

For over 40 years in assignments worldwide, Equity Development Systems, Ltd has brought A Symphony of Wall Street Smarts … Main Street Sense ™ in skillfully guiding and judiciously representing business owners, creditors, investors, attorneys and law firms, and myriad other stakeholders in the disposition of their troubled accounts.

From National Priority List Superfund Sites—to a Decommissioned Nuclear-Powered Aircraft Carrier—to the Pencils-on-the-Desk—we handle it all, and we have successfully managed and generated Billions of Dollars  for our global clientele in the conversion of their distressed assets to cash.

Award-Winning Services Our award-winning Receivership Services have earned us the distinction of being the only Court-Appointed Receiver in the country that the United States Environmental Protection Agency (USEPA) allows to conduct Asset Recovery and Divestiture Services on active Superfund Sites. We are pleased to serve as Court-Appointed Keepers (Asset Recovery) for the U.S. Marshals Service for federal court seizures of assets under admiralty jurisdiction.

We handle it all commercial | industrial | residential real estate developments | hoa and golf communities/resorts | environmentally impaired real and moveable property | hospitality/gaming | shipyards/admiralty/maritime | aviation (fixed and rotor) | automotive (manufacturing and retail) | heavy industrial manufacturing | oil & gas/minerals | and more..., 24/7/365 onsite crisis / interim / turnaround management teams our turnaround management and restructuring teams marshal onsite 24/7/365 throughout the world to provide the complete spectrum of crisis/interim and turnaround management services., testimonials, the actions undertaken on behalf of signal capital have established a level of confidence that has resulted in epa allowing signal to dispose of movable property on the facility in a way that most secured creditors would ordinarily not enjoy. in fact, i know of no other analogous situation where the epa region 6 removal program has cooperated with a secured creditor to the extent it has due to your efforts., senior attorney.

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Such a relationship generally does not develop whereby EPA would permit a secured creditor to liquidate uncontaminated movable property due to the realistic concern that such actions would aggravate existing environmental problems or would interfere with EPA’s removal action. It is not at all unusual that in EPA’s proper exercise of its CERCLA responsibilities such accommodations are flatly rejected.

Notwithstanding that general approach, you have demonstrated a level of responsibility and credibility that has warranted a different approach for epa in this matter., delaware assignment for the benefit of creditors services — nationwide, maximizing value for all stakeholders, title 10, courts and judicial procedure, special proceedings, chapter 73. insolvency, subchapter vi. voluntary assignments, title 10  >  chapter 73  authenticated pdf  § 7381 ,  § 7382 ,  § 7383 ,  § 7384 ,  § 7385 ,  § 7386 ,  § 7387.

The process of an Assignment for the Benefit of Creditors is initiated by the distressed entity (assignor) entering into an agreement with the assignee responsible for conducting the wind-down and/or liquidation or going concern sale in a fiduciary capacity for the benefit of the assignor’s creditors. The assignment agreement is a contract under which the assignor transfers all of its right, title, interest in, and custody and control of its property to the assignee in trust. The assignee divests the property and distributes the proceeds to the assignor’s creditors.

Our award-winning services have earned us the distinction of being the only Court-Appointed Receiver/Assignee in the country that the United States Environmental Protection Agency (USEPA) allows to conduct such services on active Superfund Sites.

We are pleased to serve as Court-Appointed Keepers (Assignees) for the U.S. Marshals Service for federal court seizures of assets under admiralty jurisdiction.

A Delaware Assignment for the Benefit of Creditors (ABC) is a legal process in which a debtor assigns all of its assets to an independent third party, called an assignee, for the purpose of liquidating the assets and paying off the creditors. This process is an alternative to bankruptcy, and it allows a debtor to avoid the lengthy and costly bankruptcy process while still getting relief from its creditors.

The debtor will appoint an assignee, that’s us, who will take possession of all the assets of the debtor and will be responsible for liquidating them and distributing the proceeds to the creditors according to the priority of their claims. We will be responsible for identifying, collecting, and liquidating all assets, and for making payments to the creditors.

The ABC process is usually faster than bankruptcy and it allows the debtor to have more control over the liquidation process. It also provides a way for the debtor to avoid the negative impact of a bankruptcy filing on its credit rating. However, there are also some limitations to the ABC process, such as a lack of protection from certain types of claims and a lack of automatic stay to halt litigation against the debtor.

A Delaware Assignment for the Benefit of Creditors requires highly-trained—highly skilled—highly credentialed—highly experienced special assets and special situations transitional management, valuation, and disposition experts with decades of proven experience and unimpeachable credibility.

For over 40 years in hundreds of assignments worldwide, Equity Development Systems, Ltd. has skillfully guided and judiciously represented business owners, creditors, investors, attorneys and law firms, and myriad other stakeholders in the disposition of their troubled accounts.

