Delaware Court of Chancery intensifies review of ABC liquidation

CONTEXT

Delaware has seen a significant increase 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 seeking this alternative to bankruptcy to do a better job of justifying the relief they seek. This will require much more frequent and robust disclosures to the court and to the public.

Given the primarily private nature of the CBA winding-up process and the reduced role of the court, there is a dearth of decisions from which parties can glean judicial advice on the appropriate way to facilitate a CBA. This has led attorneys to take the conservative approach of filing new ABC motions that mirror motions previously approved by the court. This trend has caught the attention of the Court of Chancery, which is now beginning to require enhanced disclosures from assignees.

ANALYSIS

The first shot across the arch by the Court of Chancery came from Vice-Chancellor Laster in In Global Safety Labs, Inc., file number 2022-0309. The decision was followed a few days later by a siege decision issued by Vice-Chancellor Fioravanti in In re Kidbox Inc., case number 2022-0379. Collectively, the two cases send an unequivocal message that the Court of Chancery will be more actively engaged in ABC proceedings.

In Global Safety Laboratories, the court was asked to determine that the company “shall not be required to post additional funds as security to provide compensation for unsecured claims, claims that have not come to the notice of [the company], have not yet occurred or may occur within five (5) years of the date of dissolution. The petition, however, offered minimal information regarding the nature and extent of the company’s assets or liabilities.

Vice-Chancellor Laster further noted that the petition was “a stripped-down four-page document consisting mostly of conclusive assertions”.¹ The court observed that “[i]t is not an outlier. It is representative of the requests that the court is regularly seized of in cases involving entities that have disappeared or dissolved and in assignment procedures for the benefit of creditors.² Citing the unique non-public aspect of the ABC proceeding, Vice-Chancellor Laster observed that “many of these proceedings are handled ex parte, so the court never has the benefit of an interested party who can provide a different perspective or ask probing questions”.³

For his part, Vice-Chancellor Fioravanti in the Children’s box the case was brought with a motion seeking restrictions “comparable to the ‘automatic stay’ provisions under the Bankruptcy Code”,⁴ including the prohibition against initiating proceedings, seizing property, enforcing liens or collecting debts against Kidbox. Denying the relief sought, the Vice-Chancellor noted that the motion was “widely copied, almost verbatim” from In re BeautyCon Media Inc.another ABC case that also failed to provide sufficient grounds for a suspension.

KEY POINTS TO REMEMBER

Counsel asking the court to exercise its powers to facilitate an ABC must be prepared to withstand closer scrutiny and provide more detail than has always been deemed sufficient. According to Vice-Chancellor Laster, “[w]what the motion lacks, and what the court invariably needs, is context.⁵ Elaborating on this point, the court noted that future petitions should include more details “about the entity, its history, the path that led to the relief sought, and the parties that may be affected by the relief.” Speaking directly to the members of the bar, the court held that “in the context of an ex parte procedure[s]lawyers have an increased obligation to provide information to the court.

Interestingly, to provide additional guidance, Vice-Chancellor Laster felt that day one statements in bankruptcy proceedings would provide a useful template for those writing ABC petitions. “The court is not trying to convert a proceeding in the Court of Chancery involving a defunct or dissolved entity into a bankruptcy case. The lawyer must determine on a case-by-case basis what information the court should have. Nevertheless, the concept of day one reporting can serve as a guide.⁶

FOOTNOTES

¹ In The Glob Affair. Safety Labs, Inc., CA No. 2022-0309-JTL (Del. Ch. 2022).

² Identifier. to 1.

³ ID. to 1.

⁴ In D Kidbox.com Inc., CA No. 2022-0379-PaF (Del. Ch. 2022).

⁵ In The Glob Affair. Safety Labs, Inc., CA No. 2022-0309-JTL (Del. Ch. 2022).

⁶ ID.