Understanding the General Assignment for the Benefit of Creditors
A General Assignment for the Benefit of Creditors, often abbreviated as an ABC, is a state-law alternative to a formal bankruptcy designed to liquidate a distressed company’s assets, centralize creditor claims, and distribute proceeds in an orderly manner. In an ABC, the company (the assignor) transfers all or substantially all of its assets to a fiduciary (the assignee) who administers the estate for the benefit of creditors. While the concept appears straightforward, the legal and tax mechanics are intricate. The governing statute varies by state, secured creditors’ rights frequently remain intact, and the drafting must harmonize corporate authorization, assignment language, notice procedures, and fiduciary duties to withstand scrutiny from creditors and potential buyers of assets.
Drafting the assignment instrument is not merely a formality. It is the foundation that enables the assignee to take title, convey assets free and clear to the greatest extent permitted, enforce contracts or reject them as appropriate, and pay claims in the correct priority. An imprecise document can invite litigation, jeopardize asset sales, or create tax and employment liabilities that could have been mitigated. Laypersons commonly assume that an ABC “automatically” erases debt; it does not. Rather, it is a liquidation process that follows statutory and contractual priorities. The assignment is the gateway that establishes control and process; it must be precise, complete, and consistent with state law and the debtor’s corporate governance.
Assessing Eligibility and Strategic Fit Before Drafting
Not every distressed company is a suitable candidate for an ABC. Before drafting, counsel should evaluate whether an ABC will achieve the client’s objectives relative to alternatives such as a UCC Article 9 foreclosure, a Chapter 7 liquidation, or a Chapter 11 sale. Key considerations include the number and disposition of creditors, the presence of contentious secured lenders, the need for a court-supervised sale process, the existence of valuable executory contracts or licenses, and the expected cooperation of management. An ABC can be faster and less costly than bankruptcy, but that advantage evaporates if major stakeholders are hostile or if critical assets cannot be transferred without court orders.
Management frequently underestimates the diligence required. A creditor matrix, current asset inventory, tax exposure analysis, and contract-by-contract review are necessary to avoid drafting blind spots. For asset-heavy businesses, the ability to quickly market and sell assets in an ABC is attractive. For contract-heavy businesses, anti-assignment clauses and change-of-control triggers may limit value unless counterparties consent. The draft must anticipate these realities by reserving the assignee’s discretion, preserving proceeds, and allowing for deal-specific sale procedures. The decision to proceed with an ABC should be supported by a written analysis that informs the scope and language of the assignment instrument.
Selecting Governing Law and Venue
ABC statutes vary significantly among states with respect to assignee qualifications, bonding, court involvement, notices, claim bar dates, and creditor remedies. The drafting should specify the governing law and, where permitted, the venue for administration and dispute resolution. Practitioners often overlook the interaction between the company’s state of incorporation and its principal place of business. Some states require that the assignment be executed where the debtor resides or conducts business; others focus on creditor location or asset situs. Conflicts of law and jurisdictional challenges can derail the process if the assignment is not aligned with statutory requirements and practical realities of asset disposition.
The instrument should include a clear choice-of-law clause and designate the venue for any petitions, motions, or disputes, including requests to approve sales or compromise claims if court involvement is anticipated or available. In states where ABCs are largely non-judicial, the document should create a contractual mechanism for dispute resolution and expressly preserve the assignee’s authority to seek court guidance if necessary. This is not boilerplate. The governing law and venue clause may determine the speed of the process, the defensibility of the sale, the notice regime, and the enforceability of releases and waivers.
Identifying and Vetting the Assignee
The assignee is a fiduciary for the creditors and must be independent, competent, and adequately insured and bonded. The draft should identify the assignee by full legal name and capacity, state any required qualifications under applicable law, and attach or reference bonding arrangements. Creditors frequently challenge the integrity or independence of the assignee when outcomes are unfavorable. Anticipate these disputes by documenting conflicts checks, articulating the scope of duties, and ensuring that compensation and expense reimbursement are disclosed and reasonable. A vague or insider-affiliated appointment invites challenges to sales, distributions, and settlements.
Include mechanisms for resignation and replacement of the assignee to preserve the process if unforeseen events occur. Provide for continuity of authority during transition and specify who may nominate a successor (for example, a majority-in-interest of unsecured creditors, or a court if the statute provides for judicial oversight). Specify recordkeeping standards, reporting cadence, and cooperation obligations to ensure that the company’s officers and employees assist the assignee in turning over books, records, keys, passwords, and domain controls. These operational details matter; without them, the assignee may lose days or weeks in a critical sale window.
Obtaining Board and Ownership Authorizations
An ABC is a fundamental corporate action that typically requires formal board approval and, in many cases, shareholder or member consent. The assignment instrument should recite the authorizations obtained and attach certified resolutions. Ensure that the corporate charter and bylaws or operating agreement do not require supermajority consent, special notices, or preferred holder approvals. If a secured lender has negative covenants restricting liquidations or extraordinary dispositions, obtain written waivers or consents and reference them in the recitals. Failure to align the assignment with corporate governance can render the transfer voidable or expose directors to claims.
The recitals should make a clear record of insolvency or financial distress, the alternatives considered, and the rationale for selecting an ABC. While recitals are not always dispositive, they shape the narrative for creditors, buyers, and courts. Include statements that the board has determined the ABC is in the best interests of the company and its creditors, that the company will cooperate fully with the assignee, and that all officers are directed to execute ancillary documents. Supporting documentation such as officer certificates, good standing certificates, and cap tables should be prepared concurrently and preserved.
Drafting the Core Assignment Language
The heart of the document is the grant of all right, title, and interest in the assignor’s property to the assignee for the benefit of creditors. This clause should be comprehensive and precise. Include tangible and intangible assets, accounts, deposit accounts to the extent transferable, general intangibles, intellectual property, contract rights, claims and causes of action (including preferences and fraudulent transfer claims under state law), tax refunds, insurance proceeds, and commercial tort claims. Exclusions should be narrowly tailored and justified, such as assets subject to non-assignable restrictions that cannot be cured by consent. Where applicable, include after-acquired property and proceeds to prevent leakage of value.
Expressly state that the assignment is irrevocable except as otherwise required by law, that it is for the benefit of all creditors as their interests may appear, and that the assignee takes possession subject to valid, perfected liens and encumbrances. Provide that the assignee may abandon burdensome assets, compromise claims, and sell assets as a whole or in parts, free and clear to the maximum extent permitted by law, with liens to attach to proceeds. This language facilitates efficient disposition and reduces the need for repeated approvals. Include a severability clause, a supremacy clause stating that the assignment governs in the event of conflict with prior agreements, and an effective date and time to establish a clear record for preference and priority analysis.
Schedules: Assets, Liabilities, Contracts, and Intellectual Property
Attach or incorporate by reference detailed schedules. At minimum, include schedules of assets with locations and serial numbers, lists of pending litigation and claims, schedules of secured creditors with lien documentation, accounts receivable aging, accounts payable, tax obligations by jurisdiction and type, and lists of executory contracts and licenses with assignment restrictions noted. The accuracy and completeness of these schedules will directly affect sale value and distribution accuracy. Inadequate schedules complicate noticing, prolong claim reconciliation, and create avoidable disputes regarding title and priority.
For intellectual property, enumerate registered and unregistered assets, domain names, source code repositories, and open-source software usage. Identify escrow arrangements and third-party components. For contracts, identify consent requirements, change-of-control provisions, cure costs, and any termination-for-convenience rights. A best practice is to include a representation that the schedules are true, correct, and complete in all material respects as of the effective date, coupled with a covenant to supplement as necessary. However, avoid overreaching warranties that the assignee cannot verify and that might expose the estate to unnecessary indemnity claims.
Notice to Creditors and Statutory Deadlines
The assignment instrument should establish the notice framework, including the creditors to be noticed, the method of service, the deadline for filing proofs of claim, and the address or online portal for claim submission. Many states require specific forms of notice and minimum time periods. Even where the statute is silent, due process dictates that notice be reasonably calculated to reach interested parties. Specify initial and supplemental noticing, publication if required or prudent, and procedures for returned mail. Provide that notices may be sent by email where permitted and that creditors must update contact information to receive distributions.
The claims bar date is essential to finality. Set a firm deadline consistent with state law and commercial reasonableness, with limited exceptions for late claims upon a showing of excusable neglect. The assignment should authorize the assignee to allow, object to, estimate, and settle claims, and to establish a reserve for disputed claims. Include a clear instruction that secured creditors must file a claim for any deficiency and that contingent or unliquidated claims should be filed with reasonable supporting documentation. The best drafts reduce ambiguity by attaching a proof-of-claim form and laying out the information required, such as basis, amount, collateral, and contact details.
