Common Types of Insolvency Proceedings Impacting Businesses and Their Counterparties

With headlines often focused on debtors in large corporate Chapter 11 filings, it is easy to assume that business distress presents itself in a single, uniform way. In practice, it rarely does. It can reach beyond the company at the center of a restructuring and into the operations of vendors, lenders, landlords, investors, and other business partners tied to that enterprise. As restructuring advisors, we have often worked with both sides of that equation—with companies considering workouts or related proceedings, as well as counterparties assessing contractual, payment, and operational risk and considering appropriate claims.

Business distress can take many legal forms. Some matters are negotiated. Others are court-supervised. Each is governed by a different legal framework, can assign different roles to management and fiduciaries, and can reshape how creditors and counterparties participate. Understanding those distinctions provides a clearer view of the legal and commercial landscape that often develops alongside a distressed situation.

What follows is a practical overview of a few common restructuring and insolvency structures.  While beyond the scope of this post, there are many nuances depending on stakeholder (such as those who may hold secured or priority claims) and also opportunities for potential transactions—in some cases, free and clear of liens, claims, and encumbrances. In cross-border contexts, these structures may also include Chapter 15 proceedings, which provide a framework for U.S. courts to recognize and coordinate with foreign insolvency cases involving multinational businesses and assets.

Out-of-Court Workouts and Restructurings

Out-of-court workouts are negotiated arrangements between a business and key stakeholders—such as secured lenders, major trade creditors, or other key constituencies—without formal court involvement. These transactions are typically contract-driven and may include forbearance agreements, maturity extensions, covenant resets, or negotiated asset sales.

Assignment for the Benefit of Creditors (ABC)

An assignment for the benefit of creditors is a state-law insolvency process in which a business transfers its assets to an independent fiduciary, known as the assignee, for liquidation and distribution to creditors. ABCs can sometimes be used for wind-downs or going-concern sales where a federal bankruptcy filing is not pursued.

The assignee typically administers the estate, markets assets, and processes creditor claims. Vendors and unsecured creditors typically submit claims to the assignee and receive distributions, if any, based on available proceeds and applicable priority rules. In some matters, disputes may be addressed through court-supervised proceedings.

Subchapter V (Small Business Chapter 11)

Subchapter V is a streamlined form of Chapter 11 reorganization designed for eligible small and mid-sized businesses. The company typically remains in possession of its assets and continues operating while proposing a plan of reorganization.

Unlike traditional Chapter 11, Subchapter V may allow existing equity owners to retain their ownership interests in appropriate cases, subject to statutory confirmation standards. As elsewhere, creditors and contract counterparties will typically monitor the case and may be affected as part of it. Disagreements may be resolved through contested motions or adversary proceedings.

Chapter 11 Reorganizations and Related Litigation

Traditional Chapter 11 is a federal court-supervised restructuring process used by businesses of all sizes, including large and complex enterprises. The debtor usually operates as a debtor-in-possession, subject to court oversight and statutory duties. As in other bankruptcy proceedings, creditors must typically submit claims for available distributions.

These cases frequently involve asset sales, claims resolution, and plan negotiations. They may also involve court-supervised disputes and adversary proceedings, including actions concerning alleged preference and fraudulent transfer claims, corporate and governance matters, contract disputes, and post-confirmation administration.

Chapter 7 Business Liquidation and Receiverships

In a Chapter 7 case, a court-appointed trustee collects and liquidates business assets and distributes proceeds to creditors in accordance with statutory priority rules. In a receivership, a court-appointed fiduciary manages or liquidates assets, often in enforcement, regulatory, or internal dispute contexts.

Conclusion 

These structures form part of the broader legal and commercial terrain that companies and their counterparties may encounter over the course of ordinary business relationships. As financial conditions and contractual relationships evolve, businesses often review these issues with their internal teams and external advisors.  Retaining experienced restructuring professionals can assist in addressing these issues and related risks.

Disclaimer: This post is for general informational purposes only and does not constitute legal advice. Reading or responding to this content does not create an attorney-client relationship. Attorney Advertising: Prior results do not guarantee a similar result.