After having shorted a company's shares, you'd need to buy those back to cover your position. But if the company collapses and declares bankruptcy, you can't buy those back on public markets if it gets delisted.
I assume that one case would be to buy them OTC from investors who owned them. But in case that's not possible, how can you cover your short position at your PB?
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Via the bankruptcy process the shares you lent eventually back to you, and their value is likely wiped out or greatly impaired. Your short trade is still a success.
I read time ago (last year) a BBG article saying that two HFs were paying fees on their accounts at their PBs because they hadn't been able to close the shorts once the companies they were short went bankrupt. Can't find the article. How could you get out from such a situation? You'd have to wait for the restructuring process to end and see what you get?
Bankrupt companies sometimes see their stock keep trading for a while after declaring bk before they are de-listed. Recall bankruptcy is just protection from creditors, nothing else. In many of these cases, shares dont trade at zero but at $0.10 or such, to account for restructuring option value.
Most smart people that were short the name have covered at this point. The stock is by now iliquid and it can be very messy having to go through restructuring to cover your short.
If you were short from $20 and the stock is at $0.50 and you haven't covered yet, you're asking for trouble.
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