Once a business is liquidated, its shares become worthless – this can be a stark reminder that whether owned on a large scale by directors or modestly by small investors, there are always risks when investing in companies.
Where do Shareholders Stand When There is a Liquidation?
Although the primary aim in a liquidation is to pay creditors, shareholders are lowest in terms of their priority.
Proceeds are paid to creditors in the following order:
- Secured creditors
- Preferential creditors )employees)
- Unsecured Creditors
What does ‘Deemed Worthless’ mean?
The term deemed worthless relates to shares following a liquidation process. For investors, it means they can be declared as a capital loss and removed from the portfolio.
Will More Shareholders Lose Out Because of Liquidation?
The economy is currently shrinking and it is predicted that many more firms will be facing liquidation in the coming months. Recent examples demonstrate that shareholders in the retail and travel sectors are among those that have been hit hard by business failure.
Shares in department store Debenhams temporarily soared when magnate Mike Ashley looked poised to buy the business in March 2019, but a month later, administration was announced and the shares were delisted from the London Stock Exchange – they have since been removed from shareholders’ investments accounts. The chain went into liquidation in December 2020, although Ashley has retained an interest and is understood to have purchased fixtures and fittings, while Boohoo bought the brand for £55 million.
Another case in point was Thomas Cook, which went into liquidation in September 2019. It had been in business for some 178 years and was credited with launching the package holiday.
A year later, the business was resurrected as an online brand as the Thomas Cook brand and online assets were purchased for £11 million by Fosun, a Chinese multinational holding company. In its former guise, Thomas Cook employed 9,000 staff, whereas now, it has only around 50. A UK government statement announced: “Unfortunately, as a result of the liquidation appointments, there is no prospect of a return to Thomas Cook’s shareholders.”
On rare occasions, a ntationally recognised business may go straight into liquidation rather than administration first. An example of this was Carillion, a private company which provided construction and services for the public sector. In 2018, a stock exchange notice said it would be going into compulsory liquidation.
It had become clear that raising sufficient sums to remain afloat was not supported by lenders or shareholders as the business had £7 billion in liabilities and only £29 million in cash.The company’s main assets were its contracts, which the Official Receiver sought to find buyers for, while shareholders were told their investments were worthless.
Share ownership, whether by directors, through employee schemes and investors large and small, may offer returns that are often far higher than traditional savings. But in the case of liquidation, losses can be a bitter pill to swallow.
What Happens to Shares in Administration?
Trading in shares will be suspended when a business first goes into administration. The timescale for this is generally a year, although an extension is sometimes allowed. During the administration process, the administrator has a number of options such as returning the business to directors if it can be rescued at the end of the process, selling the business as a going concern, restructuring the business and/or selling the assets.
Clearly, while shareholders may have some hope that the business can be salvaged, there are no certainties. It should be noted that a majority of companies in administration fail and the experience can seem long drawn out and rarely fruitful for shareholders. Generally, buyers also will favour asset over share sales, since these carry fewer risks.