Ask Colin

Shareholders in a recently failed company (name withheld) seem to have been abused in the reorganisation process. What can be done about it?

I don't know the fine details of the (name withheld) situation and therefore cannot comment on it specifically. However, I can perhaps help you to understand the situation in general terms.

It seems to me as a casual observer that what happened was that the company went broke. That means it could not pay its debts when they fell due. Sometimes this is a cash flow problem and an administrator can trade out of the hole. However, if the company has lost so much money that its debts exceed its assets, then the shareholders are wiped out. The creditors take a haircut (so many cents in the dollar) and the shareholdrs get nothing.

Now, sometimes a company can continue in business if it has good assets by raising more equity so that assets exceed debt again. This is usually done by offering the lenders shares in exchange for their debt and/or selling more shares. What usually happens is that the worthless shares are consolidated - say 1 new share for 20 old ones - which leaves the shareholders a little upside. However, they are usually effectively swamped by the new shareholders - which is not unreasonable, becasue they have bought the assets from the lenders in effect. The original shareholders are really lucky to get anything when you think about it.

There are situations where there can be abuse of minority shareholders. If you think such a situation applies here, you could take it up with the ASIC. Give them a call and they will tell you how to make a submission.

The final issue is why you were caught in this situation. The company you mention was one of the examples I used in my talks on "How to Avoid Stocks that Crash and Burn" in recent years. I also wrote an article in Shares magazine about it. There were ample warnings that something was wrong a long time before the company failed. Could I suggest that you might find it a more profitable use of your time and energy to learn more about investing rather than tilting at windmills trying to get something out of the disaster.

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