In the normal course of events the debt remains owing and the liquidator might go after the company for it, if it appears there si a chance of getting a recovery bigger than the expense involved in recovering.
You have to understood that these bogus deals had a dual benefit for NIR/AJW etc.
On the one hand where the stock was liquid they could get highly profitable cash-flow to pay any redemptions and their own management fees.
On the other hand, they could use the terms of the loans to value them at inflated levels to scam a bigger management fee out of their own investors (2% of the value of the assets under management per annum, and 20% share of the annual paper profit).
They only needed the first piece to the extent they couldn't Ponzi cash-flow from new investors via the second piece.
This model wasn't unique to CR and he wasn't some super-evil-genius inventing it. All of the penny PIPE players have a similar model, IMO, evolved over many years. As CR says somewhere, he doesn't seem to have been doing anything vastly different from YA Global/Cornell, Laurus/Valens, Dutchess etc etc etc.
The Ponzi element means that they all collapse after a while but in the meantime the fund manager has made a $gadzillion and it can be very very difficult to successfully prosecute. Usually the main ripped-off parties are the fund investors, but on the other hand they usually have signed agreements with the fund manager which allow the manager in effect to run a Ponzi scheme on them.
