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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Orion Ltd has a liquidation value of 6.0m available to creditors after costs. Secured creditors are owed 4.0m and unsecured creditors are owed 6.0m. Under a proposed scheme the unsecured creditors would receive 3.0m of new shares, which they expect to be worth 2.4m. What is the difference between the unsecured creditors' scheme value and their liquidation recovery?

Unsecured creditors would receive 2.0m on liquidation, being 6.0m less 4.0m owed to secured creditors. The scheme shares are expected to be worth 2.4m, so they gain 0.4m. The nominal 3.0m should not be used because expected market value is the relevant figure.

  1. AScheme value is 0.4m higher than liquidation recoveryCorrect
  2. BScheme value is 0.4m lower than liquidation recovery
  3. CScheme value is 0.6m higher than liquidation recovery
  4. DScheme value is 1.0m higher than liquidation recovery

Explanation

Liquidation: 6.0m less 4.0m secured = 2.0m for unsecured creditors. Scheme: expected value is 2.4m, not the 3.0m nominal. Difference = 2.4 - 2.0 = 0.4m higher. Using nominal 3.0m would give 1.0m, which is wrong because it ignores the market value of the shares.

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