business corporate-law debt bankruptcy loan
What happens to loans issued by a startup if the startup fails?
<p>I live in the U.S.  Suppose that I invest $50,000 in a startup company, signing "typical" paperwork for a 55% stake.  The founder then uses the money to issue a $20,000 loan at a minimal interest rate (say 1.6%) to one of his employees.  Subsequently, the startup goes bankrupt with the full amount of the loan outstanding.  Do I have rights to the loan as an asset of the company?  More broadly, do I have any recourse or legal options for pursuing the loaned amount?  (We can assume that the recipient of the loan is solvent.)</p>

<p>Does the answer change if the lendee is not an employee of the startup?  Similarly, does the answer depend on the numbers above, or on the state in which the investor and company reside?</p>

<blockquote>
  <p>Do I have rights to the loan as an asset of the company?</p>
</blockquote>

<p>You, no. </p>

<p>It’s an asset of the company and,as such, will be liquidated by the liquidator for the benefit of the creditors of the company. Only if all creditors are paid in full will a dividend by paid to shareholders- this virtually never happens.</p>

<p>The loan contract is still valid and the borrower will have to repay as agreed. If the contract has a repay on demand clause the liquidator will probably trigger it. If it doesn’t, they will sell it for what they can get - depending on the risk profile this could be from 50-85% of face value.</p>

<p>Dale M is correct but I would also add that investor could become a creditor by bringing a derivative suit against the company and/or founder (and winning the suit). Then investor would then also be a creditor paid ahead of the other equity investors to the extent of the judgment won, but still have no specific claim to the liquidation proceeds of the loan. </p>

<p>Note also - if the investment was via convertible note, a lot of the analysis is different, but investor still wouldn't wind up with rights to the loan.</p>