From National Priority List Superfund Sites—to a decommissioned nuclear-powered aircraft carrier—to the pencils-on-the-desk—we handle it all, and we have successfully managed and generated  Billions of Dollars  for our global clientele in the conversion of their distressed assets to cash.

We specialize in handling the disposition of complex and highly contentious special assets and special situations; Environmentally Impaired Real and Moveable Property (Superfund and Brownfields Sites), Hospitality, Gaming, Resorts, Shipyards/Admiralty/Maritime, Aviation (Fixed and Rotor), Automotive (Manufacturing and Retail), Heavy Industrial, Oil & Gas/Minerals, Commercial and High-Value Residential Real Estate.

No assignment is too small or too large for EDS.

The process of a Delaware Assignment for the Benefit of Creditors

The basic process in a Delaware Assignment for the Benefit of Creditors is that the business (Assignor) turns over its assets, both real and moveable, to an independent third-party neutral (Assignee [EDS]) who is the responsible fiduciary for divesting the assets and settling with creditors.

A Delaware Assignment for the Benefit of Creditors is a voluntary and arms-length transaction that provides a speedy, orderly disposition and equitable liquidation of the firm’s assets and subsequent distribution to its creditors. It is similar to a Chapter 7 liquidation process but is far quicker and much less expensive and, therefore, generally derives a larger distribution to all creditors.

EDS experts marshal on-site 24/7/365 throughout the State of Delaware and nationally to secure and operate troubled accounts facing operational or financial challenges. Our experts work diligently with all stakeholders to preserve, protect, maintain, and enhance the enterprise value of the business and business assets that might otherwise be lost during costly and fruitless bankruptcies.

Assets Held in Trust:  By operation of law, all assets are held in trust upon acceptance of the Assignment. These assets and the funds realized therefrom are protected against creditor claims. The assets are then liquidated, and the proceeds, less administrative expenses, are distributed to all creditors according to their lawful priority class. The order of priority is very similar to that used by the Trustee in a bankruptcy proceeding.

Duties of the Assignee:  The Assignee has similar duties to a Trustee in Bankruptcy. The Assignee is charged with acting in a business-like manner in the disposition of the assets. The Assignee has considerable flexibility in the methods used and does not have to obtain consent or have a hearing to ratify his or her actions.

Fees:  Unlike Bankruptcy, no upfront fees are required. The fee amount is determined before signing the documents and becoming part of the General Assignment agreement. The fees for the Assignee are paid as an administrative expense from the proceeds recovered.

Advantages of an Assignment for the Benefit of Creditors or Creditor/General Assignment:  An  Assignment  does not require court adjudication or consent in most states, nor does it require the consent of creditors. It does not have the stigma of bankruptcy and frequently benefits the company’s principals, who nearly always guarantee the lender obligations of the company. Because an Assignment avoids the administrative procedures that govern bankruptcy, there is a considerable reduction in the cost of disposition and the time necessary to sell the assets. The consequence is greater flexibility in divestiture methods and options, resulting in greater returns for creditors. An Assignment for the Benefit of Creditors is an option that should always be considered as an option to bankruptcy.

EDS’s unparalleled level of Delaware Assignment for the Benefit of Creditors expertise is recognized and appreciated nationwide.

EDS’s unparalleled level of expertise is recognized and appreciated in boardrooms and courtrooms throughout the world. How may we be of service to you?

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What Is an Assignment for the Benefit of Creditors and How Does It Differ From a Bankruptcy? - Creditor’s Rights Toolkit

An assignment for the benefit of creditors (ABC) is a process by which a financially distressed company (referred to as the assignor) transfers its assets to a third-party fiduciary (referred to as the assignee). The assignee is responsible for liquidating those assets and distributing the proceeds to the assignor's creditors, pursuant to the priorities established under applicable law.

Troutman Pepper's Creditor’s Rights Toolkit is a series that provides practical insights to help creditors confront the challenges of commercial bankruptcy.

Please see full publication below for more information.

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Subject Matter Jurisdiction: An Assignment For Benefit Of Creditors Requirement (In re Vernon Hills)

Delaware’s Court of Chancery has no subject matter jurisdiction over an assignment for benefit of creditors proceeding when the debtor/assignor is an Illinois corporation with no assets or operations in Delaware, even when its ABC assignee/trustee is from Delaware.

That’s the decision of Delaware’s Court of Chancery in In re Vernon Hills Serv. Co ., 2024 Del. Ch., C.A. No. 2021-0783 ( issued March 28, 2024).

Founded in 1865 under Illinois law, Vernon Hills Service Company is a hotel supplies distributor, providing janitorial and sanitation products, linens, bathroom accessories, and room amenities.

