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ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

A company in financial distress proposes a reconstruction scheme under which unsecured creditors exchange their debt for equity. Which statement best describes the minimum test that creditors will apply when deciding whether to accept the scheme?

Creditors will accept a reconstruction only if it offers a better expected recovery than liquidation would give them. Liquidation is the realistic alternative, so the scheme must beat that outcome rather than restore earlier returns or protect shareholder control.

  1. AThe scheme must give them a better expected recovery than they would obtain in a liquidationCorrect
  2. BThe scheme must give them the same return as before the distress arose
  3. CThe scheme must leave the existing shareholders with a majority holding
  4. DThe scheme must increase the company's reported earnings per share

Explanation

Creditors compare the value they receive under the scheme with what they would expect to recover on liquidation, the realistic alternative. Matching pre-distress returns is not required, and shareholder control and EPS are not the creditors' test.

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