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Hi John,
I was wondering whether you could expand a bit/comment on how to go about suggesting a reconstruction for a company facing liquidation.
I am happy with the steps suggested by BPP, though when it comes to deciding on a new capital structure, it looks as though some of the suggestions in the suggested answers were plucked from thin air! (I realise that this is entirely because of my lack of understanding)
I guess I’m looking for something that underpins the decision to cancel existing shares and re-issue them at a different value etc. Do we look at the pecking order of creditors and try and address each one in the restructure? How do we work out what the amounts involved should be? I.e I struggled to see the relationship between the suggested answer and the current liabilities or how the steps taken would solve the problem.
Hope you can help..even a general approach would be helpful!
kind regards
AntonIt is difficult to give a short answer to this. There are no rules as such and unless the exam actually tells you the restructuring scheme it is really proving that you understand the reasons and aims. Because of this there is no ‘correct’ answer – the examiner is looking for suggestions that make sense.
The aim is to avoid simply liquidating the company and putting it in position where it can start to be profitable and can attract new finance.
You would look first at long-term debt. They could force the company into liquidation and so you would want them to end up in the position where they would be likely to still be owed more that they would get if there was a liquidation. You would try and get them to agree to writing off some of the debt – often you would offer them shares as an incentive.
You would consider an arrangement with creditors whereby maybe they would agree to write off some of the amount owing – because they would then have more chance of keeping the customer in the future (if it went into liquidation then obviously they would lose future sales).
You would look at any preference share capital. There are likely to be arrears of dividend and maybe they would be prepared to accept that the arrears be cancelled if it meant the company would stay in business and they would therefore be more likely to get dividends in the future.
Maybe you could persuade them to accept a reduction in nominal value by either offering them a higher dividend or offering them some equity shares.It is the equity that you would look at last because they are the investors who would lose most if there was a liquidation. By keeping the business going, at least they would still have something! However, you would want them to be left with something if you are hoping to raise more finance from them in the future.
Hello sir,
I gave p4 last December sitting and i scored 65 and i did self study. just by doing revision kit, watching open tuition videos and ofcourse because of your prompt reply to all my doubts.
As there were no lectures on reconstruction, i skipped that whole section (it was tested in part A) so its a miracle that i passed.
You were a blessing sir! Thank you so much for all your support.Unfortunatley my friend couldnt clear and i was wondering if there are any questions or videos that you have uploaded and i could find on reconstruction sir, Or if you could suggest any other source to study this section.
It would be really helpful.
And once again, Thannkkk youuuu sooo muchhhh! God bless:)
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