The federal bankruptcy courts are largely inaccessible to companies that operate in the cannabis space¹. While cannabis companies cannot wholly avoid pending lawsuits, or the ability to restructure or maximize value through a “free and clear” sale as is available under section 363 of the Bankruptcy Code, there are some alternative forms of relief available to cannabis and cannabis-ancillary companies under state law.
The most common forms of relief available to cannabis companies are an assignment for the benefit of creditors (ABC) or a state law receivership. Similar to a Chapter 7 bankruptcy proceeding, both 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 statute providing a process for the liquidation of a debtor’s assets through an assignment of the assets to an assignee. The assignee oversees the liquidation of the assets and distributions to creditors, which is usually faster and less expensive than a bankruptcy proceeding.
The main difference between an ABC and receivership is that an ABC is a voluntary alternative to bankruptcy that transfers the assets from the debtor to a trust for liquidation and distribution, while a receivership is often involuntary and a receiver is typically appointed by the court at the request of a creditor. Receiverships are also often more costly and do not allow for the recovery of preferential or insider payments to creditors.
A more affordable option would be a “workout” of the debt, which is handled out-of-court and allows for a distressed cannabis company to negotiate with creditors to restructure the amount owed or repayment terms of a debt. Negotiating directly with creditors can be potentially beneficial by lengthening the maturities on debt instruments, amending burdensome covenants in agreements, and providing for more beneficial payment terms.
This option typically requires good-faith dealings between the 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 are unable to use the threat of a bankruptcy filing as leverage in order to obtain more favorable terms.
Although none of these options afford the same protection as the Bankruptcy Code, there are some forms of creditor protection available to cannabis and cannabis-ancillary companies.
¹ See our September 15th Legal Alert on this issue.