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ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

Dunmore plc is in financial distress and proposes a scheme of reconstruction under which its unsecured creditors will exchange their debt for new ordinary shares. Which statement best describes the main reason the creditors may accept such a scheme?

Creditors accept debt-for-equity reconstruction mainly because they expect to be better off than in liquidation, and the new shares give them a share in any recovery. Equity carries no guaranteed return and ranks below debt, so the other claims about safety or priority are wrong.

  1. AThey expect to receive more from the scheme than from the company being liquidated, and they gain a share in any future recoveryCorrect
  2. BThey gain a legal guarantee of interest at a fixed rate on the new shares
  3. CThey move up in priority ahead of the secured creditors on a winding up
  4. DThey avoid any further loss because equity is safer than debt

Explanation

Creditors accept a reconstruction when their expected outcome is better than the liquidation alternative, and equity lets them share in any recovery. Shares carry no guaranteed return, and converting to equity lowers their priority in a winding up rather than raising it.

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