Page 283 - AAA Integrated Workbook STUDENT S18-J19

UK syllabus: Auditing aspects of insolvency

3.2 Reconstructions

It may be possible for companies facing problems to survive by taking up new
contracts or exploiting market opportunities. However, such ventures usually require
cash injections and when faced with liquidity problems this can pose a problem, not
least because such businesses may not appear attractive to external investment.

Typical traits of such companies include:

 accumulated losses

 debenture interest arrears

 cumulative preference shares dividend arrears

 no payment of ordinary dividends

 share price below nominal value

 share price decline

To become more attractive to investment the company can be reorganised or
restructured. This may involve:

 writing off unpaid share capital

 writing off share capital which is not represented by available assets

 writing off paid up share capital which is in excess of requirements

 writing off debenture interest arrears

 replacing existing debentures with a lower interest debenture

 writing off preference dividend arrears

 writing off amounts owing to trade creditors

The reduction in the debt burden frees up resources for investment in future
opportunities and new growth.

279