Declaring bankruptcy is one of the last things a company ever wants to do, but unfortunately, despite their best efforts, sometimes circumstances mean that business owners have no other choice. Of course, financial difficulties are always challenging to deal with. Still, when shareholders expect a portion of the assets and company owners face money disputes, the situation can be much worse.
Bankruptcy, also known as going into administration, can be an incredibly lengthy process, made more complicated by a long list of factors. So, as leading providers of professional direct COSEC services, we’re here to explain how you can best deal with bankruptcy in line with the law and what happens to a company’s stock once it has gone bankrupt. Read on to learn more.
What Does Going Bankrupt Mean?
The most common reason a company would file for bankruptcy is that they have become overwhelmed with so much debt that it cannot keep up and can no longer afford to continue operating. Other options are available to a company in this situation, such as:
- A debt management plan
- An administration order
However, bankruptcy, or going into administration, is the most common path chosen by the business owners. It is a legal procedure that deals with the debts compiled by a company. Although debt relief is found, it is a less-than-ideal situation to be in for everyone involved, such as shareholders, debt holders, and the company itself.
There are two different types of administration. The first means that the company is protected from creditors until it has financially recovered from its debts.
The other type of bankruptcy means that the company will not financially recover and has shut its doors for good. When this happens, assets are sold and distributed accordingly, which we delve into further below.
What Bankruptcy Means to Shareholders
No matter which bankruptcy type a company goes through, more often than not, the shareholders will be the last in line to receive any payout and will usually not receive anything at all. If the company is only temporarily closing and plans to restore in the future, stock shares will stop paying dividends and dramatically decrease in value. They could regain value once the company comes out of bankruptcy; however, this isn’t guaranteed. Company owners could also drop or issue new shares, which would mean nothing is left for the original shareholders
Moreover, if the company has decided to terminate all chances of restoration, its stock is no longer. This means that shareholders will rarely receive anything in this situation.
What Bankruptcy Means to Company Owners
Bankruptcy can be a devastating process to deal with for a company owner and is often incredibly challenging and mentally draining. There is a lot to consider, such as ensuring your bankruptcy application is completed properly, keeping note of your actions in case they need to be referred back to, and assessing your options to decide whether to close your doors for good or whether restoration would be possible in the future. Because of this, you must keep a level head and seek assistance if you require it.
Who Gets Paid and When?
A tight structure is usually followed when determining who gets paid and when.
- Secured creditors, who have collateral to back the money borrowed, such as banks and borrowing firms.
- Preferential creditors, who are often members of staff entitled to wages, holidays, or other assets.
- Secured creditors with a floating charge, who usually have security over certain assets.
- Unsecured creditors, such as the company’s suppliers and contractors.
- Shareholders, who rarely get anything.
This payment hierarchy must be followed step by step, meaning that the second stage of people cannot be paid before the first has been paid and so on.
Of course, the payout will differ from company to company, so it is impossible to say how much you are owed, no matter which stage of the hierarchy you are in.
As mentioned, dealing with bankruptcy can be a mentally draining experience for everyone involved, but especially so for business owners who see their company failing in front of them. However, it’s not all doom and gloom, and, as previously discussed, it is possible to restore a company that has gone through administration in the past.
While we cannot assist in restoring a business that has filed for bankruptcy or one that has gone into administration, we do offer a wide range of other services, including company registrations for those wanting to start up a new business. Additionally, we can provide company searches, which allow you to learn about businesses you plan to work with, including discovering if the company has ever filed for bankruptcy.
If this sounds like something you would be interested in, please don’t hesitate to get in touch, and a member of our team will be more than happy to assist.
