Where does a company’s wealth go if they go bankrupt?


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.

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.

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.

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.