What to Expect When You Invested in a Company that Goes Bankrupt?
In Singapore, companies that undergo losses within three consecutive years are put on a watch-list. Some companies are being monitored by the Singapore Exchange (SGX). If you have invested in a company that became part of the watch list, this post will tell you the risks and the expectations you need to get ready.
Characteristics of a Company Facing Bankruptcy
When the company does not have the enough funds to meet its regular operating expenses, then the company is facing bankruptcy. An insolvent company also has debts that are unpaid, and the interests are shooting up.
This is also called as the restructuring process. In this phase, the insolvent company needs to renegotiate with its creditors (be it banks or bond holders) and its borrowing provisions. During this process, the common shareholders do not have any say about the outcome. There are also cases where the company needs to issue a huge number of new shares for the recapitalization of the company. The existing owners are being affected since there is a tendency that the percentage of their shares is low.
This process is considered as one of the most horrible things that can happen to an investor who has common shares in a company. When the insolvent company has no other options to keep its operations running, it then needs to sell its assets to pay the creditors. In this process, the existing owners can end with nothing. They are the last ones to claim anything from the company.
Also, the insolvent company is forced to sell their assets at a discounted price. After the assets are sold, the company shall pay first the outstanding taxes it has, then the creditors, and next to the employees. It should not also forget to pay the lawyers and consultants along the process. After such, what happens usually is that nothing is left for the common shareholders.
Prevention of bankruptcy
A company must have enough monetary reserves for it to sustain its operations for several years. This is highly important if there is no revenue coming in. Those with high debt loads are at a higher risk for bankruptcy. As investors, you should know how to evaluate a company before investing to avoid such untoward occurrences.
In cases where bankruptcy is inevitable, you have to know that it is a complex and time-consuming endeavor. It is advisable that you comply with all the legal requirements and do the best course of action.
Investing is a risky endeavor. Yet, with the right knowledge and research, it can help you make the right decisions. There is no sure thing in business, but it has been known as a fact that business is taking risks and reaping the good rewards after.
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