What happens when a Company Goes Bankrupt?

Bankrupt, Bankruptcy, Company going bankrupt
Bankruptcy & Insolvency » What happens when a Company Goes Bankrupt?

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The business industry is one of the top contributors to the economy. If it grows, it brings immense profit to many people, like shareholders, employees, the board, and more. However, there are two sides to a coin. While a business can yield excellent profits, it can also incur huge losses. There might be a time when a company is going bankrupt. This not only puts the company owners at risk but the people related to it too. Here’s all about bankruptcy and what happens when a company goes bankrupt. Get closure on any case regarding Bankruptcy or Insolvency with Lex Solutions.

What Is Bankruptcy?

Bankruptcy can be termed as a legal process by which entities or people who are not able to repay debts to their creditors can seek relief from the debts. Bankruptcy is often initiated by the debtor and imposed by a court order. However, insolvency and bankruptcy are different.

Difference Between Bankruptcy And Insolvency

A company or person is considered insolvent when they are not able to repay debts to the lenders on time. If a company or person becomes insolvent, they can opt to file for bankruptcy or go for other options like debt consolidation or consumer proposals.

On the other hand, bankruptcy is a legal process that helps a person who is not able to repay their debts to lenders to clear their debts. Here are the steps involved in filing for bankruptcy:

  • Meet a licensed insolvency trustee or LIT (formerly called Trustee in Bankruptcy)
  • File the paperwork
  • Sell assets of the bankrupt person or entity if required
  • Contact and meet the lenders if required
  • Attend credit counseling services
  • Get debts cleared / discharged by the Federal Government’s Office of the Superintendent of Bankruptcy (OSB).

Once the person or entity is discharged from bankruptcy, it means that they are relieved from the obligation to repay the debts, and they become solvent again.

Types Of Bankruptcies

There are 3 main types of bankruptcies. It is important to know which chapter to file, as each has its own options and objectives. Here are the 3 types of bankruptcies:

Chapter 7 Bankruptcy

Chapter 7 is also called liquidation bankruptcy as it calls for most of the debtor’s assets to be sold to pay the lenders. Almost all chapter 7 filers get at least some of their debts discharged. This can be used by both businesses and individuals. 

It can be said that chapter 7 offers the fastest way through bankruptcy. A chapter 7 filing may take about 4 months from filing to the resolution, which is a lesser time. This is because there is no repayment plan involved in this chapter unlike other chapters. 

Chapter 13 Bankruptcy

A chapter 13 filing is also termed as a wage earner’s plan. It lets the debtor keep more property at the cost of repaying the debts over a long period, about 3 to 5 years. 

Chapter 13 lets the filers protect their homes from foreclosure. This type of bankruptcy halts the foreclosure and lets the debtor catch up to the late mortgage payments. Herein, the debt makes payments to the trustee, who distributes funds to the lenders so that the debtors don’t have to be in contact with the lenders while making payments.

Chapter 11 Bankruptcy

Chapter 11 can also be called reorganizing bankruptcy. It is usually related to business corporations and partnerships. Business individuals, like sole proprietors, may use this type of bankruptcy filing. Like chapter 13, this chapter also involves a repayment plan. 

Chapter 11 helps the business to stay in operation while its debts get restructured, paying the lenders over time. This is a major asset for the filer, and even for the lenders who, otherwise, may not have any prospects of repayment. 

When compared to chapter 7 and 13, chapter 11 is complex, lengthy, and costly. If a huge corporation goes bankrupt, it can seek bankruptcy protection with this chapter.

What Happens When A Company Goes Bankrupt?

When a company goes bankrupt, the most affected are its shareholders and the employees. When a company that is publicly listed ceases its operations and goes into liquidation, its shareholders may be entitled to a portion of the assets, depending on the types of shares that have. However, the stop is usually worthless.

Bankruptcy And Shareholders

There are different effects of different chapters of bankruptcy. If it is a chapter 11 bankruptcy, common stock shares become worthless and stop paying dividends to the shareholders. The stock may also get delisted on the major stock exchanges and a Q may be added to the stock’s symbol to indicate that the company has filed for bankruptcy. 

