The Uniform Assignment for Benefit of Creditors Act (the “UABCA”) was promulgated by the Uniform Law Commission in 2025 and has already been enacted in a number of states.[1] If widely enacted, the UABCA would replace, in the enacting states, current statutes and, in some states, the common law governing an assignment for benefit of creditors (an “ABC”). This article explains what an ABC is, why the UABCA was promulgated, and why a broadly enacted UABCA could materially improve available restructuring options for secured creditors.

What an ABC Is

In an ABC, a financially distressed business (the “assignor”) assigns its assets to an assignee. The assignee, acting as a fiduciary for the assignor’s creditors, undertakes to liquidate the assignor’s assets and distribute the proceeds to the assignor’s creditors toward payment of their claims. An assignment is a state law alternative to other procedures available for winding up a business, such as a state law dissolution, a filing under chapters 7 or 11 of the federal Bankruptcy Code^[2] or a state or federal law receivership. 

An ABC has attributes that set it apart from a case under the Bankruptcy Code or a federal or state court receivership.^[3] For one thing, an ABC is entirely voluntary on the part of the assignor and the assignor’s creditors. Because there is no automatic stay in an ABC and creditors of the assignor are not precluded from commencing an involuntary bankruptcy case or receivership against the assignor, the success of an ABC will often depend on the experience of the assignee and the credibility of the assignee to the assignor’s creditors.

Despite this limitation, in many cases an ABC will be more flexible, quicker, and less costly than a case under the Bankruptcy Code, a state or federal law receivership, or any other available alternative.^[4]

Why the UABCA was Promulgated

Laws on ABCs and the use of ABCs vary from state to state. In some states, an ABC is a common law procedure with little or no statutory guidance or court supervision. In other states, the procedure is statutory and court supervised. In some states, an ABC is a commonly used procedure for winding up an assignor’s business. In others, the procedure is hardly used. The only uniform law affecting an ABC relates to the status of the assignee as a “lien creditor” under Article 9 of the uniformly enacted Uniform Commercial Code for purposes of applying Article 9, including its priority rules, for security interests in personal property and fixtures.^[5]

The Uniform Law Commission thought that the divergent treatments of ABCs in the various states presented an opportunity for the promulgation of a set of laws and rules that could enhance predictability and make the ABC a viable alternative in distress situations irrespective of the venue of the ABC. The promulgation of the UABCA is the result of a three-year process by the Uniform Law Commission with the participation of numerous insolvency professionals and other interested stakeholders as advisors and observers.^[6] The UABCA provides for a uniform treatment of ABCs potentially applicable in all states, relying on the experience with ABCs in the various states where they are used prevalently.

Why the UABCA is Good for a Secured Creditor

Consider the following situation for a secured creditor with a perfected security interest in the material assets of its debtor:

The business of ABC Corporation, organized under law of State A (the “Company”), and owned by a group of investors, has been deteriorating for months as the Company’s financial performance has been weighed down by the loss of some key customers and higher tariffs on imported goods. The investors are now out of the money and are not willing to invest further. The Company is about to default on the line of credit from the secured creditor. Unpaid creditors are getting restless. The chief executive officer is ready to resign. The board members think that there may be a buyer for the Company’s business, especially its unsold inventory and its trademarks and other intellectual property. They want to sell the business, wind down the Company in an orderly way, and walk.

The board has considered a number of options. The Company could, of course, commence a bankruptcy case. However, for the size of the Company, a Chapter 11 or Chapter 7 case would be too expensive and time-consuming. Similar concerns arise with the Company encouraging a creditor to subject the Company to a state or federal law receivership.[7] While the Company could wind down and dissolve under state law, that process could invite an involuntary bankruptcy case if, as is likely, all creditors of the Company will not be paid in full. 

The Company could let its secured creditor foreclose on its collateral and dispose of the collateral in a public or private sale. The Company could even agree to a “strict foreclosure” in which the secured creditor accepts the collateral in whole or part satisfaction of the secured debt. But the Company would still need to deal with unpaid unsecured creditors, disposing of miscellaneous assets not included in the secured creditor’s collateral, and dissolving under state law.

Because State A recently enacted the UABCA, an ABC conducted under the UABCA is an option also available to the Company for winding up its business.

There are a number of reasons why the secured creditor might like the ABC option. First, the secured creditor can play an influential role in the ABC process. As we noted above, an ABC is entirely voluntary. The Company cannot require the secured creditor to participate in the ABC. As a result, in return for the secured creditor’s participation in the ABC, the secured creditor usually has some influence on who the Company chooses as an assignee. To be sure, the UABCA requires that the assignee be disinterested. The assignee or one of its affiliates cannot, for example, be a creditor of or hold an equity interest in the Company.[8] But given that the success of an ABC depends on the experience and credibility of the assignee, the secured lender will want to have confidence in the skills of the assignee and may therefore (strongly) suggest to the Company potential assignees for the Company to consider.

Similarly, the secured creditor in many ways has the “power of the purse.” In connection with the secured creditor’s agreement to participate in the ABC, the potential assignee would usually negotiate with the secured creditor for the secured creditor to subordinate its security interest to the expenses of the assignment estate and to permit the assignee to use the creditor’s cash collateral, but only for purposes of administering the assignment estate and only under a budget to which the secured creditor agrees, much like what is typical in debtor in possession financing and use of cash collateral orders in a Chapter 11 bankruptcy case.

