What Happens When A Pot Company Goes Belly Up?

Cannabis companies have no banking protections under the law, which exposes the quarter of a million people who work in the industry to an endlessly confusing, inconvenient and, often, dangerous legal situation. Now, the question of bankruptcy, available to just about all businesses and individuals in the land, has arisen.

The Portland Mercury asked a pot lawyer who said bankruptcy details depend on the type of business and at what entrepreneurial stage it’s in when financial problems become untenable, “but generally speaking, it’s not pretty.”

The easiest cases tend to be businesses that fold before they are licensed because they haven’t sunk too much cash into their enterprise.

The harder cases are the ones that already have assets, including weed, employees and debt.

The main problem, of course, is that there is no such thing as bankruptcy for pot businesses. Because cannabis is still a controlled substance, things can get messy.

Bankruptcy courts have ruled repeatedly that pot businesses are ineligible for protections under the law. Recently, the Department of Justice directed its minions to stay away from all bankruptcy cases involving cannabis.

Bankruptcy is governed by federal law, in federal courts. Hence, it would be impossible for a U.S. bankruptcy trustee to control and administer a debtor’s assets (weed) without violating the federal Controlled Substances Act.

Options For Pot Companies Facing Bankruptcy

What’s to be done if legitimate marijuana companies are blocked from bankruptcy laws designed to give a fresh start to honest debtors, while also providing fair treatment to creditors?

Without this process, everyone involved ends up getting screwed.

Because bankruptcy is not an option, Oregon’s pot lawyer points to these less-than-attractive options: (1) liquidate (convert your assets to cash) without court supervision, or (2) explore something called receivership, wherein you appoint a person who takes custodial responsibility of your property or company.

In the first option, “the pot business would close up shop, pick the creditors it likes best, pay them whatever it can, and politely ask that nobody sue.”

The second option, receivership, allows the receiver to sell the weed under judicial approval. So, be sure to pick a trusted person as your “receiver.”

This whole mess ends up being a vicious cycle for pot companies.

Final Hit: What Happens When Pot Companies Go Belly Up?

In that banking and bankruptcy are not viable options, pot companies find themselves in situations where their financial possibilities are already being sabotaged.

Therefore lenders are understandably reluctant because they know that if a pot company goes belly up, recovering their investments will be difficult.

As a result of the perceived risk, investors tend to charge higher interest on loans. Higher interest loans lead to more defaults. Defaults lead to closed doors. And so on.

Thankfully, the multi-billion dollar weed industry is on a successful roll, with more expected in the future. But until the banks and federal government don’t start treating the country’s fastest growing industry fairly, caution in money matters is always advisable.