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Suppose a company is insolvent with negative shareholder's equity, $10 million in debt, and has only $1 million in cash. Can the company declare dividends of $1 million to shareholders prior to filing for bankruptcy and liquidating? If the company judges that the equity will be worthless after the bankruptcy and liquidation, can it soften the blow to the equity holders by giving them one last dividend? I can see that the creditors will be very unhappy with this behavior, but can they stop management from looking after the interests of the equity owners?

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It's called a transfer in fraud of creditors, and the bankruptcy court would claw it back. It could also be a crime.

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