While Delaware corporations may take advantage of a “safe harbor” process that involves notice to creditors and guidance of the Delaware Court of Chancery in approving reserves, this process is rarely invoked and is not available for other Delaware entity forms.Failure to make “reasonable reserve” is a basis for liability on the part of the person(s) conducting the liquidation.For an entity with a complicated asset portfolio, it may make sense to transfer all assets, rights, and causes in action to a liquidating trust that can liquidate assets and investments over time, avoiding market dips and other timing concerns.
These considerations may tip the scales in favor of setting up a liquidation vehicle and bringing in an administrator experienced with winding down operations.Whether the trust is the product of a bankruptcy plan or a state law plan of dissolution, certain factors must be considered. Section 1123(b)(3)(B) of the Bankruptcy Code allows this prospect to be avoided.To find out more, Lawyer Monthly hears from Ashley B. It states that a plan may provide for the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest.The appointment is generally done in the plan, confirmation order and trust agreement. 94-45, the plan and disclosure statement must explain how the bankruptcy estate will treat the transfer of its assets to the trust for federal income tax purposes.The liquidating trustee must also demonstrate that he or she qualifies as a representative of the estate. 94-45 notes that it does not define as a matter of law the circumstances under which an organization will be classified as a liquidating trust for income tax purposes, the conditions are commonly incorporated into plans and liquidating trust agreements whether or not an advance ruling is sought. A transfer to a liquidating trust for the benefit of creditors must be treated for all purposes of the Revenue Code as a transfer to creditors to the extent that the creditors are beneficiaries of the trust.
Other timing considerations may be presented by contingent, unliquidated or unmatured claims.