Chapter 11 Bankruptcy
Chapter 11 Bankruptcy is a legal process by which a business or individual may declare bankruptcy but continue to operate under the direction of the federal bankruptcy court. A company may stay in control of its operations and manage its property as a debtor-in-possession (“DIP”) or, if appropriate, a court may appoint a Chapter 11 trustee to oversee the business operations. Usually, the DIP or Trustee seeks to “reorganize” a company’s business by streamlining operations, obtaining financing, or restructuring debt so as to pay some or all of the company’s debt. On occasion, a Chapter 11 can be used to liquidate or sell a company’s assets in an orderly fashion either through a §363 sale or a Chapter 11 plan. Chapter 11 is available to any type of business, including sole proprietorships, partnerships, limited liability companies (LLCs) or corporations.
Chapter 7 Bankruptcy:
In a Chapter 7 bankruptcy, a trustee is appointed by the federal bankruptcy court to liquidate a company’s assets and to distribute any proceeds to creditors. There is little or no attempt to operate the business as a going concern or to reorganize the company to pay some of the debts. The Chapter 7 trustee has full discretion to cease business operations and liquidate the assets subject only to court approval for the sale of real estate or personal property. Similar to Chapter 11, Chapter 7 is available to any individual or type of business.
Court Appointed Receivership:
In contrast to bankruptcy, a receiver is a person appointed by the state court to take possession of certain property or all the assets of a company. A receiver is a fiduciary and officer of the court, and must administer the assets or property in accordance with the court’s directives. A receivership is an alternative to filing a bankruptcy case to liquidate a company’s assets. Also, a receiver can be appointed to operate a company to maintain its value as a going concern. Whether a receivership’s goals involve liquidation or continued business operations, the receiver is expected to maximize the value of the company, and has a further duty to protect all shareholders and creditors to the highest extent possible.
Assignment for Benefit of Creditors:
The Assignment for Benefit of Creditors (ABC) is a state law tool. Under an ABC, the company (the Assignor) voluntarily executes a contract transferring legal and equitable title of its assets, as well as custody and control of its property, to a third party (the Assignee) in trust, to apply the proceeds of the Liquidation of the assets to the Assignor’s creditors in accord with priorities established by law. Unlike a Chapter 7 however, an Assignee can more easily elect to keep the business operating, maintaining the value, while he tries to liquidate and sell the company as a going business or concern.