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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Delta plc is in financial distress and proposes a reconstruction scheme in which unsecured creditors exchange part of their debt for equity. Which test should the finance director apply to decide whether each class of security holder is likely to approve the scheme?

Each party should be compared on what it receives under the scheme versus what it would receive on liquidation, the alternative if the scheme fails. A party will normally accept only if it is no worse off, so liquidation value is the benchmark for approval.

  1. AWhether each party is expected to be better off under the scheme than under liquidation of the companyCorrect
  2. BWhether the scheme maximises the dividend per share for ordinary shareholders in the first year
  3. CWhether the scheme leaves the company's gearing at the industry average
  4. DWhether the scheme raises the company's book value of equity

Explanation

Each party will only agree if its expected outcome under the scheme is at least as good as its outcome if the company is liquidated, the realistic alternative. Gearing, book equity and short-term dividends do not determine acceptance by a party that would otherwise receive liquidation proceeds.

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