Question

QUESTION 9

1. Due to Coronavirus Lockdowns, many Corporations are declaring Bankruptcies such as: 1) Hertz Car Rental Firm, 2) Neiman Marcus, 3) Gold’s Gym & many more.

   In case the Assets of a Bankrupt Firm are liquidated, all the Cash received must be paid to the various Creditors in the following order:

   	a.	1. Common Share Holders 2. Pf Stockholders, 3. Notes Payable 4.Debenture Holders, 5. Bondholders
   	b.	1. Notes payable (NP) Holders 2. Bondholders 3. Debenture holders 4. Pf Stockholders 5. Common Share holders
   	c.	1. Bondholders 2. Debenture Holders, 3. Pf Stockholders, 4. Notes Payable Holders 5. Common Share Holders
   	d.	1.  Common Share holders 2. Pf Stockholders 3. Bondholder 4. Debenture holders. 5.  Notes payable (NP) Holde

Answer 1

Answer: -

B.  1. Notes payable (NP) Holders

2. Bondholders

3. Debenture holders

4. Pf Stockholders

5. Common Share holders

Notes:-

After solvency of a firm creditors are paid in the followin sequence: -

1. Secured creditors with a fixed charge: - Majorly consist of banks, bondholders etc

2. Preferential creditors : - Majorly consist of employee wages and benefits like pension and all

3. Secured creditors with a floating charge: - Credits where underlying assets are Raw material, stock , Work in process etc.

4. Unsecured creditors: - Consist of suppliers , contractors, HMRC etc.

5. Shareholders: - Prefered shares and common shares.

1) Note payables get first preferece as these are secured instrument with fixed charge for short term credit

2) Bond comes next as it is also a secured with fixed charge.

3) Debenture are unsecured instrument so given the priority to be paid after bonds.

4) Preference shares are paid before common shares.

5) Common shares are last in the order as shareholders take risk while investing and are paid if anything is remaining after paying all above.