Court of Chancery's Increased Scrutiny of Non-Bankruptcy Liquidations
Background
Delaware has seen a significant uptick in the number of assignment for the benefit of creditors (ABC) filings. Through recent decisions, the Court of Chancery has sent a strong message that it expects parties pursuing this bankruptcy alternative to do a better job of justifying the relief they seek. This will require significantly more frequent and robust disclosures to the court and public.
Given the mostly private nature of the ABC liquidation process and reduced role of the court, there is a dearth of decisions from which parties can glean judicial guidance on the appropriate way to facilitate an ABC. This has resulted in lawyers taking the conservative approach of filing new ABC petitions that mirror petitions that had been previously approved by the court. This tendency has caught the attention of the Court of Chancery, which is now starting to require enhanced disclosures on the part of assignees.
Analysis
The first shot across the bow by the Court of Chancery came from Vice Chancellor Laster in In the Matter of Global Safety Labs, Inc., case number 2022-0309. The decision was followed a few days later by a bench ruling handed down by Vice Chancellor Fioravanti in In re Kidbox Inc., case number 2022-0379. Collectively, the two cases send an unmistakable message that the Court of Chancery will be more actively engaged in ABC proceedings.
In Global Safety Labs, the court was asked to determine that the company “shall not be required to set aside additional funds as security to provide compensation for unsecured claims, claims that have not been made known to [the company], have not yet arisen, or may arise within five (5) years of the date of dissolution.” The Petition, however, offered minimal information regarding the nature and magnitude of the company’s assets or liabilities.
Vice Chancellor Laster further noted that the petition was “a bare-bones four-page document consisting principally of conclusory averments.”1 The court observed that “[i]t 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.”2 Citing the unique non-public aspect of the ABC proceedings, Vice Chancellor Laster observed that “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.”3
For his part, Vice Chancellor Fioravanti in the Kidbox matter was presented with a motion seeking restrictions “comparable to the ‘automatic stay’ provisions under the Bankruptcy Code,”4 including enjoining initiating litigation, seizing property, enforcing liens, or recovering claims against Kidbox. Denying the relief requested, the vice chancellor noted the motion was “largely copied, nearly verbatim” from In re BeautyCon Media Inc., another ABC case that also failed to supply sufficient grounds for a stay.
Key Takeaways
Counsel requesting the court to exercise its powers to facilitate an ABC should be prepared to withstand greater scrutiny and provide more detail than what historically has been deemed to be sufficient. According to Vice Chancellor Laster, “[w]hat the petition lacks, and what the court invariably needs, is context.”5 Elaborating on this point, the court noted that future petitions should include more detail “about the entity, its history, the path that led to the relief being sought, and the parties who could be affected by the relief.” Speaking directly to members of the bar, the court held that “in ex parte proceeding[s], counsel have a heightened obligation to provide information to the court.”
Interestingly, to provide additional guidance, Vice Chancellor Laster took the view that first-day declarations in a bankruptcy proceeding would provide a helpful model for those drafting ABC petitions. “The court is not trying to convert a Court of Chancery proceeding involving a defunct or dissolved entity into a bankruptcy case. Counsel must make case-by-case determinations about the information the court should have. Nevertheless, the concept of a first-day declaration can serve as a guide.”6
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm's clients.
