Liquidation Trust Agreement vs. Plan Trust

Updated August 15, 2023
21 min read
Liquidation Trust Agreement vs. Plan Trust


Stepping into the realm of corporate finance often unveils the need to comprehend complex business contracts, especially when dealing with asset divestitures. Terms like liquidation trust agreement and plan trust may seem overwhelming at first, but they form the backbone for ensuring a smooth dissolution process. This article aims to unravel these concepts, shedding light on their merits and their unique roles in executing business strategies.

What Is a Liquidation Trust Agreement?

At the core of a corporate dissolution process, you'll often find a liquidation trust agreement playing a critical role. Born out of the U.S. bankruptcy law, this legal instrument has paved the way for an orderly asset disposition during tumultuous times. 

To put it simply, a liquidation trust agreement, just like a skilled captain navigating turbulent waters, steers a bankrupt entity's assets to safer shores. It's not just about divesting the assets, but doing so in a manner that upholds equity and fairness.

A liquidation trust agreement takes its definition from U.S. bankruptcy law. For instance, under the U.S. Bankruptcy Code § 1123(b)(3)(B), a liquidation trust agreement permits a debtor to retain any claim or interest that occurred before the commencement of a bankruptcy case. This way, the debtor can make orderly distributions to the relevant parties while settling any outstanding claims.

It sets the ground rules for how the liquidation process should unfold. It often stipulates terms related to:

  • Asset liquidation: The liquidation trust agreement lays out the process for converting the entity's assets into cash. 

  • Claims resolution: It outlines the steps for attending to the claims against the bankrupt entity.

  • Distribution of proceeds: How the proceeds from asset liquidation should be distributed among creditors is detailed in the liquidation trust agreement.

  • Trustee appointment: The liquidation trust agreement also highlights the process and criteria for appointing the 'navigating captain,' the trustee who oversees the entire process.

While the process may sound overwhelming, having a liquidation trust agreement template at hand can make drafting this critical document a far smoother exercise. A well-structured liquidation trust agreement not only ensures a proper legal course for the venturing entity but also peace of mind for all stakeholders involved.

Role and Benefits of Liquidation Trust Agreement

The role of a liquidation trust agreement is multifaceted. It empowers the appointed trustee to liquidate the assets of the insolvent entity, ensures the fair distribution of proceeds to creditors, and concludes all pending litigation in an organized manner.

A liquidation trust agreement offers several tangible benefits. It allows companies to focus on their core operations, leaving the intricacies of divestiture to the skilled trustee. Furthermore, a sound liquidation trust agreement can expedite the liquidation process, while reducing costs and maximizing returns to creditors. No wonder the term 'trust liquidation agreement' rings an optimistic bell in a bankruptcy context.

What is a Plan Trust?

Just as a liquidation trust agreement plays its role in the dissolution process, a Plan Trust emerges as another significant legal tool in corporate restructuring. It essentially serves as a viable counterpart to a liquidation trust agreement in the context of corporate bankruptcy scenarios.

Plan Trusts are often associated with Chapter 11 of the U.S. Bankruptcy Code, also widely recognized as a reorganization bankruptcy. Characterized by some U.S. courts as a form of liquidating trust under section 1123(b)(3)(B) of the Bankruptcy Code, Plan Trusts extend a lifeline to keep a struggling business afloat while it focuses on reorganizing its corporate finances.

Brought into existence by a confirmed reorganization plan, Plan Trusts empower debtors to weather financial storms while maintaining continuity in their operations. The mechanics of establishing a Plan Trust under Chapter 11 might encompass:

  1. Debtor's petition: The debtor files a petition under Chapter 11, often willingly. This marks the initiation of the reorganization process.

  2. Reorganization plan: A Plan Trust operates under a comprehensive reorganization plan, highlighting the debtor's strategy to pay off creditors over time. 

  3. Court protection: Once the reorganization plan receives court approval, the debtor gains protection from creditors. They can then continue operations while executing the plan under the supervision of the court.

  4. Trust formation: As part of the reorganization plan, a Plan Trust is formed to hold certain assets of the debtor. The trust's assets are then used to satisfy the claims of creditors. 