Second, the secured creditor is afforded a number of protections under the UABCA. Its collateral may not be sold or used by the assignee without the secured creditor’s consent. If the collateral is to be sold by the assignee, the sale will either be subject to the secured creditor’s security interest or the secured creditor will be entitled to set a release price and, if that price is obtained, receive the net proceeds of the sale.[9]

Third, an ABC could be attractive as an alternative to the secured creditor foreclosing on its collateral. In a foreclosure under Article 9 of the Uniform Commercial Code, the secured creditor is exposed to liability if it failed to provide timely and proper notifications of the foreclosure to the debtor or secondary obligors or to collect on or dispose of the collateral in a commercially reasonable manner.[10] However, if the assignee collects on or disposes of the collateral, the secured creditor avoids these potential liabilities and litigation risks applicable to an Article 9 foreclosing secured party. Furthermore, even in a “strict foreclosure” in which the secured creditor accepts the collateral in whole or partial satisfaction of the secured debt, the secured creditor needs to dispose of the collateral once it has taken title. That burden is not relevant if the assignee collects on the collateral and disposes of the collateral to a third party.

Finally, the UABCA contains the following provisions beneficial to a secured creditor that are not generally available under current state ABC laws:

Company groups. If the Company owns a subsidiary that would not otherwise be eligible for an ABC in State A, the subsidiary may nevertheless commence its own ABC in State A in conjunction with the Company’s ABC in State A. If the subsidiary were organized under the law of State B or has its principal place of business in State B, and State B has enacted the UABCA, State B would be required to recognize the subsidiary’s ABC in State A.[11]

Non-assignable assets. In an ABC, the Company lacks the ability to assign to the assignee otherwise non-assignable executory contracts, licenses and permits without the consent of the contract counterparties and licensing and permitting authorities.[12] In many circumstances, rights under those contracts, licenses, and permits may be included in the secured creditor’s collateral even though the secured creditor is not permitted to foreclose on those rights.[13] The UABCA puts a duty on the Company to cooperate with the assignee in obtaining consents for the assignment to and later disposition of those rights by the assignee.[14]

Preserving going concern value. It’s possible that the best way to preserve the value of the secured creditor’s collateral is for the assignor’s business to be operated by the assignee pending the sale or other disposition of the assigned assets. The UABCA expressly permits the assignee to do so, allowing for a sale of the Company’s going concern business in lieu of fire sales of the Company’s individual assets.[15]

Assignee as a fiduciary. Like many ABC laws, the assignee is a fiduciary of the assignment estate. But under the UABCA, the assignee’s fiduciary duty expressly includes the duty to use reasonable care to maximize distributions to creditors. This duty extends not only to unsecured creditors but also to secured creditors.[16] The duty may result in a higher standard for the assignee’s liquidation process than merely using a commercially reasonable method to collect on or dispose of collateral applicable to a secured party under Article 9 of the Uniform Commercial Code.[17]

Claims resolution process. The UABCA permits the assignee to allow a secured creditor’s claim at or around the time of the commencement of the ABC even if the secured creditor does not submit a proof of claim.[18] 

Avoidance powers of the assignee. Under the UABCA, the assignee does have the power to avoid a transfer of an asset or the incurrence of an obligation that a creditor can avoid under applicable voidable transactions law, such as the Uniform Voidable Transaction Act or the Uniform Fraudulent Transfer Act.[19] But the assignee does not have the power to avoid a preference to a non-insider creditor, absent the enacting state having a preference avoidance power under other law of the state. As a result, payments to or collateral obtained by a non-insider secured creditor on the eve of the ABC would not usually be subject to a preference avoidance risk. In addition, the UABCA contains the same “safe harbors” for financial contracts (swap agreements, securities contracts, repurchase agreements, commodity contracts, forward contracts, and master netting agreements) as are contained in the Bankruptcy Code.[20]

Court involvement. Court involvement is not a requirement under the UABCA, thus minimizing the costs of the ABC. However, any interested party is entitled to seek court intervention to resolve a dispute in the administration of the ABC including the assignee seeking court intervention to resolve a disputed claim or to obtain a court order approving a sale or other disposition of assigned assets.[21]

Assets in another state. If the ABC is commenced in State A but assigned assets are located in State B and both State A and State B have enacted the UABCA, State B would generally be required to recognize the ABC in State A.[22] Where necessary, the UABCA permits a court in State B to appoint an ancillary assignee to seek a turnover of assigned assets held in that state.[23]

Uniformity. If the UABCA is widely enacted, it would create greater certainty on ABCs for secured creditors acting nationally and allow professionals to develop a standard set of documents, thereby reducing transaction costs.

Conclusion

There are many situations in which an ABC may not be appropriate for a financially distressed business. But there may be circumstances in which an ABC would be appropriate. The UABCA, especially if widely enacted, has the potential in those circumstances to maximize value for the assignor’s creditors, including its secured creditors, by streamlining the liquidation of the business. Indeed, there is much in the UABCA that a secured creditor might like.