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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Brightway Ltd has net assets in liquidation of 3.0m, available to unsecured creditors who are owed 6.0m. Under a reconstruction, unsecured creditors would exchange their debt for new shares valued at 3.6m in total. What is the creditors' recovery under the scheme as a proportion of their claim, and is the scheme better for them than liquidation?

Creditors recover 60% under the scheme (3.6m on a 6.0m claim) against 50% in liquidation (3.0m on 6.0m). The scheme therefore leaves them better off than liquidation, so they have a rational reason to accept it.

  1. A60%, better than liquidation (50%)Correct
  2. B50%, equal to liquidation
  3. C60%, worse than liquidation (70%)
  4. D36%, worse than liquidation (50%)

Explanation

Liquidation recovery = 3.0/6.0 = 50%. Scheme recovery = 3.6/6.0 = 60%. As 60% exceeds 50%, creditors are better off under the scheme. Option 4 wrongly divides by 10m or misreads the value.

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