To better appreciate the role of a Plan Trust, consider it as a balancing scale. On one side, it offers a strategic alternative to a liquidation trust agreement, providing a lifeline to struggling businesses. On the other, it serves as an instrument to reorganize and rejuvenate a company's finances under the protection of the courts, ensuring its continued survival while paying off debts. Just as a ship encounters and overcomes rough seas, a Plan Trust helps a financially-troubled company navigate through bankruptcy and emerge stronger.

Role and Advantages of Plan Trust

Plan trusts typically serve to monitor and enforce the debtor's reorganization or liquidation plan post-confirmation ("post-confirmation plan trusts"). They, too, are managed by a trustee who works diligently to execute the reorganization plan on the debtor’s behalf.

While different from our subject matter of trust liquidation agreement, a plan trust also provides several advantages. They foster a streamlined process for reorganizing debts and ensure a more efficient operational structure, contributing to the debtor’s financial recovery.

Key Differences between Liquidation Trust Agreement and Plan Trust

Unveiling the nuances of both the liquidation trust agreement and plan trust shows us some distinct contrasts. Let's delve deeper into these two key tools used in corporate restructuring and bankruptcy.

Firstly, the primary objective of each type of trust is different. A liquidation trust agreement is structured under the proceedings of Chapter 7 of the U.S. Bankruptcy Code. It marks the commencement of liquidation, winding down operations, monetizing the assets of an insolvent entity, and distributing the proceeds to creditors. 

On the other hand, a plan trust practices under Chapter 11 of the U.S. Bankruptcy Code, focusing on reorganizing a financially beset entity's debts while maintaining the company's operations. The plan trust allows for the revival of the entity's financial health and a return to profitability. 

Some other key contrasts between the liquidation trust agreement and plan trust include:

  • Objective: A liquidation trust agreement aims at orderly selling off assets to resolve all debts, while a plan trust strives for debt restructuring and business continuity.

  • Scope: A liquidation trust agreement entails the winding down of the debtor's operations, whereas a plan trust permits an overhaul of the entity's debt structure while it keeps running its operations.

  • Outcome: A liquidation trust agreement leads to the debtor's operations being ceased permanently upon resolving all debts. Conversely, a plan trust enables the company to emerge from bankruptcy and continue its operations.

  • Legal process: Liquidation trust agreements function within Chapter 7 proceedings, implying a complete shutdown strategy. However, plan trusts are set up under Chapter 11 proceedings which signals a continuation strategy.

Understanding the reasons and circumstances under which entities might choose to use a liquidation trust agreement or plan trust can be crucial for business owners, legal consultants, and financial analysts. The decision between the two is shaped by the debtor's unique financial situation, strategic objectives, and the state of its relationships with creditors and stakeholders.

What To Choose — Liquidation Trust Agreement or Plan Trust?

Choosing between a trust liquidation agreement and a plan trust boils down to the current financial status of the entity, and your end goal. If your entity faces insurmountable financial challenges, it might be wise to opt for a liquidation trust agreement. On the other hand, if there's a possibility of operational revival and debt reorganization, a plan trust is your best bet. You can always seek advice from business lawyers for the best course of action suited to your professional needs.


Liquidation trust agreements and plan trusts serve as essential tools in navigating the turbulent waters of bankruptcy, divestitures, and reorganizations. Whether it is the liquidation of assets by a trustee in a liquidation trust agreement or the vigilant reorganization of debts in a plan trust, each brings its unique utility and advantages. Dig deeper into such legal contracts and many more on the Lawrina and access various templates designed to simplify your legal journey.

Frequently Asked Questions

When do you need Liquidation Trust Agreement and Plan Trust?

The need for a liquidation trust agreement arises when an entity faces insolvency and opts for dissolution. A plan trust is typically required when a company is working on reorganizing its debts under Chapter 11 of the Bankruptcy Code.

What happens in a Liquidation Trust Agreement?

In a liquidation trust agreement, a trustee is appointed to oversee the orderly liquidation of assets, ensuring that the proceeds are fairly distributed among creditors. Any residual assets or unresolved claims are also managed as per the details of the trust liquidation agreement.

What is the role of the Trustee in a Liquidation Trust Agreement?

The trustee plays a pivotal role in a liquidation trust agreement. They are responsible for administrating the liquidation process, which involves marketing and selling the entity’s assets, handling creditors' claims, and distributed the liquidated proceeds as per the agreement.