It is possible that the company’s shares regain value as it emerges from bankruptcy. The company may also cancel old shares and issue new ones as a part of reorganization of debt, leaving little or nothing to the original shareholders. 

If it is a chapter 7 bankruptcy, the stock is defunct. Herein, the common shareholders may get a portion of their value back when the company’s assets are distributed. However, they rarely get anything.

Bankruptcy And Employees

Apart from shareholders, if a corporation goes bankrupt then employees of the bankrupt company, too, are affected in the most negative way. At the time of bankruptcy, the employees are often seen as abandonable. During the process, their pensions and savings are spent on the survival of the company. It is the most difficult to deal with the employees’ salary, pension, and benefit schemes as they hold most of the money of the company. This does not only bring financial problems for the employees but also brings emotional turmoil. In India, there is no adequate safeguard for them when the company is liquidated. 

However, the Insolvency and Bankruptcy Code, 2016 (IBC) has mechanisms that help employees claim their wages and salaries unpaid in the course of business up to 12 months before the initiation of the company’s liquidation process. However, workmen can claim their dues for 24 months as the court distinguishes between employees and workmen.


There are many aspects to a company. While businesses are big contributors to the economy, they also have their pros and cons. It is not necessary for a business to always earn profit, there can be situations where they can incur huge losses and reach the verge of bankruptcy.

Bankruptcy is a legal process by which entities or individuals who are not able to repay debts to their lenders can seek relief from the debts. However, many people confuse the term ‘insolvency’ with bankruptcy. The term insolvency is used for a company or person when they are considered insolvent and are not able to repay debts to the creditors on time. However, if a company or person becomes insolvent, they can file for bankruptcy as they are not able to repay their debts. Bankruptcy is the next step to insolvency; it is a legal process that helps a person or entity which is not able to repay their debts to the lenders.

The situation of bankruptcy may not be the same for every company. Therefore, there are 3 common types of bankruptcy, namely, chapter 7 bankruptcy, chapter 13 bankruptcy, and chapter 11 bankruptcy. While all the three operate differently, chapter 7 and chapter 11 are mostly preferred by the companies or individuals as per their situation.

There are provisions made for the company, its lenders, and affected parties so that they get their dues cleared without creating any mess. In case a company ends up bankrupt, it can simply file bankruptcy and get aid in repaying its creditors and recovering its shareholders’ and employees’ losses as much as possible. 

According to estimates, 65% of people living in urban areas around the world are tenants. This is also true in India due to the sky-high prices of real estate in the major cities and the large population of migrant workers who live there. Nevertheless, living as a renter can be a peaceful arrangement, but occasionally there are situations where one can run into rental problems and other connected issues, such as receiving an unauthorized eviction notice or the erratic behaviour of the landlord.

Are you, however, a renter who is experiencing such problems or simply curious about what to do if you ever find yourself in a similar situation? In that case, allow us to help you through this blog, which will briefly discuss about the several protections against landowner harassment.

What does illegal eviction of tenants mean?

An illegal eviction, also known as an unlawful termination of tenancy, typically happens when a landowner forbids a tenant from entering a rental property or removes the tenant’s belongings from the property through the use of force, intimidation, or other methods (such as cutting off utilities or changing the locks). However, if the landowners evict you without taking the proper legal action, they are breaking the law.

How Do You Respond When Your Landlord Forcibly Evicts You?

Almost every state has rental control legislation pertaining to tenant protection, and each state has established specific circumstances for which the landlord may lawfully evict the renter. Additionally, a tenant has a legal right under the law to appear in court and defend himself against unlawful eviction, and some of those accessible remedies for tenants are discussed below:

Grounds for eviction

Non-payment of rent, breach of the lease, property damage, and illegal activity are the most typical grounds for evicting a renter. The tenant must therefore review the provisions of the State Rent Control Act to ascertain the grounds for eviction specified in the Act. In addition, if the tenant is being evicted for any reason other than those specified in the Act—which is considered wrongful eviction—they must seek the help of an eviction lawyer and the enforcement agencies to halt this.

