OnLive's alternative to bankruptcy: just what is an Assignment for the Benefit of Creditors?

The news is out. OnLive, Inc. is no more, having cut the bulk of its workforce loose and used an Assignment for the Benefit of Creditors (ABC) to absolve itself of massive debts incurred by the expansion of its services without a corresponding increase in its customer base. But what is this alternative to filing for bankruptcy, and why did OnLive choose this particular legal reset button to start over? We spoke with an expert on the matter, Martin Pichinson, co-founder and managing member of Sherwood Partners (which does two or three ABCs in a given week), to help educate us on this little-known tool used by companies irrevocably in the red.

It turns out, ABC is a preferred method for debtor companies backed by venture capital to satisfy creditors, because it allows such firms to preserve their assets while staying viable long enough to find a buyer for those assets. The ABC process begins when a debtor company signs a contract assigning its assets to a third-party assignee (like Sherwood), which acts as a fiduciary for the company's creditors. Translation: the assignee's job is to get the creditors paid.

In California, once the contract is signed, the assignee has 30 days to send out written notice of the assignment to the company's creditors. Subsequently, those creditors have six months to respond and submit proof of the amount of money that they're owed, so that the assignee can verify the claims. Sale of the assets occurs in parallel to the claim process, and while the sale usually occurs via an auction there are no formal legal requirements for how the assets are monetized. It is only necessary for the assignee to act in the best interests of the creditors (i.e. by getting them the most money possible). This flexibility is one of the advantages provided by an ABC that's not afforded those filing for bankruptcy -- it allows the sale to happen quickly if the assignee thinks it financially advantageous to do so, and the process isn't dictated by the rules and procedures of the bankruptcy courts.

Given what we've heard from ex-OnLive employees, it seems that the company has already assigned its assets, and the assignee has already sold them. The buyer, a VC, plans to remake OnLive's assets (including the retained employees) into a lean, profitable new start-up. When we asked Pichinson if it was common for a company to have a buyer lined up before beginning the ABC process, he responded that it's not out of the ordinary. He was also quick to point out, however, that it's particularly important for the sale of the assets to be done correctly in order to fulfill the fiduciary duty of maximizing the creditors' return.

It appears that OnLive's already well into the ABC process, and if that's the case, all that's left is for its assignee to verify the company's creditors' claims and dole out the cash accordingly. If all goes to plan, it'll take about seven months to completely wind up its business, and the remains of OnLive -- the first iteration, at least -- will finally be no more.