How to Liquidate a Company: 6 Routes and Who Does the Selling in Each

There are six ways to liquidate a failing company, mostly differing in who does the selling.

• The owner can sell the assets to a third party.
• The secured lender can sell its collateral.
• A court-appointed receiver can sell the assets at a sale.
• An assignee in an assignment for the benefit of creditors can sell them.
• A Chapter 7 trustee can sell them.
• The debtor itself can sell the assets in Chapter 11.

The differences among these have to do with cost, control and scrutiny.

If you sell assets yourself, the SBA says this is usually a last resort when you have no buyer, merger partner or successor. The SBA recommends listing assets and getting liquidation values from a qualified appraiser. When you run a sale, you can run it as a negotiated sale, as a sale in which all bids are sealed, as a sale by retail or consignment, or as an internet sale. You can hire an auctioneer, dealer, broker or other expert to run it. The SBA also recommends you sell with a nonrecourse bill of sale so the buyer accepts the risk. Make sure to formally dissolve the LLC or corporation in every state where it is registered, to avoid continuing taxes and filings.

But if the lender won’t wait, after a default the secured lender itself can sell its collateral by public or private sale. The UCC says every aspect of a sale must be commercially reasonable. In a business loan, the law says the lender’s notice to you counts as reasonable if it’s sent after a default, and at least 10 days before the earliest sale date it states. So watch the mail.

A court-appointed receivership usually happens when a loan default turns into a dispute. A lender petitions the court, often under its loan and security agreement. The court appoints a receiver to take over the business. Usually, the lender has lost trust in the owner. In receivership, the bank does not have to deal with an automatic stay. The receiver, a third party it selects, reports to the court. The end result is often a sale or liquidation. In a receiver sale, the receiver may want to sell property free and clear of liens. In Minnesota, for example, a receiver must first get approval from a judge.

Assignment for the Benefit of Creditors

Another path is the assignment for the benefit of creditors (ABC). This is sometimes easier if you don’t have complex or big disputes to fight out in court. It can be run out of court, under state law. You can choose a third-party assignee to take over your assets, to sell them and pay creditors. The first step in an ABC is the company (assignor) signs a trust agreement with the assignee and transfers title, custody and control of its assets in trust. This usually needs board and shareholder approval. If a public company can’t get shareholders to agree, bankruptcy may be the only option.

In an ABC, the secured lender must consent to using proceeds from collateral (paid receivables, sold equipment) to fund wind-down costs like professional fees, employee wages and rent. The assignee then notifies creditors, who can file claims. Next the assignee and secured creditor draw up the ABC plan, on how to shut down and sell. Sometimes it’s a going-concern sale, where the assignee runs the business briefly to keep value. The plan must budget for rent, insurance, staff kept, and assignee and attorney fees. The assignee often contacts competitors and strategic buyers to try and sell the firm’s assets in bulk. A buyer who restarts the plant often pays more than a piecemeal auction, and may keep some staff on. The sale is publicly advertised. Payout in an assignment for the benefit of creditors is by legal priority. Secured and priority creditors get paid first, then unsecured creditors pro rata, and owners or equity get nothing until unsecured creditors are paid in full. The assignee sends a final letter to creditors to report on the liquidation.

An assignment for the benefit of creditors often suits small firms. You pick the assignee, not a court. Fees usually run a fraction of a bankruptcy. A typical ABC takes three to four months. You often do best collecting receivables. If you cooperate, an ABC can get a lender to release personal guarantees if pre-agreed milestones are met. Your past actions may not be looked at, and are not likely to be clawed back. This is unlike a bankruptcy, where salaries and distributions may be clawed back and your past actions may be under scrutiny. The ABC’s stigma is less than that of bankruptcy.

Before an ABC, check with a lawyer in your state, as rules vary. Illinois lets ABCs proceed on common law outside of court, while Florida runs under statute and has stricter limits. Some buyers may insist on a court order approving the sale, which can rule out a nonjudicial ABC.

Chapter 7 is often the first thing you think of. Here, a U.S. trustee appoints an impartial case trustee who sells nonexempt assets for unsecured creditors. A business gets no discharge. Chapter 7 can be complex, can take months or years, and can be costly. A Chapter 7 trustee may leave unsecured creditors with less.

If a sale in Chapter 11 seems better, the company can put in a liquidating plan, staying in control as a debtor in possession to run and sell the firm itself. Creditors have more of a say than in Chapter 7. A company gets no discharge. In either bankruptcy route (trustee or debtor in possession) you can’t sell outside the ordinary course without notice and a hearing. To sell free and clear of liens takes a condition, like lienholder consent.

The Government Wants Its Tax Forms

No matter who sells the assets, the government wants its tax forms, such as a final Form 941 or 944, for the last quarter with a payroll. Unpaid payroll taxes can bring the Trust Fund Recovery Penalty. If the company is a corporation, it has to file a Form 966 within 30 days of a plan to dissolve.

For many small and mid-size firms with no big disputes, an assignment for the benefit of creditors can be a more flexible and quicker route. It can be the most compassionate of the bad options.