ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

A reconstruction scheme requires a new cash injection from existing shareholders. Why must the finance director check the scheme from the viewpoint of the shareholders as well as creditors?

Shareholders asked to invest new cash will participate only if the expected value of their enlarged holding justifies the extra investment compared with alternatives. The scheme therefore has to give them an adequate return, otherwise the funding will not be raised and the scheme fails.

AShareholders must be offered a return on the new cash that is at least as good as their alternatives, otherwise they will not subscribeCorrect
BShareholders always receive priority over creditors in a reconstruction
CShareholder approval is only needed if the scheme reduces nominal share capital
DShareholders must receive the same value as creditors under the scheme

Explanation

If shareholders are asked to inject new money, they will do so only if the expected value of their post-scheme holding exceeds the cash they put in, relative to the alternative of walking away. They do not rank ahead of creditors, and equal values across classes is not required.

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