A corporation undergoes liquidation under Chapter 7 bankruptcy. Among its outstanding obligations are mortgage bonds, senior debentures, and subordinated debentures. How are the claims of senior debenture holders prioritized relative to mortgage bondholders and subordinated debenture holders?
- Senior debenture holders are paid after mortgage bondholders are satisfied from pledged asset proceeds, but before subordinated debenture holders receive any distribution.Answer
- BSenior debenture holders are paid prior to mortgage bondholders because unsecured debt takes precedence over secured debt in corporate liquidation.
- CSenior debenture holders share equal priority with subordinated debenture holders, receiving pro-rata distributions after mortgage bondholders are paid.
- DSenior debenture holders are paid only after preferred stockholders and common stockholders have been fully compensated.
Answer
Senior debenture holders are paid after mortgage bondholders are satisfied from pledged asset proceeds, but before subordinated debenture holders receive any distribution.
In a corporate liquidation, secured debt holders (such as mortgage bondholders) have first priority to proceeds from the sale of pledged collateral assets. After secured debt claims are satisfied, general liquidation funds are paid to senior unsecured creditors (senior debenture holders). Subordinated debenture holders are junior in priority to senior debenture holders, receiving distributions only after senior debenture claims have been satisfied.
Step-by-Step Solution
Key Concept
Corporate Liquidation Priority and Bond Seniority Structures