In the event of liquidation, who is a more senior creditor with a higher claim on assets: a bondholder or a stockholder?

Introduction / Context:
In corporate finance and capital structure, understanding the hierarchy of claims in liquidation is essential. Companies typically finance themselves with a mix of debt and equity. When a firm is liquidated or goes bankrupt, its remaining assets must be distributed according to legal priority. Interviewers often ask who is more senior between bondholders and stockholders to test knowledge of basic claim structure.

Given Data / Assumptions:

• The company has issued bonds, representing debt obligations, and shares, representing equity ownership.
• The company is being liquidated, so its assets are being sold to pay obligations.
• There is a legal order of priority for paying different stakeholders.
• The question asks who has higher priority, or seniority, as a creditor.

Concept / Approach:
Bondholders are creditors of the company. They have lent money to the firm and hold legal claims to repayment of principal and interest. Shareholders (stockholders) are residual owners. They are entitled to the company residual value after all liabilities have been paid. In liquidation, the law requires that creditors, including bondholders and other lenders, be paid before any distribution is made to equity holders. Therefore, bondholders are more senior in the capital structure and have a higher claim on assets than stockholders.

Step-by-Step Solution:
Step 1: Classify bondholders as holders of debt instruments, meaning they have creditor status. Step 2: Classify stockholders as equity holders, meaning they are owners entitled to residual profits and assets. Step 3: Recall that in liquidation, the order of payment is usually: secured creditors, unsecured creditors (which may include many bondholders), then preference shareholders (if any) and finally equity shareholders. Step 4: Recognise that because bondholders are in the creditor category, they are paid before equity shareholders receive anything. Step 5: Conclude that bondholders are more senior creditors with higher priority claims on company assets than stockholders.

Verification / Alternative check:
Imagine a company is liquidated and its assets, after paying legal and administrative costs, total Rs 100 crore. If outstanding debt to bondholders amounts to Rs 80 crore and there are no other significant creditors, the bondholders are paid first. If any funds remain, they may be distributed to shareholders according to their rights. If assets are insufficient to cover the debt, bondholders may receive partial repayment, and ordinary shareholders may receive nothing. This structure demonstrates that bondholders are more senior in claims than stockholders.

Why Other Options Are Wrong:
Option B incorrectly states that stockholders are paid before lenders. In fact, shareholders are residual claimants and come last in priority. Option C claims that both have the same level of priority, which is not true under standard corporate law. Option D says neither has any claim during liquidation, which contradicts the basic purpose of issuing bonds and shares. Option E suggests that priority depends on share price, but priority is based on the nature of the instrument (debt versus equity), not current market prices. Only option A correctly reflects the seniority of bondholders over stockholders.

Common Pitfalls:
Some learners confuse ownership with priority and assume that because shareholders own the company, they must be paid first. In reality, ownership comes with higher potential return but also higher risk, including the risk of losing everything in liquidation. Another pitfall is to overlook differences among creditors themselves, such as secured versus unsecured, but in simple questions like this, the main distinction is between debt (bondholders) and equity (stockholders). In interviews, clearly stating that bondholders are senior creditors and shareholders are residual claimants shows a strong understanding of capital structure basics.

Final Answer:
In liquidation, a bondholder is a more senior creditor than a stockholder, because bonds are debt instruments with priority claims on company assets.