Bankruptcy is a common method of gaining the right to start afresh when the burden of debts is too overwhelming. Individuals and businesses are both entitled to file for bankruptcy under the federal law and achieve relief.
Public companies can also resort to this solution and nowadays it is not uncommon to see a large firm filing for bankruptcy.
There are different possible outcomes when such enterprises choose this path. In this post, we are going to provide an answer to the most frequent questions related to public companies that file for bankruptcy.
What happens to a public company after filing for bankruptcy?
Things will definitely change after this decision is made, but the result depends upon the type of bankruptcy chapter that is being filed. Essentially, there are two possible outcomes; companies can either manage to cover all or most of the debt and remain active, or they might not be able to do so and eventually go out of business.
Which are the consequences of each bankruptcy chapter?
Companies can typically choose one of these two bankruptcy options: Chapter 7 or Chapter 11. If they file for Chapter 11, they will basically be given the chance to reorganize the business and keep it going in order to pay their debt. The purpose, in this case, is to render the business profitable once again.
If Chapter 7 is being filed, all the company's operations cease, and the company basically goes out of business. This form of bankruptcy is also called liquidation which implies that the company's assets are being sold in order to pay off the debts.
Who will manage the company after bankruptcy is being filed?
In Chapter 11 bankruptcy, the company continues its activity under the existing management. However, all the important business decisions will require the approval of the bankruptcy court.
In Chapter 7, the company will see a drastic shift of authority as the liquidation process will be managed by an appointed bankruptcy trustee.
Who gets paid first after bankruptcy is filed?
Creditors will get paid according to a strict priority order which places the secured creditors at the front of the queue. These creditors represent a privileged category because their credit is secured through collateral. This means that it is backed up by other assets or by a mortgage for example. Secured creditors thus manage to minimize their risks in case the company goes bankrupt.
Generally, bondholders are more likely to recover their loss if the company files for bankruptcy than stockholders. Bondholders own bounds that represent the debt of the company; in case of bankruptcy, they have priority in getting paid. Stockholders, on the other hand, own the company itself and are therefore more at risk if the company doesn't perform well and files for bankruptcy. Finally, the owners of the company are the back of the queue, being the last who get repaid if the company goes bankrupt.
What happens to the stock and bonds?
In Chapter 11, the company can continue to trade its securities even after it files for bankruptcy. However, in most cases, a company that files for bankruptcy is no longer able to meet the listing requirements that would allow it to continue trading on the major stock exchanges. If the company recovers through the reorganization plan that governs Chapter 11, the existing equity shares will probably be canceled. The shareholders who participated in the reorganization plan will probably see the value of their stock decrease. If the company survives bankruptcy and regains profitability, the bondholders and creditors are most likely to become the new owners of the business.
If the company files for Chapter 7, its stock loses value as the company prepares for liquidation. Stockholders usually lose their investment if the company files for Chapter 7. Bondholders may receive a part of the value of their bounds depending on how many available assets the company is able to distribute. The amount bondholders may recover also depends on their debt's position on the priority list.
Is it risky to invest in a bankrupt company?
If the company becomes profitable again after a Chapter 11 bankruptcy, the stock it had prior to bankruptcy will most probably lose its value. If the company issues new shares, the old shareholders will probably not get any of them. The company's aim is to cover its debts, so the new shares will go to creditors and bondholders who have to be paid first. Investors usually approach bankrupted companies with extreme caution because investing money in these entities often leads to financial loss. On the other hand, investing in newly organized companies that have just emerged from bankruptcy might be a profitable idea.
Our extensive experience in corporate bankruptcy has taught us that each company has specific challenges after filing. The best way to find out what difficulties you might encounter and how to prepare for them is to consult us. We are ready to put our expertise at your service. Contact us and let's find a way out of your financial struggle.