There are realistic scenarios here where the liquidity of a stock can't cover the short though, as in there being not enough shares listed for sale at any ask price.

I understand shorts are said to be unbounded risk, but surely there's some escape hatch: if the top hedge fund shorted 30% of some penny stock presumably a competitor that buys out 71% of shares doesn't get to take over the whole hedge fund by only selling that last share back at a price of 100% of the funds value: instead the fund will default on their recall responsibility and pay out some reasonable amount (and some true end stock holder just surprise loses their share?)