Treatment of Secured Creditors and UCC Considerations
Secured creditors typically retain their liens through an ABC, and the assignment must acknowledge the primacy of valid, perfected security interests. The draft should state that the assignee will provide notice of any sale to secured creditors, afford an opportunity to credit bid where appropriate, and apply sale proceeds first to costs of administration, then to secured obligations, subject to statutory carve-outs and lien priorities. If intercreditor agreements exist, recognize them and authorize the assignee to rely on them absent manifest error. Conflicts among secured parties are common; empower the assignee to seek declaratory relief or court instructions to prevent paralysis.
Article 9 of the Uniform Commercial Code intersects with ABC practice in several ways, including the disposition of collateral, perfection and priority of security interests in proceeds, and account debtor notification. The assignment should authorize the assignee to send UCC notifications to account debtors, amend financing statements as necessary, and cooperate with secured parties to release liens upon payment. In addition, include a representation by the assignor that it has not sold or pledged assets beyond disclosed liens and that there are no hidden consents required to sell assets. This is not merely belt-and-suspenders; mismatches between UCC filings and the asset list can stall closings and erode buyer confidence.
Employee, Tax, and Regulatory Considerations
ABC drafts frequently omit critical employee and tax language. Clarify whether the assignee will conduct limited wind-down operations, whether any employees will be retained temporarily, and whether payroll obligations pre- and post-assignment will be paid from the estate. Address accrued wages, vacation, and benefits. Prioritize compliance with wage payment laws and trust fund obligations. If the assignee intends to sell the business as a going concern, memorialize the authority to enter into transition services agreements, assign employment agreements where consent is obtained, and handle COBRA and WARN Act considerations in coordination with counsel.
On taxes, specify responsibility for sales and use taxes on asset dispositions, withholding and payroll taxes, information returns, and tax refunds. Provide that the assignor will turn over all tax records and authorize the assignee to file returns and request transcripts. The assignee should be empowered to withhold distributions sufficient to satisfy known or potential tax liabilities and to resolve tax claims through compromise. Practitioners must recognize the personal liability risks associated with trust fund taxes and sales tax successor liability. Precision in drafting reduces exposure and demonstrates fiduciary prudence to both taxing authorities and creditors.
Sale Procedures and Distribution Waterfall
The strongest assignments incorporate a flexible sale framework. Authorize the assignee to market assets, select stalking horse bidders, enter into asset purchase agreements, conduct auctions, and request court approval where beneficial or required. Include authority to sell free and clear to the extent permitted, with liens to attach to proceeds, and to convey title and possession. Permit execution of customary closing documents, including bills of sale, assignment and assumption agreements, IP assignments, and affidavits. Provide that the assignee may solicit backup bids and reopen bidding if the highest bidder fails to close.
For distributions, codify the priority scheme consistent with state law: administrative expenses of the assignment, secured claims from their collateral proceeds, wage and similar priority claims as applicable, taxes, and general unsecured claims. Provide for reserves for disputed claims, wind-up costs, and tax obligations. Clarify the treatment of de minimis distributions and unclaimed funds, including escheatment or redistribution. Establish a reporting cadence to creditors on sale results and distribution calculations. Creditor trust and transparency are earned through thoughtful, specific language that shows the fiduciary has anticipated the mechanics of monetization and payout.
Fiduciary Duties, Bonding, and Reporting Requirements
Assignees owe fiduciary duties of loyalty and care to the creditor body. The assignment should articulate these duties, require a bond in the amount mandated by statute or as reasonably determined, and specify insurance coverage such as errors and omissions and cyber policies when digital assets are involved. Provide for periodic reports to creditors that include cash receipts and disbursements, asset disposition status, claim reconciliation progress, and anticipated timelines. Require maintenance of books and records in accordance with reasonable commercial standards and preservation of electronic data in a searchable format.
The draft should delineate limitations of liability consistent with law, clarifying that the assignee is not personally liable for pre-assignment obligations, that all obligations are limited to estate assets, and that the assignee may rely on the advice of professionals. Include indemnification provisions for the assignee and its agents, subject to carve-outs for gross negligence, willful misconduct, and bad faith. Courts and creditors scrutinize these provisions; striking the right balance encourages qualified professionals to serve while preserving accountability.
