ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction
Corvin plc is in financial distress. Its liquidation value would give unsecured creditors 30 cents per $1 owed. A reconstruction scheme offers unsecured creditors 45 cents per $1 in a mix of cash and new shares. From the creditors' viewpoint, what is the key test for accepting the scheme?
Creditors should support a reconstruction only if what they receive under it, in cash and the value of new securities, is greater than their liquidation recovery. Here 45 cents beats 30 cents, so the scheme is acceptable to them on a value basis.
- AWhether the scheme's value to them exceeds what they would receive on liquidationCorrect
- BWhether the scheme restores the original dividend to existing shareholders
- CWhether the scheme lowers the company's gearing to below the industry average
- DWhether the scheme gives them voting control of the board
Explanation
Creditors will accept a reconstruction only if they are better off than in the alternative, which is liquidation. Here 45 cents is above 30 cents, so they should accept. Restoring shareholder dividends, gearing targets and board control are not the test of creditor acceptance.
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