The company announces bankruptcy protection and the legal proceedings start in which it will be decided what pay-outs will be paid to stakeholders (if any).
- A Bankruptcy (also referred to as an insolvency or default) is the inability of an individual or entity to pay its debts when they are due. It does not always result in liquidation. An alternative is reorganisation, in which the firm’s obligations may be renegotiated.
- Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts.
- As Bankruptcy is closely intertwined with local (national) corporate law, the process for Bankruptcy proceedings and insolvency is therefore not the same everywhere.
- From a Corporate Actions Event Type Perspective the Bankruptcy may be a multiple stage event whereby – typically – the BRUP event is a General Event announcing the change in legal status of the company, a potential second stage voluntary event asking the shareholders to vote on suggested solutions and a 3 stage LIQU event whereby potential cash is returned.
- At this stage the Issuer will need to send out a notification about the fact that Bankruptcy proceedings have started. Usually this involves providing contact details of the insolvency practitioner. The Event – from a Corporate Actions perspective – is a GENERAL EVENT. So there are no cash payments or stock transactions as a result from this event.
- The Registrar needs to update the status of the register to “under administration” or something along those lines on the Effective Date of the event.
- Agent Bank
- The Agent Bank (Paying Agent of the event) will set up a new event (most likely a LIQUIDATION event) as and when liquidation proceeds are to be paid after all remaining assets are sold and obligations have been met.
- Security Identification Provider
- Numbering Agencies need to update the status of the shares to “under insolvency proceeding” or something along those lines.
- Any exchange that is listing the security will have to indicate that the legal status of the issuer of the security is “under payment protection”.
- Any index that included the security will continue to have to indicate that the legal status of the issuer of the security is “under payment protection”. It is possible that they would have to calculate a hypothetical NAV as stock may become illiquid and pricing becomes disturbed.
- Issuer CSD
- At CSD level the message has to be passed on down the chain and security details may need their status to be amended to “under insolvency proceedings” in their internal systems.
- Investor CSD / Global / Direct Custodian
- At Custodian level the message has to be passed on down the chain and security details may need their status to be amended to “under insolvency proceedings” in their internal systems.
- Broker Dealer
- At Broker level the message has to be passed on down the chain and security details may need their status to be amended to “under insolvency proceedings” in their internal systems.
- Stock Lending Broker / Collateral Agent
- If the stock is on loan or held as collateral, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) and collateral agents need to agree with each other what to do. It is likely that stock may have to be recalled and changed for other stocks.
- Transfer Agents
- In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the change in legal status of the issuer of the company.
- The Information needs to be included in investment statements that are sent to investors also.
- Fund Manager
- Fund Manager need to include the change in the fund accounting and possibly in the NAV. The NAV will probably decrease to zero.
- Data Vendors and Rating Agencies
- Vendors will have to update their systems with the correct information for the security and send messaging to their clients about it.
- Data Vendors and Rating Agencies
- Retail Bank
- At Retail Bank level the messaging is received from higher up in the chain (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. What is interesting to see here is that this seems to be the End Point for Swift Messaging as a means to inform underlying clients. At this level it’s often just a text message or a short description with the event and a reference to where source documentation can be found (online).
- When the beneficial owner holds the securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event (it’s part of the fund manager’s tasks)
- Beneficial Owner
- Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable)
- Retail Bank
- Perceptions and attitudes with regards to Bankruptcies, Insolvencies and inability to repay debts differ around the world. There are countries in which Bankruptcies are seen as shameful and the people involved will be marked for life, whereas in other parts of the world, it is simply regarded as part of the economic process and everyone involved just accepts it and gets on with life after proceedings have finished.
- Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid while offering creditors a chance to obtain some measure of repayment based on the individual’s or business’s assets available for liquidation. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses a second chance to gain access to credit and by providing creditors with a measure of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.
Bankruptcies/Insolvencies/payment protections are covered by local/national laws and therefore there are certainly regional/national differences in the way they are treated. From a purely Corporate Action Processing, Bankruptcies can be processed by sending out the General Announcement message with the information about the protection payment.
If a company runs into liquidity issues, then sometimes the only way out is to file for payment protection.
The purpose of the Bankruptcy event in the wider economic context is that it should give failed companies and their owners a second chance whilst providing a chance for the creditors of the company to recuperate at least some of their initial investment. From the processing point of view, the BRUP is solely a way to inform the shareholders of the legal proceedings.
- Qualifier CAEV =BRUP
- Mandatory event => field 22F: CAMV = MAND
- Announcement Date – Date on which the Announcement is made public
- Filing Date – Date on which filings with the court have started
- Court Approval Date – Date on which the court is expected to make a decision
- Effective Date – Date at which the decision will come into effect.
As there are no payments involved in this process, there will be no claims and transformations involved in the BRUP process.
There is no ratio in the BRUP event and therefore also no Fractions.