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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

A company in financial distress proposes a reconstruction scheme. Which statement best describes the key test that creditors and shareholders apply when deciding whether to accept the scheme?

Stakeholders compare their outcome under the scheme with their outcome in liquidation. A group should accept only if it is no worse off, and preferably better off, than on liquidation, since liquidation is the realistic alternative if the scheme fails.

  1. AEach party compares what it receives under the scheme with what it would receive if the company were liquidated, and accepts only if it is no worse off and ideally better offCorrect
  2. BEach party accepts if the scheme maximises the total value of the company regardless of its own outcome
  3. CEach party accepts if the scheme leaves the existing capital structure unchanged
  4. DEach party accepts only if it receives cash rather than new securities

Explanation

In a reconstruction, each stakeholder group compares its position under the scheme with its likely position on liquidation. If the scheme gives it at least as much as liquidation, and ideally more, it is rational to accept. Total value alone is not the test because individual groups must be better off.

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