The COVID-19 pandemic hits the hotel business hard . . . including hotel suppliers like Vernon Hills.

In 2021, Vernon Hills’s major secured creditor begins a private disposition of collateral process.

At the same time, Vernon Hills’s stockholders approve an agreement for sale of substantially all Vernon Hills’s assets to a third party buyer.

Then, the Vernon Hills’s board authorizes it to enter into an assignment for the benefit of creditors (“ABC”) and then to formally dissolve. The board’s resolution also approves a selection of an Assignee.

So, Vernon Hills enters into an ABC agreement that:

• makes no mention of a choice of law or choice of forum;
• “nominates and appoints” the Assignee; and
• transfers all Vernon Hills’s assets to the Assignee.

ABC Proceeding in Delaware

Then, Assignee formalizes the ABC process for Vernon Hills by filing an ABC petition in the Delaware Court of Chancery.

As is typical in that Court, the ABC proceeding begins ex parte with the Court entering an order proposed by the Assignee:

• asserting jurisdiction over the ABC under Delaware law; and
• requiring the Assignee to provide notice to Vernon Hills’s creditors.

Assignee also files with the Court an affidavit identifying Vernon Hills’s only assets as equity interests in, (i) AHR International Hotel Supply Coöperatief U.A., a Netherlands cooperative, and (ii) International Hotel Supply (India) Private Limited.

The affidavit says the value of such entities is “TBD.”

Proposed Sale

Then, Vernon Hills’s Assignee moves the Delaware Court of Chancery for approval of a proposed sale of Vernon Hills’s assets for a price of $200,000 and entry of an order insulating the sale and the Assignee from any future challenge.

The Chancery Court holds a status conference on the proposed sale and:

• notes that Delaware’s assignment statutes do not provide for Court approval of an ABC assignee’s sale of assigned assets; and
• indicates its reluctance to, (i) approve a sale involving parties not before the court, or (ii) grant additional relief designed to insulate the transaction from future challenge.

Additionally, a creditor objects to the proposed sale, arguing that it is designed to extinguish Assignor’s debts.

Appraisers and Bond

In response, Assignee withdraws the proposed sale and, instead, asks the Court to:

• appoint appraisers; and
• set an unsecured bond of $200,000.

Since the Assignee had already obtained the proposed appraisals (which set the value of Assignor’s two equity interests at $1,511,000 and $2,880,000, respectively), the Court:

• appoints the appraisers; but
• requires a secured bond of $2,195,500.

Discharge Motion

Fast forward five months: Assignee files a motion in the Court of Chancery for final accounting and for an order closing the case, releasing the bond, and discharging the Assignee (the “Discharge Motion”).

The Delaware Court of Chancery reviews the Discharge Motion and considers whether it ever had subject matter jurisdiction over Vernon Hills’s ABC proceeding. The jurisdiction issue arises because Vernon Hills:

• is an Illinois corporation; and
• has no connection to Delaware.

After briefing and a hearing, the Delaware Court of Chancery finds as follows.

The issue of subject matter jurisdiction may be raised at any time before final judgment and by the court sua sponte , and the burden of establishing subject matter jurisdiction rests with the party seeking the Court’s intervention.

The Delaware Court of Chancery has limited jurisdiction, and its jurisdiction over Delaware ABCs is delegated by statute. The subject matter jurisdiction question is this:

• “whether the Assignor, as an Illinois corporation with no substantial contacts with Delaware, may pursue an ABC proceeding under Delaware statutes.”

ABC Laws in Illinois and Delaware

In Illinois, where Assignor is incorporated and conducted its operations, ABCs are governed by common law and do not involve judicial oversight.

By contrast, ABCs in Delaware are governed by statute and involve oversight by the Court of Chancery. However, Delaware’s ABC statute, (i) is facially limited to debtors with assets in Delaware, and (ii) has also been applied to assignors that are incorporated in Delaware.

Assignee’s Arguments

Even though Vernon Hills is incorporated in Illinois, has no assets or operations in Delaware and has no other Delaware connection, Assignee argues that Delaware law governs the assignment and that the Court of Chancery has subject matter jurisdiction solely because the Assignee is a Delaware entity.

According to Assignee:

• Assignor’s assets are located in Delaware because they were transferred by agreement to the Assignee—a Delaware limited liability company; and
• because the Assignee is a Delaware entity with legal authority over the Assignor’s assets, those assets are deemed to be located in Delaware.

Assignor also argues that jurisdiction exists in Delaware because the assignment agreement provides, (i) that it is governed by Delaware law, and (ii) gives to the Assignee sole discretion to proceed under Delaware law in Delaware’s Court of Chancery.

Court Rulings

The Delaware Court of Chancery declares that Assignee cites no persuasive authority for any of its propositions.

