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Specialised entities and specialised transactions

3.2 Entity reconstructions

If an entity is in financial difficulty it may have no choice but to liquidate.

However, the entity may be in a position to survive, and flourish, by taking up some
future contract or opportunities. A major hindrance to this may be a lack of cash.
Sometimes a cash injection cannot be raised because the structure and status of the
entity is unattractive to current and potential investors for the following reasons:

 accumulated losses

 unpaid loans and interest

 low market value of shares

 no recent dividend payments.

A reconstruction of the entity's capital may help to alleviate these problems. It
normally involves one or more of the following procedures:

 writing off accumulated losses

 writing off loan and interest arrears

 writing down the nominal value of equity capital.

This will involve stakeholders surrendering some of their rights. A reconstruction
scheme will only be approved if it provides a more beneficial outcome than the
liquidation of the entity.

Illustrations and further practice

Now try TYU question 1 from Chapter 16.

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