If your company can’t pay its debts and you are thinking about winding it down through an assignment for the benefit of creditors, it is natural to worry that once you hand over the keys, you will be left in the dark. That doesn’t mean you’ll be cut off from all information. Instead, you’ll receive regular updates - especially when major milestones are reached. The business that owes money (debtor) assigns its assets to someone (assignee, usually a professional liquidator) who will sell its assets to pay its creditors.
The first updates are really paperwork, and most of it ends up in the public record. The assignment needs to be written and irrevocable. The original has to be recorded at the county where the assignor’s principal place of business is located and a certified copy has to be recorded in each county where there are assets. The assignee has to file a petition with the clerk starting the proceeding and a motion to set the amount of the assignee’s bond. That means anyone (including you) can go to the public records and access a lot of information about it.
Within the first 30 days, the assignee has to examine you, the owner, under oath. In this examination, the assignee gathers information about the debtor’s business and assets. Because it is under oath, the owner is expected to answer the questions to the best of his or her ability. It’s a good idea to have a list of questions ready to ask the assignee.
Notice of the Assignment
Your creditors get their own update, and it comes quickly. The assignment needs to be advertised. This is done through the newspaper. Specifically, the assignee must publish a notice of the assignment in the local paper once a week for 4 weeks, starting within 10 days of filing the petition. Also, within 20 days of filing the petition, the assignee must send a notice to all known creditors. This will tell the creditors that they should look to the assignee for their claims, instead of to the business. The notice gives the date the petition was filed, the court and case number, and the last day a proof of claim can be served. For you, the notice matters because it is the first thing that will alert your creditors to the assignment and will provide them with an opportunity to protect their interests. People who are owed money need to file a claim within 120 days from the date the petition was filed. The claim must specify the creditor’s name and address, the type of claim, and the amount. The claim must be signed by the creditor or his or her agent or attorney. The assignee will review the validity and priority of all claims.
After the notices go out, things can seem quiet for a while, but the assignee is still very much in motion. When the assignee first looks at your business, he or she will be focused on identifying what’s left to be protected or liquidated. He or she will also begin processing accounts receivables and recovering and selling assets. Where it makes sense, the assignee can also pursue claims against third parties, such as fraudulent transfers. Throughout, the assignee must maintain ongoing records of the assignor’s estate and provide updates to interested parties about the estate’s status.
Next comes the interim report. The assignee has to submit a report to the court six months after the assignment. Once again, there is paperwork, but this one is an opportunity to get more information about what’s going on. This document will tell the court, and other interested parties, how the estate is doing up to that point.
Sometimes, though, it makes sense to keep the business alive for a little while. The court may allow the assignee to run the debtor’s business for short periods of time, in the interest of the estate, so that the business can be sold as a going concern. An ongoing business generally carries extra value, even when it is insolvent, which can mean more for creditors.
The last big update comes at the close of the administration. When the assignment is done, the assignee files a final report of the receipts and disbursements and asks the court to approve it. It’s a thorough document that provides a comprehensive accounting of the estate’s financial activities, including all payments and distributions made. When the court approves the report, it will officially discharge the assignee from the case, and the assignee’s bond will be released.
Automatic Stay
It also helps to know what an assignment does not do. Unlike bankruptcy, a general automatic stay does not exist. From a creditor’s point of view, the rule works like this: Generally, unless you’re a secured creditor or a mortgagee, if you want to proceed against the assignee you have to do so through the assignment process. If you’ve got a judgment, execution or garnishment lien you can’t just sue the guy who’s supposed to be collecting all the monies and dividing them up fairly. You have to participate. Creditors also have the right to take an active part in the case, including the right to conduct discovery.
All of this assumes an assignment is the right path, and that depends on your company’s specific situation. Before deciding, get advice from a business lawyer who can review your options. Delancey Street is not a law firm, so when legal work like this is the right call, we refer owners to a vetted independent attorney. And if you are still weighing other options, negotiating with creditors is what a business debt settlement company like ours does: our senior advisors negotiate with funders and lenders for less than the full balance owed.
The bottom line is that the updates come consistently, but you’re not the driver. A first consultation with us is free and confidential.
