How are different types of claims paid out in bankruptcy? Company X commits fraud. 1) US government has an SEC claim against X for $100 2) Investors have a claim against X for $200 3) Bank has a claim against X for $100 A only has $100. How is it divided across 1, 2, and 3?
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Legal claims first. Lender next. Investors last. Government should get $100.
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They signed up to be in different levels of the risk hierarchy. Stuff like back employee wages would come before the lenders, too. That's why stocks get all the upside: it's a lot easier to lose everything.
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Hierarchy as stated largely true in a simple corporate structure. In real life nuances are relevant. Eg. Bank could have security/mortgage over the key assets and get most of the recovery, “ahead” of the government.
End of conversation
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