Common Drafting Pitfalls and Misconceptions
Several recurring errors undermine ABCs: vague asset descriptions that omit causes of action and IP; failure to address anti-assignment clauses; missing or noncompliant notice procedures; silence on claims bar dates; and inadequate authority for sales and compromises. Many laypersons assume that a generic form will suffice. In reality, minor omissions can have major consequences, such as clouded title, inability to transfer key contracts, or avoidable tax liabilities. State statutes change, case law evolves, and secured creditor positions differ from deal to deal; templates must be adapted thoughtfully.
Another misconception is that an ABC can be executed and forgotten. The assignment is the start, not the end. Without schedules, notices, marketing, claim reconciliation, and reporting, the process will stall and invite creditor action. Yet another misconception is that an ABC wipes out personal guarantees. It does not. Guarantors remain liable unless separately released, and creditor strategies will account for that leverage. The drafting should never overpromise; it should accurately reflect the rights and limitations inherent in the process.
Coordinating with Bankruptcy and Other Alternatives
Effective drafting contemplates the possibility that an ABC might be complemented by, or transition into, another proceeding. For example, if a secured lender refuses to cooperate with an ABC sale, the assignment should authorize the assignee to seek court assistance available under state law or to negotiate a consensual Article 9 sale. If litigation proliferates, the parties may consider a subsequent bankruptcy filing; in that scenario, the assignment should preserve records, maintain segregation of funds, and document transactions to withstand bankruptcy scrutiny.
Coordination is also essential with receiverships, foreclosure processes, and dissolutions. The draft should clarify that the ABC is the exclusive mechanism for asset disposition unless otherwise agreed or ordered, while allowing the assignee to cooperate with parallel processes when beneficial. This flexibility supports value maximization without ceding control. It also signals to stakeholders that the estate has a coherent strategy rather than a patchwork of ad hoc responses.
Execution Formalities and Immediate Post-Assignment Steps
Formalities matter. Execute the assignment with appropriate officer signatures, corporate seals if used, and notarization where required. Record the assignment or a memorandum in jurisdictions where recording is customary or beneficial, such as to give notice regarding real property or certain intellectual property. Immediately upon execution, the assignee should take physical and digital possession: change locks, secure servers and cloud accounts, redirect mail and email, and notify banks to require dual authorization on accounts. The assignment should pre-authorize these operational steps to avoid delays.
Establish estate bank accounts, obtain a taxpayer identification number for the estate if needed, and implement cash controls. Send preservation notices to employees and vendors, suspend automatic debits not authorized by the assignee, and review insurance coverage to prevent lapses. Prepare a day-one notice to customers and vendors that explains the ABC, sets expectations for performance, and provides new remittance instructions. The speed and clarity of these early actions often determine whether value is preserved and whether stakeholders view the process as credible.
Professional Engagements: Assignee, Counsel, Financial Advisor, and Broker
An ABC is a multidisciplinary exercise. The assignment should authorize the assignee to retain legal counsel, accountants, financial advisors, brokers or investment bankers, technology consultants, and auctioneers, with compensation terms disclosed and subject to reasonableness. Where court approval is available or customary, incorporate that mechanism; where not, provide for creditor consultation or notice before engaging professionals above specified thresholds. Specify that professionals are estate fiduciaries, that conflicts will be disclosed, and that detailed invoices will be maintained and available for creditor review upon request.
Laypersons often underestimate the need for specialized professionals. For instance, selling a software platform requires diligence on code provenance, open-source compliance, and customer data privacy. Selling manufacturing assets may require environmental assessments and lien releases. The cost of qualified help is an investment in recoveries. The assignment can set expectations for engagement scope, timelines, and reporting, helping to align stakeholders and reduce friction.
Sample Clause Concepts to Consider
While each assignment is bespoke, the following clause concepts often prove useful and can be adapted to jurisdictional requirements and deal specifics:
Free-and-Clear Authority: The assignee may sell assets free and clear of liens, claims, and interests to the maximum extent permitted by applicable law, with such liens to attach to proceeds in the same order and priority as previously attached to the assets.
Claims Administration: The assignee may allow, disallow, estimate, or compromise claims, establish reserves, and make interim and final distributions consistent with statutory priorities.
Abandonment: The assignee may abandon assets that are burdensome or of inconsequential value after notice to interested parties.
Contract Treatment: The assignee may assume and assign contracts with consent as required, or elect nonperformance where allowed, with no successor liability except as expressly undertaken in a written assumption agreement.
Access and Cooperation: The assignor shall deliver all books and records, provide passwords and credentials, and make knowledgeable personnel available to assist for a reasonable period.
