ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction
Zeta plc is insolvent. Its secured creditors would be repaid in full from asset sales, but unsecured creditors would receive only 20 cents per dollar in a liquidation. Which feature of a financial reconstruction scheme best explains why unsecured creditors might rationally accept a scheme paying them more than 20 cents per dollar in total value?
Unsecured creditors may accept a scheme paying more than the liquidation return because a reconstruction avoids liquidation costs and forced-sale discounts and preserves going concern value. The scheme therefore makes the total value available higher than in liquidation, so creditors can be better off by agreeing to it.
- ALiquidation costs are avoided and the going concern value of the business is retainedCorrect
- BCreditors are legally prevented from voting against any proposed scheme
- CInterest on all debt is automatically cancelled once a scheme starts
- DShareholders must always be paid before unsecured creditors in a scheme
Explanation
Creditors compare the scheme with the liquidation alternative. A scheme avoids liquidator costs and forced-sale discounts and keeps going concern value, so a payout above the liquidation return can still be rational. The other options misstate the legal position: creditors can vote against, interest is not automatically cancelled, and shareholders rank behind creditors.
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