Where does a company’s wealth go if they go bankrupt?
In: 7
It is distributed among the people, companies and agencies that this bankrupt company ended up owing money to. According to a complicated set of rules, some of them can get some of their money back.
In an ideal world it would be redistributed to the companies debtors.
In reality it goes to the Caymans.
The process is quite similar to splitting up someone’s estate once they die. So in the same way the mortgage company gets paid off first (secured creditor), then it you have loans the bank can get repaid from cash assets. Anything remaining goes to the beneficiaries.
Company wind up is similar. An administrator/liquidator is appointed. The administrator will liquidate whatever assets (cash, property, equipment) there are and distribute them in terms of priority. The priority order can get quite complicated but it’s basically: 1. administrator, 2. suppliers/employees/tax (priority debt) 3. secured creditors, 4. unsecured creditors 5. Preferential shareholders 6. Regular shareholders. The owners/shareholders only get paid if there is anything left after everyone else is paid off and same goes up the chain. Generally companies who are bankrupt have more debts than assets so people can easily end up with nothing.
A company rarely owns its own “wealth”. Buildings are leased, equipment too. Intellectual property and trade secrets may be the closest thing to wealth. Of course there are other assets like brand awareness and relationships with customers and suppliers.
In the case of a wealth management or brokerage company structures are typically set up by regulators such that assets like shares are shielded from creditors.
There is nothing that says wealth needs to be preserved. If you buy a house and then burn it down you won’t be able to sell it for as much as you paid for it. The land would be worth something and there may be other things that are salvageable but wealth has been lost.
That’s extreme, but things can depreciate if maintenance is ignored or if the neighborhood gets bad.
The same thing can happen with companies. Maybe they lose an account. Maybe a breakthrough at another company makes it hard for them to compete with them. Wealth can simply be lost.
It is supposed to be split up and given to their creditors. With larger companies often those creditors are owned by the same people so it moves from one accounting book to a different accounting book.
They have no “wealth” (i.e. net worth) which is why they went bankrupt.
What they MAY have is assets, along with entities that have a claim on those assets. A bankruptcy court or trustee decides who gets what percentage of those assets.
In general, secured creditors (who have legal claims on specific assets pledged as collateral) get paid first, then unsecured creditors, then equity holders (such as stockholders). Usually there isn’t anything left for the equity holders.
The assets, which is probably the only thing the company has that has any kind of value, are usually sold at auction. There are two ways this can go, you can firesale all the assets, so real estate holdings, equipment, even patents can go up to sale to the highest bidders. For a company like Kodak, a financially solvent company will typically buy the bankrupt one, rob it for anything of value (Kodak had a very enviable patent list) and then sell all the assets they couldn’t squeeze a dime out of at auction.
This is risky for the acquirer; most bankruptcies aren’t a SEARS or Kodak, where they have some redeeming quality that makes them interesting. Mostly you end up with something like the old Packard plant in Detroit, a huge relic no one wants to touch because no matter what it will cost you a fortune.
That is why there are so many boarded up businesses during economic downturns, no one wants the liability. I lived near and old phone factory (no kidding, the old Avaya digital handsets that used to be built right here in the USA) that shut down and that facility stood vacant for ~15 years until the city figured they had enough in the coffers to buy off what wasn’t parted out to a company and redeveloped it as a mixed use area.
They don’t have any. Investors who own shares get wiped out as share price falls to $0, money and assets company holds get sold off to pay creditors (assuming liquidation, not re-organization).
Depends on the type of bankruptcy. Chapter 11 is a restructuring. It just means the business keeps going and renegotiates its outstanding debt, getting some of it cancelled. Some lenders will lose money, it depends on the type of debt. But assets are usually not sold as the business intends to continue working. So in general nowhere in this case.
Chapter 7 is complete liquidation. The business’s assets and cash get distributed to lenders according to a priority. Usually it goes something like secured bonds (very low interest rate but first in line in cases like this), then bond holders, then shareholders (this gets pretty complicated and depends on specifics and state). In this case the company is gone afterwards. The name might get sold, but the company is effectively dead.
If you want a good picture of how shafted some lenders can be, look at FTX. Depositors and investors in any financial institution are like lenders with specific legal protections. Depositors and investors in any crypto exchanges have no regulations or laws to protect them as it is an unregulated industry. FTX can flip them the bird in chapter 7 and the depositors would have no way to get their money back. Things like the FDIC exist for a reason.
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