–ABC Agreement

The Court also declares that Vernon Hills’s ABC agreement cannot create jurisdiction under Delaware’s ABC statute “for at least two reasons”:

• parties cannot confer subject matter jurisdiction on the Delaware Court of Chancery by contract; and
• Vernon Hills’s ABC agreement fails to expressly provide for either, (i) the application of Delaware law, or (ii) venue in the Delaware Court of Chancery.

What the Vernon Hills’s ABC agreement actually provides is that the assignment will proceed without judicial supervision unless otherwise required by law. So, here’s the reality:

• Vernon Hills is an Illinois corporation and is headquartered in Illinois so that Illinois law would apply to its ABC assignment, and jurisdiction would be proper in Illinois—Assignee acknowledges that it could have pursued Vernon Hills’s ABC under Illinois law; and
• Assignee’s filing of the ABC in the Delaware Court of Chancery and invocation of the Delaware ABC statute is contrary to the parties’ express agreement that the ABC “shall be administered out of court.”

–Restatement (Second) of Conflict of Laws

Moreover, the Restatement (Second) of Conflict of Laws identifies the following factors applicable to the issue before the Court of Chancery:

• the effectiveness of a general assignment for benefit of creditors is usually governed by the local law of the state of the assignor’s domicil or incorporation or principal place of business;
• it is important that such assignments should be governed by the local law of a single state; and
• considerations of fairness to creditors dictate that the state should be one that is closely connected with the debtor and where the debtor could readily have been subjected to suit.

–Delaware Precedents

Assignee also cites a handful of uncontested ex parte orders entered by the Delaware Court of Chancery in ABCs involving non-Delaware parties. Such cited cases can be broken into three categories:

• cases where the assignor is a Delaware entity, but the assignee is a foreign entity;
• cases where some, but not all, assignors are Delaware entities; and
• cases with exclusively out-of-state assignors, each of which is wholly owned by a Delaware entity.

The Vernon Hills ABC proceeding is not analogous to any of those.

Accordingly, the Delaware Court of Chancery rules that:

• it lacks subject matter jurisdiction over Vernon Hills’s ABC;
• Vernon Hills’s ABC petition is dismissed; and
• the bond is released.

Here is a lesson from the In re Vernon Hills opinion described above:

• don’t attempt an ABC in a state with which the debtor/assignor has no connection.

Filed under

• Insolvency & Restructuring
• Koley Jessen PC
• Delaware Court of Chancery

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Assignment for the Benefit of Creditors? One Creditor’s Experience With an Archaic State Insolvency Process

This article provides insight, from a creditor’s perspective, into the ABC process in New Jersey. "My advice to any creditors that find themselves in an ABC is to try to move it to a federal bankruptcy court as soon as possible."

September 08, 2022 at 10:00 AM

9 minute read

Creditors' and Debtors' Rights

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An Assignment for the Benefit of Creditors (“ABC”) is the state court analogue to a federal bankruptcy. Most, if not all, states have some version of an ABC (sometimes called a general assignment), which is governed either by statute or common law rather than federal bankruptcy law. In New Jersey, ABCs are governed by statute (N.J.S.A. §2A:19-1, et seq.), the earliest version of which dates back to the 1820s, i.e., well before the Federal Bankruptcy Code was codified in 1978.

While New Jersey’s ABC law predates the Federal Bankruptcy Code by approximately 150 years, many creditors are not familiar with this state-court insolvency process, as ABCs have more or less been supplanted by the Federal Bankruptcy Code. Although New Jersey courts have described ABCs as similar to Chapter 7 bankruptcy petitions, ABCs vary from federal bankruptcy proceedings in significant ways. For instance, unlike in a federal bankruptcy, where the United States Trustee assigns the bankruptcy trustee to a particular petition, in an ABC the debtor has the power to select who will serve as the “assignee,” which is the fiduciary who represents both the debtor (known as the “assignor”) and all creditors in the ABC proceeding.

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Shareholder Approval Is Required Under Delaware Law to Sell All or Substantially All of an Insolvent and Failing Corporation’s Assets

Under Delaware General Corporation Law (DCGL) 8 Del. C. §271, a corporation’s board of directors may sell, lease or exchange all or substantially all of the corporation’s property and assets as the board deems expedient and in the best interests of the corporation so long the sale, lease or exchange is authorized by a majority of the outstanding stockholders of the corporation entitled to vote thereon. The Supreme Court of the State of Delaware recently was called upon to decide whether Section 271 is subject to a “common law insolvency exception” that would allow the board to sell, lease or exchange all or substantially all of the corporation’s assets without stockholder approval if the corporation is insolvent and failing. The Supreme Court of Delaware determined that Section 271 is not subject to a “common law insolvency exception,” reversing a decision of the Delaware Court of Chancery.

