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The Most Important Wind-down Terms Every Entrepreneur Should Know

At Ravix Group, we understand shutting down your start-up can be confusing, challenging, disheartening, and emotional.

Here are key terms to help you better understand a vernacular you hoped never to have to know:

Assignment to the Benefit of Creditors (ABC):  A state law insolvency proceeding wherein a company voluntarily transfers its assets to a third-party assignee. The assignee then liquidates these assets and uses the proceeds to pay off the company’s creditors. It’s an alternative to federal bankruptcy.

Assignor: The startup (usually a financially distressed company or individual) transfers its assets to a third party (the assignee) to facilitate liquidating those assets for the benefit of its creditors.

Bankruptcy:  A federal legal procedure for dealing with debt problems of individuals and businesses. Under bankruptcy, a person or company can eliminate or repay some or all debts under the protection of the federal bankruptcy court.

Chief Restructuring Officer (CRO):  An executive hired by a company, typically in financial distress, to stabilize finances, operations, and often lead a business through a business restructuring, sale, or liquidation process.

Debtor in Possession (DIP): In a Chapter 11 bankruptcy case, the debtor remains in control of its business operations as a “debtor in possession” and continues to operate its business.

Dispersed Agent: This term appears to be a typo or might not be standard in the context of managed wind-downs. Perhaps you meant “Disbursing Agent”? If so:

Disbursing Agent:  An entity or individual responsible for distributing payments or assets during liquidation, bankruptcy, or other financial transactions.

Liquidation: The process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed. It usually involves selling off company assets to pay creditors.

Managed Wind-Down:  A controlled process by which a company strategically and orderly ceases operations, pays off creditors, and handles all remaining financial and operational obligations. This business wind-down is often an alternative to bankruptcy and is intended to maximize the value of the company’s assets for its creditors and stakeholders

Preference Period:  A specific period before declaring bankruptcy during which certain payments made by the debtor might be deemed preferential and can be recovered by the bankruptcy trustee.

Receivership: A legal process where an external party, called a receiver, is appointed by a court or creditor to take control of and manage the assets and operations of a company in distress.

Secured Creditor:  A creditor that has a security interest, typically in the form of a lien, in some or all of the debtor’s assets. If the debtor defaults, the secured creditor can take and sell the collateral to satisfy the debt.

Stay: A legal hold or suspension of certain activities or actions, often related to collection activities, against a debtor. For instance, an automatic stay goes into effect when a company files for bankruptcy, preventing most creditors from taking collection actions against the debtor.

Unsecured Creditor:  A creditor that doesn’t have a lien or other security interest in the debtor’s assets. They are paid out of the general assets of the debtor and are at higher risk compared to secured creditors.

Zone of Insolvency: A financial condition where a company’s liabilities surpass its assets, or it’s unable to meet its obligations as they come due. When a company is in the “zone of insolvency”, directors might owe fiduciary duties to the company’s creditors in addition to its shareholders.

Facing startup wind-down, bankruptcy, or debt? Ravix Group is your expert in startup liquidation, finance, bookkeeping & accounting. Manage your VC-backed startup journey right with industry professionals.

Need to speak to a wind-down expert immediately? Contact us for a free hour consult: