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Chapter 727 Assignment for the Benefit of Creditors
Assignment for the benefit of creditors is generally thought of as a state court version of a Chapter 7 Bankruptcy for a business. Some compare it to the probate of a dying business’s “estate.” However you look at it, Chapter 727 provides an important tool for businesses that are insolvent or soon will be insolvent.
How does it work?
The assignment begins when the debtor business fills out the statutory form that executes an irrevocable assignment of the business to an assignee for the benefit of creditors (it can be and often is one of the business’s creditors).[1] The assignment must then be recorded in the county in which the assignor business has its principal place of business and where the assets of the estate[2] are located.[3] The assignee then must file a petition with the clerk of the court to commence the assignment proceeding and must file a motion asking the court fix the appropriate amount of the assignee’s bond.[4]
The assignee acts much like a bankruptcy trustee from this point forward. He/she conducts an initial examination of the debtor within 30 days; gives notice to all creditors; works to turn the business’s assets to cash; conducts the business of the assignor for limited periods; pays reasonable and necessary administration costs; keeps regular accounts and furnishes information to interested parties; examines validity and priority of all claims against the estate; abandons assets to perfected lien creditors where estate has no equity; performs necessary accounting; hires professionals as they are needed; pays dividends as appropriate; and submits the final report upon completion.[5]
Why Not Bankruptcy?
Assignment for the benefit of creditors involves one extremely unattractive characteristic: unlike bankruptcy, there is no general automatic stay of creditor’s claims. Rather, a holder of a consensual lien may foreclose upon its collateral without leave of the court, and governmental entities may still enforce police or regulatory powers.[6] All nonconsensual lienholders must participate in the process and may only receive their dues in the distribution stage.
The most significant difference between assignment for the benefit of creditors and bankruptcy is that the assignee may continue to operate the business without court approval for up to 45 days, upon notice, if there is no objection by an interested party.[7] Beyond that, the assignee may continue to operate the business with court approval so long as no party objects.[8] This, paired with the ability of the assignor to select the assignee provides a major benefit to small businesses. Bankruptcy trustees are often lawyers or accountants who are not experts in every field of business. Thus, they may not be as well-equipped to liquidate the assets of a business as well as an assignee selected by the business owner would be. Additionally, the assignee has the ability to operate the business without the consent of the court which allows for a seamless transition to the assignee. The assignee has the power then to sell the business as a going concern, often bringing in more money for the business then if it had been liquidated in bankruptcy. Otherwise, the assignee works towards an orderly winding down the business liquidating the assets and operating the business so as to maximize payments to creditors.
To put it in finite terms, if a corporation is solely owned and the sole owner has personally guaranteed the debt, it is important that when the business is liquidated, the guaranteed debt is paid up as much as possible. An assignment for the benefit of creditors may provide a way for a business to potentially pay out more to its creditors upon liquidation, if it is operated for limited amount of time to finish up pending or ongoing business concerns. For example, there may be a few contracts incomplete at the time of assignment that, if completed, would bring in profits that would assist in paying the business’s debts. An assignment for the benefit of creditors allows these contracts to be completed by a carefully selected assignee who is better equipped to run the business than a bankruptcy trustee. Additionally, most assignees are willing to work with assignors more closely than bankruptcy trustees. Also, most consensual lienholders recognize that they will likely receive a better payout on their lien if they allow the assignment rather than foreclose immediately. Lastly, assignment for the benefit of creditors is often cheaper than bankruptcy when it comes to legal fees and costs. Thus, assignment for the benefit of creditors may help mitigate the losses that follow the business owner after the business is wound up.
An assignment for the benefit of creditors provides a less expensive and often more efficient alternative to bankruptcy. However, there are instances where filing for bankruptcy is the best option. Both legal tools provide different solutions and it is important that you seek out an experienced attorney who can determine which option is best for you. Contact Boatman Ricci for a consultation at 239-330-1494.
[1] Fla.Stat. §727.104(1)(a).
[2] The statute refers to the remaining assets of the business as the “estate.”
[3] Fla.Stat. §727.104(2)(a).
[4] Fla.Stat. §727.104(2)(b).
[5] Fla.Stat. §727.108.
[6] Fla.Stat. §727.105.
[7] Fla. Stat. § 727.108(4).
[8] Id.
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