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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Zephyr plc is in financial distress and proposes a reconstruction scheme. Which of the following would a creditor-focused assessment of the scheme most directly compare?

Creditors compare what they expect to receive under the reconstruction scheme with what they would expect to get in a liquidation. If the scheme gives them at least as much, and preferably more, they are likely to agree, since liquidation is their alternative.

  1. AThe creditor's expected recovery under the scheme against the expected recovery if the company were liquidatedCorrect
  2. BThe company's earnings per share before and after the scheme
  3. CThe par value of the new shares against the par value of the old shares
  4. DThe directors' remuneration before and after the scheme

Explanation

A creditor will accept a scheme only if it expects to receive at least as much as it would in liquidation. Comparing recovery under the scheme with the liquidation outcome is the basic test. The other options do not measure the creditor's position.

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