The bankruptcy of GM (General Motors), a mainstay of American industry since 1908, was one of the biggest shocks of the financial crisis of 2008–2009. GM had $173 billion in liabilities and $82 billion in assets in its 2009 filing. It took General Motors five years and a sizable infusion of government money, but the company recovered fully and paid off its debt to the taxpayers. Investors who persisted received their money back. Companies experiencing severe financial difficulties but wishing to recover and rebuild are eligible for protection under Chapter 11 of the bankruptcy law.

Chapter 7 Bankruptcy

The business submits a reorganization plan to achieve this. For instance, a struggling retailer might propose closing half of its locations, renegotiating some of its debts, and selling its corporate headquarters to raise cash. The plan typically aims to appease the parties with the biggest financial stake in the business. In the case of a retailer, this might include unpaid suppliers and a bank that has given the business sizable loans. Either the reorganization plan will be accepted, or Chapter 7 bankruptcy will be imposed on the business. If the latter is the case, the company has failed, and any remaining stock shares are likely worthless. If the proposal is approved, the business will have another chance. If it is successful, its stock price might start to rise once more.

Will the Liquidation Cause More Shareholders to Lose?

Since the economy is currently contracting, many more businesses are expected to file for liquidation in the upcoming months. Recent instances show that investors in the retail and tourism industries are among those who have been severely impacted by business failure. When businessman Mike Ashley appeared to be in the process of purchasing the company in March 2019, shares of the department store Debenhams briefly rose. However, a month later, the administration was announced, and the shares were delisted from the London Stock Exchange. Since then, they have been removed from shareholders' investment accounts. The chain entered liquidation in December 2020, though Ashley reportedly kept a stake and bought fixtures and fittings, and Boohoo paid £55 million to acquire the brand. Thomas Cook, which entered liquidation in September 2019, is another example.

A stock exchange announcement from 2018 said that it would enter forced liquidation. The company had £7 billion in liabilities and only £29 million in cash, making it obvious that raising the necessary funds to stay afloat would not be supported by lenders or shareholders. The company's main assets were its contracts, which the Official Receiver tried to sell while informing shareholders that their investments were worthless. Share ownership can frequently provide returns that are much higher than traditional savings, whether it is by directors, through employee plans, or by investors, big and small. However, losses in liquidation can be a difficult pill to swallow.

What Happens to Shares in Administration?

When a company first enters administration, share trading is halted. The timescale for this is normally a year, although an extension is sometimes allowed. The administrator has a variety of alternatives during the administration process, including returning the company to the directors if it can be saved at the end of the procedure, selling the company as-is, restructuring the company, and selling the assets. There are no guarantees, even though investors may believe the company can be saved. It should be highlighted that most businesses that go into administration fail, and the process can appear protracted and rarely rewarding for shareholders. Buyers will typically prefer asset sales over share sales since they are less risky.