In finance textbooks, when a company defaults on its bond, the investor in the bond simply does not receive its money or recover only a certain percentage. But what happens in reality? Shouldn't the company still be liable to reimburse the investor the investor in totality?
This depends on whether or not the bond holders think that the company is -- or can be made to be -- a going concern.
The company could:
- renegotiate the loans,
- go into bankruptcy (liquidation, reorganization, etc)
- pay the bond holders what cash it has,
- sell parts of itself to other companies.
The major bond holders will be in on this, talking with the banks and -- if they think the company can be salvaged -- possibly forcing a change in the CEO, CFO, COB, etc.
The company is bankrupt.
If they can't pay back the bond they're bankrupt and you likely don't see a whole lot of your money again (especially soon). There are a lot of costs associated with bankruptcy which eat a lot of the money that could be paid back. The company will likely hope for a restructure/sale of the company which would (eventually) lead to you getting paid.
If they won't pay back the bond, they'll be bankrupt soon because no one will give them any money and the legal issues of that decision will be quite costly.
So yes, if they default you probably will get pennies on the dollar years down the line.