These concepts should be integrated with care, aligned to the statute, and calibrated to the facts. Overbroad clauses that ignore statutory limits risk challenge; overly timid clauses can hamstring the assignee and depress recoveries. The objective is pragmatic authority bounded by fiduciary duty and due process.
Timelines, Milestones, and Closing the Estate
A well-drafted assignment contemplates a timeline. Common milestones include: day-one notices; 10–20 day initial marketing launch; 30–60 day asset sale or contract solicitation; claims bar date 60–120 days post-assignment depending on statute; interim distribution following claim reconciliation; and final distribution and report. Of course, these ranges vary with industry, asset complexity, and creditor dynamics. Express authority for interim distributions allows value to be returned sooner when major claims are liquidated and reserves are adequate.
Closing the estate requires careful attention. The assignment should specify conditions for final reports, objection deadlines, and disposition of unclaimed distributions. Provide for the retention of records for a defined period and the method of destruction thereafter consistent with law. State that the assignor will dissolve after completion of the ABC, subject to statutory requirements, and that officers will execute any necessary certificates. The finality of the process depends on clarity; creditors should know when and how their last opportunity to object will occur.
Why Experienced Counsel and Advisors Are Essential
Even simple ABCs are beset with complexities that are not obvious to non-specialists. The assignment must be tailored to the governing statute, the capital structure, the asset profile, and the anticipated sale path. Seemingly minor drafting choices—such as whether to include after-acquired property, how to frame free-and-clear language, or how to set the claims bar date—can have outsized impacts on value and litigation risk. As both legal and tax issues are implicated, missteps can generate successor liability, tax penalties, or the collapse of a sale.
Experienced professionals provide the judgment and precision necessary to navigate these risks. They manage stakeholder communications, pre-negotiate with secured lenders, stage an efficient marketing process, and defend the assignee’s actions with a strong paper record. The cost of that support is usually outweighed by higher sale proceeds, fewer disputes, and quicker distributions. A carefully drafted assignment, executed by a seasoned team, is the single best predictor of a successful ABC.
Checklist: Key Elements to Include in Your Draft
While each case is unique, an organized checklist promotes completeness and defensibility:
Recitals: Financial condition, alternatives considered, approvals obtained.
Definitions: Clear definitions of assets, claims, creditors, contracts, proceeds.
Granting Clause: Comprehensive transfer of assets, including proceeds and causes of action.
Assignee Authority: Possession, operation, sale, compromise, abandonment, litigation.
Notices and Claims: Creditor list, bar date, proof-of-claim requirements, publication.
Secured Claims: Recognition of liens, procedures for sales and lien releases.
Contracts and IP: Consent mechanics, assignment procedures, schedules.
Employees and Taxes: Wage priorities, benefits, trust fund taxes, returns, refunds.
Professional Retention: Counsel, advisors, brokers; disclosure and reasonableness.
Bonding and Insurance: Amounts, proof, replacement mechanics.
Reporting: Frequency, content, availability to creditors.
Distributions: Waterfall, reserves, de minimis thresholds, unclaimed funds.
Dispute Resolution: Venue, governing law, court recourse if available.
Indemnity and Exculpation: Balanced protections with fiduciary carve-outs.
Execution and Effectiveness: Signatures, notarization, recording, effective time.
Termination and Closure: Final report, objection period, dissolution steps, record retention.
Using this checklist as a drafting aid reduces the risk of omissions. However, it is not a substitute for jurisdiction-specific legal and tax advice. Each bullet point requires tailoring to the company’s facts, creditors’ rights, and the applicable statute.
Final Thoughts
Drafting a General Assignment for the Benefit of Creditors is not an exercise in filling blanks on a form. It is a detailed, fact-driven legal instrument that shapes the trajectory of a complex liquidation process. The best drafts anticipate points of friction—secured creditor dynamics, contract assignment hurdles, tax exposures, and data access—and build in tools for the assignee to act decisively yet responsibly. They balance flexibility with transparency and procedural fairness.
Stakeholders often focus on speed, but precision at the drafting stage is what enables an efficient, credible, and value-maximizing process. Engage experienced counsel and advisors early, assemble accurate schedules, plan your sale strategy, and embed those realities in the document. By doing so, you transform the assignment from a mere transfer instrument into an operational blueprint for a successful ABC that withstands scrutiny and delivers the best possible outcome to creditors.
