Question

A friend of yours bought a handful of common stocks issued by a small company a few months ago. Recently, the company filed for bankruptcy and is now in the process of liquidation.

1. Indicate in which order of priority would the following parties be able to claim the company’s assets:

• Holders of common stock
• Bondholders (secured with collateral)
• Holders of preferred stock

2. In general, could the court take possession of your friend’s private assets (house, car etc.) for owning a common stock of a company going bankrupt? Why/Why not?

Answer 1

Answer>

Facts -

My friend has bought common stocks for the company. This means that my friend has equities for the said company.  

The company is going bankrupt and would be liquidated. This means that all of the company's assets would be sold off at fair value. Also, as per company law, the preference of claim over the company's assets would be -

1> Debt Holders

2> Equity Holders

Since the top priority claim over the company's assets is of the debt holders, the preference order would be -

1> Bond holders (secured with collateral)

2> Bond holders

3> Preference stock holders

4> Common stock holders

Also, as per the company law - all assets and liabilities pertaining to the company are the sole responsibility of the company as an entity. The equity holders are not responsible for any debt owned by the company.

a> As per the above mentioned information the correct answer is (in order of decreasing priority):

1> Bondholders (secured with collateral)

2> Holders of preferred stock

3> Holders of common stock

b> No, the court cannot take possession of my friend's private assets for owning common stocks of a company going bankrupt.

Hope this answers your question