What Happens to Your Shares in Bankruptcy: A Guide
Bankruptcy and Insolvency Explained
When a company is facing bankruptcy or insolvency, investors often find themselves in a challenging and complex situation. It is crucial to understand the implications of such a turn of events on your investment.
When a company is delisted from an exchange, it does not mean that the shares themselves have ceased to exist. Instead, they will be quoted on the Over-The-Counter (OTC) market. The value of your shares will depend on the company's financial status and the process of liquidation.
Understanding the Liquidation Process
During the liquidation process, the company's assets will be sold to pay off external liabilities and preferred shares (if any) before the remaining proceeds are distributed to common shareholders. If there is nothing left after paying off all creditors, you will receive nothing. Your shares, though, will still belong to you, but their value could range from nothing to very little.
What to Expect During Bankruptcy
Bankruptcy means your company is effectively taken away from you and given to a group of accountants to liquidate. The first call for payment is the receiver (the accountants in charge), followed by the bank. The small print in the bank's agreement could allow them to take more. The accountants will then sell the company's assets to pay off creditors. You may feel poorly at the low prices they get for the assets. If you have any cash, consider purchasing assets in the sale at a bargain price.
Key assets such as vehicles, property, and machinery will go below book value and market value. While the company should focus on satisfying all creditors, the remaining assets will be left for you to deal with. In rare cases, a company might manage to retain some assets, such as buildings, machinery, and warehouses filled with useless stock. However, the majority of the time, these assets will be sold off.
Limitation of Loss
Your loss from an insolvency will always be limited to the value of your shares. For instance, if the company loses a lawsuit and becomes bankrupt, losing all of its assets, you will lose all the value of your shares. However, if the company loses 50% of its asset value, you will only lose 50% of the value of your shares.
Conclusion
The reality of share ownership in the face of bankruptcy or insolvency can be a difficult and disheartening experience. Understanding the process and the legal framework is crucial to protect your interests as a shareholder.