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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Which of the following is a recognised reason for a company undertaking a financial reconstruction rather than going into liquidation?

Financial reconstruction makes sense when creditors expect to recover more from a continuing business under revised terms, such as debt-for-equity swaps, than from a break-up sale. If liquidation value were higher, creditors would prefer liquidation instead.

  1. AThe liquidation value of assets exceeds the going-concern value, so creditors prefer continuation
  2. BCreditors expect to recover more from the continuing business under revised terms than from a break-up saleCorrect
  3. CShareholders wish to maximise the immediate cash payout from asset disposals
  4. DDirectors want to avoid any negotiation with lenders

Explanation

Reconstruction is sensible when going-concern value exceeds liquidation value, so creditors and others do better by agreeing revised terms. If liquidation value were higher, liquidation would be preferred, so the first option is wrong.

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