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.
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.
 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.
 See In re Theonys, Inc., C.A. No. 2023-0195-PAF, Letter (Del. Ch. May 22, 2023) (the “Theonys Letter”).
 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.”).
 See Theonys Letter.
 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.”).
 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).