Federal bankruptcy courts are largely inaccessible to businesses operating in the cannabis business¹. While cannabis companies cannot entirely avoid pending lawsuits, or the opportunity to restructure or maximize value through a “free and clear” sale as provided by Section 363 of the Bankruptcy Code, there are other forms of relief available for cannabis and cannabis ancillary products. state law companies.
The most common forms of relief available to cannabis companies are an assignment for the benefit of creditors (ABC) or receivership under state law. Similar to a Chapter 7 bankruptcy proceeding, an ABC and receivership are state law mechanisms for the structured liquidation of assets, as well as the restructuring of a business.
ABCs and receiverships are not governed by the Bankruptcy Code. Rather, each state has its own law providing a process for liquidating a debtor’s assets through an assignment of the assets to an assignee. The assignee oversees the liquidation of assets and distributions to creditors, which is generally faster and less costly than a bankruptcy proceeding.
The main difference between an ABC and a receivership is that an ABC is a voluntary alternative to bankruptcy that transfers the debtor’s assets to a trust for liquidation and distribution, whereas a receivership is often involuntary and a receiver is usually appointed by the court at the request of a creditor. Receiverships are also often more expensive and do not allow for the collection of preferential or insider payments to creditors.
A more affordable option would be a debt “resolution,” which is settled out of court and allows a struggling cannabis business to negotiate with creditors to restructure the amount owed or repayment terms of a debt. Negotiating directly with creditors can be potentially beneficial by extending the maturities of debt securities, modifying the binding clauses of agreements and providing more advantageous payment terms.
This option generally requires a good faith relationship between debtor and creditor, as it does not involve hiring or requesting the appointment of a third party. While this option may be more affordable, cannabis companies cannot use the threat of bankruptcy as leverage to obtain more favorable terms.
Although neither of these options offers the same protection as the Bankruptcy Code, some forms of creditor protection are available to cannabis companies and cannabis ancillary companies.
¹ See our September 15 Legal alert about this question.