Facts Stream TV Network, Inc. (Stream) is a Delaware corporation essentially controlled and owned by Mathu Rajan, his brother Raja Rajan and their parents, who hold a majority of Stream’s Class B common stock and a majority of Stream’s outstanding voting power. Stream’s charter contains the following Class B voting provision:

For so long as shares of Class B Voting Stock remain outstanding, in addition to any other vote or consent required herein or by law, the affirmative or written consent of the holders of a majority of the then-outstanding shares of Class B Voting Stock, voting as a separate class, shall be necessary for the Corporation to consummation [sic] an Acquisition or Asset Transfer.

(the Charter Voting Provision). Stream’s senior secured lender held a senior security interest in all of Stream’s assets, and Stream’s junior secured creditor held a subordinated security interest in all of Stream’s assets. Each of the senior and junior secured creditors was authorized to take control of Stream’s assets in the event Stream defaulted on its obligations to the respective lender. By February 2020, Stream had defaulted on its obligations to its senior and junior secured lenders, missed payroll, furloughed workers and defaulted on its trade debt, and in March 2020, its senior secured lender filed a complaint against Stream seeking foreclosure and other relief.

Stream’s board was comprised of the Rajan brothers and four independent outside directors. At a board meeting on May 4, 2020, a Resolution Committee was formed to resolve Stream debt defaults and claims, as well as actual and threatened litigation “without further action being required from the Board of Directors or any executive of the Corporation.” Following negotiations, Stream, the senior and junior secured lenders and 52 of Stream’s stockholders entered into an agreement pursuant to which, in full satisfaction of the obligations to the secured lenders, all rights, title and interest in and to all of Stream’s assets would be transferred to SeeCubic, a newly formed holding corporation established by the lenders (the Omnibus Agreement). Additionally, Stream and its Class A common stockholders, except the Rajan brothers, were to receive certain rights under the Omnibus Agreement.

The Court of Chancery

On Sept. 8, 2020, Stream commenced an action in the Court of Chancery of the State of Delaware, seeking a declaration that the Omnibus Agreement was invalid. Stream moved for a temporary restraining order to bar SeeCubic from enforcing the Omnibus Agreement. SeeCubic filed counterclaims and third-party claims against the Rajan brothers, requesting expedition and a temporary restraining order that would prevent Stream from interfering with its rights under the Omnibus Agreement. In December 2020, the Court of Chancery held that it was reasonably probable that the Omnibus Agreement was a valid, binding, enforceable agreement and entered a preliminary injunction barring Stream and anyone acting in concert with it from taking any action to interfere with SeeCubic’s rights under the Omnibus Agreement.

In September 2021, the Court granted in part, SeeCubic’s motion for summary judgment, holding that the Omnibus Agreement is valid and enforceable and converting the preliminary injunction into a permanent injunction. The Court subsequently granted a motion filed by Stream and the Rajan brothers to have the decision on SeeCubic’s summary judgment motion entered as a partial final judgment. On Nov. 12, 2021, Stream and the Rajan brothers appealed the decision, and on the same day, they moved before the Court of Chancery for an order modifying or staying the permanent injunction. On Dec. 2, 2021, the Court of Chancery issued a 34-page opinion in which it denied the motion seeking to modify or stay the permanent injunction. The Court reasoned that the Omnibus Agreement was valid and binding and that a common law insolvency exception operated to eliminate any requirement that the Omnibus Agreement was subject to a shareholder vote. The Court began its analysis with an exhaustive review of Section 271, including a comprehensive review of Section 64a, Section 271’s predecessor. Section 271 provides in relevant part:

Every corporation may at any meeting of its board of directors or governing body sell, lease or exchange all or substantially all of its property and assets, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or other property, including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors or governing body deems expedient and for the best interests of the corporation, when and as authorized by a resolution adopted by the holders of a majority of the outstanding stock of the corporation entitled to vote thereon.

The Court concluded that a “common law insolvency exception” to the shareholder vote requirement contained in Section 271 was applicable to allow directors of an insolvent and failing corporation to sell Stream’s assets without shareholder vote or approval. In its December 2020 decision granting SeeCubic’s request for a preliminary injunction, the Court of Chancery considered the interplay between Sections 271 and Section 272 of the DGCL. Section 272 provides:

The authorization or consent of stockholders to the mortgage or pledge of a corporation’s property and assets shall not be necessary, except to the extent that the certificate of incorporation otherwise provides.

