ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Which of the following is a recognised reason why a company might undertake a financial reconstruction rather than allow liquidation?

A company reconstructs because liquidation costs and forced asset sales would give creditors lower recoveries than the continuing business can deliver. If going-concern value exceeds liquidation value, all stakeholders can potentially be better off by restructuring the capital structure instead of closing the firm.

ALiquidation costs and asset sale discounts would give creditors lower recoveries than the continuing business wouldCorrect
BShareholders of a distressed company always receive a premium on liquidation
CReconstruction removes the need for any new financing in future
DReconstruction increases the company's legal obligation to repay creditors in full

Explanation

Liquidation often realises assets below their going-concern worth and incurs costs, so stakeholders may do better by restructuring. Shareholders usually receive nothing in liquidation of a distressed firm, reconstruction may require new financing, and it typically reduces rather than increases creditor claims.

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