Purchase Obligations in case of Liquidation
Hey guys,
I was wondering what happens to the purchase obligations (non-cancelable ones) when the company is going into a liquidation?
Do the counter-party of these obligations gets paid by the company that going into the liquidation anyways, and before the shareholders? (let's assume the company is expected to generate enough cash from the liquidation to pay down those obligations).
Thanks a lot, and the references to the potentially helpful materials are very appreciated as well.
Unsecured creditors generally get paid ahead of equity, but the specifics of who gets what and in what order will depend on the company's financing structure and the outcome of negotiations in bankruptcy. Also, some obligations are dischargeable in bankruptcy and some are not, so the answer to your question is "it depends". Take a look at the variable treatment of operating leases and aircraft orders in a few bankruptcy cases, for example.
If you're trying to figure out whether there's equity value left, the answer is almost always no in a chapter 7 case.
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