The Court determined that interpreting Section 271 to require a shareholder vote for the transfer of an insolvent corporation’s assets to its secured creditors would create a conflict with Section 272. The Court reasoned that since Section 272 makes clear that, absent a provision in a certificate of incorporation to the contrary, shareholder approval is not necessary to mortgage or pledge assets of a corporation to secure a debt, it would be illogical to require shareholder approval to transfer collateral to a secured creditor in satisfaction of an insolvent corporation’s obligations. Moreover, if shareholder approval is required to transfer collateral to a secured creditor, the value of a security interest in collateral would be undermined. Finally, the Court observed that given the prevalence of security interests and the fact that Section 271 and its predecessor have been in effect since 1917, the issue of whether Section 271 applies to the transfer of an insolvent corporation’s assets to its secured creditor in satisfaction of its obligations would have arisen, but it has not. Finally, the Court of Chancery summarily addressed the Charter Voting Provision, stating that the provision “tracks the text of Section 271 and warrants the same interpretation” — namely, that the Omnibus Agreement does not implicate the Charter Voting Provision.

On appeal, the following four issues were presented to the Supreme Court of Delaware:

• Whether the Charter Voting Provision unambiguously requires Class B stockholder approval and renders Section 271’s shareholder voting rule irrelevant.
• Whether, in determining whether the Charter Voting Provision requires stockholder approval of the Omnibus Agreement, the Court of Chancery erred in its analysis by examining Section 271 prior to considering the applicability of the Charter Voting Provision.
• Whether Section 271 superseded any common law insolvency exception and whether such an exception ever existed under Delaware law.
• Whether the Court of Chancery’s decision would upset Delaware’s contractarian focus and the predictable application of Section 271.

The Supreme Court considered the first and second issues simultaneously. First, the Court determined that the Court of Chancery erred by commencing its analysis with an examination of Section 271, concluding that instead, the analysis should commence with a determination of whether the Charter Voting Provision renders Section 271’s shareholder voting rule irrelevant. Accordingly, the Supreme Court began by noting that corporate charters are “broadly enabling” and may depart from the rules of common law so long as a charter provision does not conflict with the DGCL. The Court went on to note that corporate charters are contracts subject to the general rules of contract construction. Under Delaware law, contracts are to be read as a whole, and terms are to be given their commonly accepted meanings. The Supreme Court concluded that the terms of the Charter Voting Provision are clear and unambiguous, and therefore, extrinsic evidence may not be considered in construing the provision. Reading the Charter Voting Provision and the Omnibus Agreement together, the Supreme Court determined that the transaction embodied in the Omnibus Agreement falls within the Charter Voting Provision, and an affirmative vote of the holders of a majority of the then-outstanding shares of Class B stock is necessary to consummate the Omnibus Agreement.

While the Supreme Court acknowledged that it need not engage in any additional review, it undertook an exhaustive analysis of the third issue before it and determined that any common law insolvency exception to the shareholder voting requirement contained in Section 271 that may have existed under Delaware law had been superseded by Section 271’s predecessor. In reviewing the Court of Chancery’s application of the insolvency exception, the Supreme Court noted that the Court of Chancery relied on authorities and cases that either predated Section 271 or were decided in jurisdictions other than Delaware. The Supreme Court reasoned that the Court of Chancery’s reliance on the cited authorities and cases was misplaced and embarked on its own exhaustive survey of the law relating to the common law insolvency exception. First, the Supreme Court examined the case law throughout the United States addressing the insolvency exception and found that no Delaware case has ever expressly addressed or adopted the insolvency exception. Then, the Supreme Court examined Section 271 and its predecessor, DGCL Section 64a.

Section 64a made it easier for a board to sell, lease or exchange all or substantially all of the corporation’s assets by imposing a majority stockholder vote in favor of the sale of all assets of a corporation. Section 64a was enacted to supersede the common law rule that required a unanimous shareholder vote in favor of such sales.

The Supreme Court left open the question of whether a common law insolvency exception existed under Delaware law prior to the enactment of Section 64a, concluding that when the common law unanimity rule was superseded by Section 64a, so too was any insolvency exception to that rule. The Court noted that this conclusion is reinforced by the plain language of Section 271, which is not ambiguous and does not contain any exceptions.

Finally, the Supreme Court considered the fourth issue placed before it. The Court recognized Delaware’s contractarian philosophy and focused on the importance of stability and predictability in the application of DGCL, finding that allowing a common law insolvency exception to Section 271 that was never applied by a Delaware court would not advance these fundamental goals.

Analysis The Delaware Supreme Court has foreclosed the possibility that a common law insolvency exception exists with respect to the shareholder voting requirement contained in Section 271. Therefore, absent a provision in a corporation’s certificate of incorporation that clearly and unambiguously provides otherwise, the consent of a majority of shareholders entitled to vote on the issue will be required in order for a board of directors to sell, lease or exchange all or substantially all of the assets of a corporation. This is the case regardless of whether the corporation is failing and insolvent or thriving and profitable.