Suit for injunction

A renter might be unable to leave a property when asked to do so for a number of reasons, such as having a medical emergency or having his elderly parents live with him. When this happens, the tenant has the option to file a case in the appropriate court to obtain an injunction that will prevent them from being evicted for any other grounds (other than those listed in the State’s Rent Act). Along with the assistance of housing rental lawyers, the renter should take this action, if they are violently evicted without providing them with adequate notice.

Rent Controller

In the event that the tenant receives a notice of eviction on pretences, they should go see the rent controller of the relevant jurisdiction and explain why they believe the notice of eviction is invalid. Additionally, following the tenant eviction laws, the court will summon the tenant, who will then be forced to submit his or her case and the arguments supporting the necessary evidence.

Notice of rent payment

If the landowner claims that he has not received the required rent and lists this as the reason for serving the notice of eviction, the tenant may legitimately ask him or her to send the information to his bank account so that he can conduct the transaction and deposit the outstanding rent. Moreover, after agreeing to it, the landowner must give the tenant the information within 10 days of the date they received the notice.

Also Read: Lex Solutions – Your One-Stop Destination For All Things Legal

Steps that you must follow to legally evict a tenant in India

Because eviction laws differ from state to state, the following are typical recommendations for evicting a renter. Nevertheless, you can contact the tenants lawyer of Lex Solutions if you need any assistance.

Serve the Tenant With a Termination Notice

The tenancy must be terminated before a landlord can evict a tenant for cause, and the landowner shall provide the tenant with the required notice before taking legal action to do so. Three different kinds of termination notices are generally available:

  • Pay Rent or Quit: The tenant is required to pay the rent within a predetermined period (often three to five days) or leave the rented property.
  • Cure or Quit: A breach of the rental agreement or lease must be remedied by the tenant within a set amount of time.
  • Unconditional Quit: Without a chance to correct the offense or pay the rent, the tenant must leave the property.

But to evict a tenant without good reason, the landlord must give the renter a 30- or 60-day notice to leave the premises.

File an Eviction Lawsuit

If the renter does not correct the issue or quit the property within the allotted time, the landowner must initiate an unlawful detainer case in small claims court. Following this, landlords have the right to evict tenants by serving a legal notice to tenants to vacate their premises.

Wait for the Tenant’s Answer

Within the time frame given on the summons, the tenant may “answer” the complaint. The renter may, however, use the response to refute the charges or present a defence. And, for instance, a tenant might claim that the eviction was carried out in retaliation or that the unpaid rent was used to pay for repairs the landlord refused to undertake.

Receive a Judgment for Possession

A default judgment is granted to the landowner if the tenant ignores the eviction notice India. Moreover, the landowner is entitled to take ownership of the property if the renter replies with an answer but the court rules in his or her favor.

Remove the Tenant

Despite having the right to reclaim the property, the landlord is unable to evict a renter without the help of a law enforcement official. Nevertheless, the tenant will be informed of the legal eviction and the number of days they have to leave once such an official receives the judgment and the cost. Moreover, the law enforcement authority may physically evict the tenant if they don’t leave the property in the allotted period.

Also Read: Introduction To The Indian Judicial System And Court Hierarchy

Summing Up

Now that you are aware of the characteristics of evictions and how to deal with them in a nation like India, you must use them as needed. Additionally, as a landowner, you must evict a problematic renter per the law. And, to ensure that you are acting legally, consult a local landlord-tenant law attorney in your area. For such assistance, a legal firm in Chandigarh, lexsolution can offer you a one-stop solution.


  • Can a tenant seek an injunction against the landlord?

According to the state rental rules present in India, a tenant does not have the right to issue an injunction against the landlord. Moreover, injunction procedures are always discretionary, and a court of law cannot grant a perpetual injunction in favour of the plaintiff against the right owner if the plaintiff is only a trespasser.

  • Can police evict a tenant in India?

Even if the renters behave disrespectfully, the police cannot assist in reclaiming the property. However, the only court with the authority to order the eviction of a tenant is the court of the rent controller under whose jurisdiction the property is located. 

  • When a tenant can get the benefit of protection against eviction?

If the tenant can show that the landlord gave his written approval to the subtenant, he is entitled to protection from eviction. Additionally, it disallows any other consent, including implied or oral permission.