If a firm is in financial distress, who will get paid first?Multiple choice question.The shareholdersThe lawyersThe bondholdersThe bondholders and the lawyers have equal seniority
Question
If a firm is in financial distress, who will get paid first?Multiple choice question.The shareholdersThe lawyersThe bondholdersThe bondholders and the lawyers have equal seniority
Solution
The correct answer is "The lawyers". In the event of a firm's financial distress, the order of payment is typically determined by the principle of "absolute priority". This principle states that creditors are paid before equity holders (shareholders). However, the costs of the bankruptcy process, including lawyers' fees, are paid first. Therefore, the lawyers are the ones who get paid first.
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