The Supreme Court’s elimination of the possibility of a common law insolvency exception to Section 271 may not be dire. It simply defers to corporations, the decision of whether to include an insolvency exception to the voting requirement contained in Section 271 in their governance scheme.

As a corporation is insolvent and failing, fast action often is required to preserve value and “stop the bleeding.” Requiring shareholder approval in addition to a board resolution to enter into an assignment for the benefit of creditors or other agreement for the sale, lease or exchange of all or substantially all of an insolvent and failing corporation’s assets may frustrate the corporation’s ability to avail itself of opportunities to maximize the value of its assets for the benefit of its creditors. Moreover, absent an insolvency exception, shareholders whose individual interests may not be aligned with the interests of the corporation and its creditors may withhold votes for self-serving reasons, potentially pushing the corporation into bankruptcy or an alternative restructure that is costly in terms of time and money and potentially risky in terms of achieving success. Since the Supreme Court merely determined that a common law insolvency exception to Section 271 does not exist and because Section 271 is a default provision, a corporation can include a carefully drafted insolvency exception into its certificate of incorporation, and it will have the advantage of a contractual insolvency exception despite the Supreme Court’s ruling.

Incorporation of an insolvency exception to the voting requirement contained in Section 271 will eliminate the roadblocks that could arise from requiring majority shareholder approval of a transaction at a time when shareholders’ individual interests may diverge from the interests of the corporation and its creditors. Eliminating these roadblocks may afford a corporation the agility to take advantage of opportunities to maximize the value of its assets for the benefit of its creditors should it become insolvent and failing. However, corporations must be cautious when delegating such power to their board since the board may lack the skill set to unilaterally make such decisions, or directors may be hesitant to act without a shareholder vote, given their duties and the scrutiny they are under. Accordingly, if such power is delegated to a corporate board, the corporation must periodically scrutinize the composition of its board with this delegation in mind to ensure that board members are capable of understanding the corporation’s financial condition, evaluating the corporation’s options and making and acting upon independent, well-reasoned decisions that are in the best interest of the corporation in the event the corporation becomes insolvent and is failing. This should be done regularly before the corporation becomes insolvent and is failing and should be equally important to directors so that they can dutifully discharge their fiduciary obligations and shareholders so that the remaining value, if any, of their investment can be preserved.

Finally, the Supreme Court’s decision may impact secured creditors. The Supreme Court noted the Court of Chancery’s analysis regarding the interplay between Sections 271 and 272 with seeming approval, and in its discussion of the historical development of Section 271, the Supreme Court stated: “Section 272 clarified that Section 271 does not apply to mortgages or pledges of corporate assets.” From this statement, it appears indisputable that Section 271 does not apply to the delivery by an insolvent corporation of collateral to a secured creditor. The Supreme Court, however, did not expressly rule upon this issue. Instead, it relied upon the Charter Voting Provision to conclude that the Omnibus Agreement, which operated to deliver collateral to the designee of Stream’s secured creditors, required a shareholder vote. Accordingly, it is possible there could be further litigation on this issue absent a clear and unambiguous provision in a corporation’s charter that the delivery of mortgaged or pledged corporate assets to a secured creditor does not require a shareholder vote.

In summary, the Delaware Supreme Court’s ruling unequivocally establishes that under Delaware law, there is no common law insolvency exception to Section 271. This decision does not prevent corporations from including an insolvency exception to Section 271 in their certificate of incorporation, thus creating a contractual insolvency exception. Before including such a provision in its certificate of incorporation, a corporation should carefully consider whether it wishes to confer upon its board the right to dispose of all or substantially all of its assets without a shareholder vote. If it chooses to confer such a right on its board, it should regularly assess the composition of its board to be sure that the board is capable of properly exercising this right in the event the corporation becomes insolvent and failing. Additionally, at least until it is definitely settled that the voting requirement of Section 271 is inapplicable to the transfer of assets to a secured creditor, secured creditors would be wise to consider requesting an express provision in a corporate borrower’s certificate of incorporation that permits the board to sell, lease or exchange to the secured creditor its collateral without the necessity of a shareholder vote.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest

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Dissolving a Delaware Corporation

An earlier version of this post originally appeared on Bob’s blog In The (Red) ® – The Business Bankruptcy Blog

An Overview Of The Formal Corporate Wind Down

If a corporation’s board of directors decides that the business needs to be wound down, there are a number of legal paths to consider. Determining the best approach is fact-dependent, and the corporation and its board should get legal advice before making a decision. Sometimes a bankruptcy filing is needed, either a Chapter 11 reorganization (perhaps to  complete a going-concern sale ), a Subshapter V small business reorganization (if eligible), or a Chapter 7 liquidation bankruptcy (in which a trustee will be appointed to liquidate the business). In other cases, an assignment for the benefit of creditors  might be a good choice.

