Wilson Cole, President of Adams, Evens, & Ross (AER) and Samantha Cole, in-house counsel for AER, sit down to discuss asset sales.
The popular conception of asset sales is that a purchasing company owns everything from the company they purchased, including their debt. This is not correct. When a company does an asset sale, typically because it is going out of business, the purchasing company typically doesn't own the purchased company's liabilities, such as debts or litigation. Asset sales are typically the purchasing company purchasing only assets (the good stuff) and leaving liabilities (bad stuff) behind in a useless shell. Winning a judgement against a shell is pointless because it has no assets so in the end you will never collect any money. Notification/litigation that doesn't start until after a company begins an asset sale is does not have a high success rate of debt recovery. That scenario frequently ends with the holders of debt winning judgements against a useless shell company, which again, are not really victories because no money is typically collected. Odds of debt recovery are much better when notification/litigation against the debtor company occurs prior to an asset sale. In that case, the debtor company has to notify the purchasing company of such pending litigation. How much of a difference does it make? Wilson gives the figures that AER typically collect 80% of the time if litigation has begun prior to an asset sale, but 3% of the time if litigation did not occur until after the asset sale. One key thing to remember regarding those statistics is that if the debtor signed a personal guarantee, as suggested in other podcasts, that is a whole different ball game and makes rate of success much higher. Clients of the debtor company who are owed money can go after the proceeds of the asset sale to try to recover the debt, but it is a long shot. Sometimes asset sales also occur when a company changes its name. From a collections standpoint, this is a red flag that said company is crashing and burning and trying to shake its creditors, though it is no guarantee.
Bankruptcy is a kiss of death and much closer to a guarantee that a company is trying to shake its creditors. Wilson explains that AER's high level of success when it comes to debt recovery is related to a number of well-designed and rigorous processes. Instead of going straight to filing a lawsuit, AER will work through collections processes first. Even if a given scenario does end up meaning a lawsuit is filed, AER will be doing much investigation and research into assets, asset sales, and more prior to that point. These methods by AER are much more effective than going straight to lawsuit. The numbers speak for themselves - AER recovers money 85% of the time vs lawyers going to filing lawsuits only recover money 7% of the time (per statistics from the American Bar Association. If have a collections issue that you want AER to take a look at, feel free to call 800-452-5287, extension 6578 or extension 6681, or you can email Samantha@aercollections.com or Wilson@aercollections.com.
2 Key Quotes
Odds of debt recovery are much better when notification/litigation against the debtor company occurs prior to an asset sale.
Do not assume the purchasing company owes you anything and especially do not assume a large company's offer to settle a debt of a company it is purchasing should be bigger just because it's a large company.