The company announces bankruptcy protection and the legal proceedings start in which it will be decided what pay-outs will be paid to stakeholders.
A Bankruptcy (also referred to as an insolvency or default) is the inability of an individual or entity to pay its debts when they are due. It does not always result in liquidation. An alternative is reorganisation, in which the firms obligations may be re-negotiated.
Usually a specialised and qualified lawyer is appointed who handles the proceedings. This lawyer is known as an insolvency practitioner.
Any party that has claims outstanding can file a claim.
In case of a Liquidation, all assets will be sold by the insolvency practitioner. If - after all the debt has been paid off - there is something left, this will be paid out as proceeds to equity holders.
Example (that took place in reality):
Insolvency Filing of Portfolio Company No. 15 (Julius Boos jr. GmbH & Co. KG)
The board of directors of H.E.A.T Mezzanine S.A. ("HEAT SA") wishes to make the following announcement:
"The Transaction Adviser has been informed by the management of the company about the insolvency filing due to illiquidity. After the takeover by a new investor and the restructuring of the company (including a substantial capital injection by the new investor in 2008) (cp. Investor Report as of 31-Oct-08), the company had slowly started to recover but was then fully affected by the economic crisis which led to a significant loss in sales and earnings. As the main shareholder has not been able to inject fresh money again, the company failed to pay outstanding debt. The Transaction Adviser is currently in the process of gathering further up-to-date information from the company and the insolvency administrator. This insolvency event does not have an immediate effect on the transaction as the principal amount of the SOLA (EUR 7m) had already been recorded to the Principal Deficiency Ledger (PDL) on the Payment Date in October 2008 due to Payment Default. Further information will be made available to investors immediately upon availability."
A shareholder of the above mentioned security will see his shares drop in value. At some point they will be delisted from the exchange and liquidated (if the value of the assets is more than that of the debts).