A Delaware Corporate Dissolution

This post takes a high-level look at another, often simpler option: the corporate dissolution.  It assumes that the business is a Delaware corporation, since many corporations incorporate there. The laws of the state of incorporation govern the dissolution process, so it’s important to remember that the process described below will differ if the business is incorporated in another state.

Why A Corporate Dissolution?

Corporations typically choose to do a corporate dissolution when they don’t need bankruptcy protection (and prefer to avoid filing bankruptcy) but want to have the corporation formally wound down. The dissolution process can be less expensive than other alternatives, particularly when litigation or disputes over claims is unlikely.

• When a long-form dissolution is properly conducted, it can bar late claims against the corporation and provide directors with protection from personal liability to claimants.
• Unlike a bankruptcy filing (but similar to an assignment for the benefit of creditors), a dissolution requires shareholder approval; that often makes it a better fit for privately held corporations.
• A dissolution typically requires at least one director to supervise the process and at least one officer to manage the wind down and liquidation, although some professional firms will step into those roles.
• Corporations often elect to dissolve at a point when they anticipate being able to pay creditors in full and return some funds to shareholders or, if they are insolvent, find their creditors generally to be cooperative. If the corporation has a bank or other secured creditor, it helps if they are willing to work with the corporation to liquidate the assets without a foreclosure.

A Corporation In Dissolution

Under Delaware law, once the dissolution commences the corporation is no longer permitted to operate as a normal business. Instead, as the Delaware statute provides, the corporation continues only “gradually to settle and close their business, to dispose of and convey their property, to discharge their liabilities and to distribute to their stockholders any remaining assets, but not for the purpose of continuing the business for which the corporation was organized.” The corporation is allowed up to three years to complete the dissolution process; if more time is required, a request has to be made to the Delaware Court of Chancery (although a corporation in dissolution remains in existence, without having to go to the Chancery Court, to complete lawsuits that are pending when the three year period expires).

Key Aspects Of A Dissolution

To give you a sense of the process involved, below is a list of some of the main steps in a dissolution. However, please note that important details go beyond the scope of this post. Examples include special voting procedures that may be required if preferred stock has been issued, possible alternatives to the claims process, establishing reserves for claims, payment of the costs of the liquidation, winding down subsidiaries, and the impact of foreign affiliates. It bears repeating: a corporation considering a dissolution should get legal advice on all aspects of the process, including whether to pursue the more involved long-form dissolution or the often simpler short-form dissolution

With that caveat, a dissolution generally involves the following:

• Board approval  of a decision to dissolve and adoption of a  plan of liquidation ;
• Shareholder approval  of the dissolution and plan of liquidation in requisite majorities as provided under the corporation’s then-current Certificate of Incorporation ;
• Filing of a Delaware Annual Franchise Tax Report and  payment of franchise taxes , including a partial-year final franchise tax report;
• Filing a  Certificate of Dissolution  with the Delaware Secretary of State ’s office;
• Timely reporting  to the Internal Revenue Service of the dissolution;
• If pursuing a long-form dissolution, a formal claims process , with at least 60 days notice to potential claimants of the dissolution and deadline to file claims, together with publication of the notice in required newspapers, and fillings with the Court of Chancery as provided under Delaware law;
• If pursuing a long-form dissolution, review  of filed claims, with appropriate offers to claimants or rejections of claims;
• If pursuing a short-form dissolution, paying, or reserving for , to the extent of the ability to pay, claims of all creditors currently owed and those likely to arise (based on facts then known) in the 10 years following the date of dissolution;
• Resolution  of any lawsuits, including any timely-filed by claimants whose claims the corporation rejected;
• Liquidation  of remaining corporate assets in accordance with the plan of liquidation;
• Preparation and filing of all  final tax returns ;
• Withdrawals or surrender  of qualifications to do business in other states; and
• Final distributions  to creditors and, if funds remain, to applicable shareholders.

In the right situation, a dissolution can be the best approach to formally wind down a corporation’s business and corporate existence. As with all corporate governance matters, however, the corporation’s board and management should get legal advice tailored to the corporation, its business, and creditors, and guidance throughout the dissolution process.

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In connection with representations involving the sale of distressed businesses, we have advised each of the key stakeholders including buyers, sellers, sponsors, lenders, directors and officers. Our clients in distressed business transactions include public and private companies, private equity firms and financial institutions. We understand the complexities and sensitivities in these matters and recognize that each transaction has a different mix of risk, certainty, speed and expense. Our job is to understand our client’s needs, master the facts, develop an optimal strategy for accomplishing our client’s business objectives that anticipates all potential challenges and identifies solutions in advance, and efficiently execute the agreed upon strategy to successful completion.

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