How Bankruptcy Court Protects the Investors of a Public Company

If a public company files for bankruptcy in bankruptcy court, those who hold stocks or bonds in the company may very well wonder if they will recover their money, and what rights they might have. The answer depends on what kind of bankruptcy the company is filing, but in any case it’s useful for investors to know that bankruptcy court does have provisions in place designed to try and protect the rights of those with ownership.

Bankruptcy Court Laws and Investor Rights 

If the public company files for a Chapter 7 bankruptcy, this means that the company is liquidating their assets in order to pay debts, and the company is effectively considered out of business. Investors in this situation can expect to be paid back according to the type of investment they made. Typically, those with collateral and secured loans to the company are paid first, and stockholders are much further down the priority list.

Should the company file for Chapter 11, things will proceed slightly differently.

• A Chapter 11 bankruptcy for a business is, like Chapter 13 for individuals, not a complete liquidation. Rather, it’s a repayment bankruptcy, with the intention being to create a repayment plan via the bankruptcy courts. 
• This plan is approved by the judge and put into place when the bankruptcy is finalized. However, odds are excellent that those who hold shares in the company will still lose out. 
• During the reorganization process that takes place during a Chapter 11, the company’s assets and worth will be divided up and established as sources of repayment for creditors and debt holders. 
• In the vast majority of cases, then, the people to whom the company owes money will become, effectively, the new owners of the business, at least until such a time as the debts are paid. Equity shares on the company held by investors are very likely to be canceled at this point.

Getting Help

The purpose of a Chapter 11 is for the company to get back on its feet financially, and doing so is a complex process. Those with investments in the company should be aware that bankruptcy courts will do whatever is possible to protect their equity and investment, but that in many cases bankruptcy laws will simply not make it possible. The priority will go to those to whom the company owes serious debts, and stockholders, bondholders, and other investors may very well lose out. As part of the risk of owning company shares, this probably doesn’t come as a surprise. However, if you have questions about your rights under chapter 11- either as a business owner as a stock owner- speaking with a lawyer is your best option to make sure that you understand the laws as they apply to you.