ACCA F4: Understanding Insolvency and Liquidation Procedures

ACCA

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| Questions: 12 | Updated: Aug 4, 2025

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1. If a company finds itself in financial difficulty, what are the two main options available?

1 Voluntary liquidation: s84 Insolvency Act (IA 1986) 1) Administration. This aims to rescue the company so that it may... 1 Voluntary liquidation: s84 Insolvency Act (IA 1986) 1) Administration. This aims to rescue the company so that it may continue trading as a going concern. 2) Liquidation. This winds up the company, thus bringing its life to an end.

1) Merger. This involves combining the company with another entity to improve financial stability.

2) Bankruptcy. This involves declaring the company financially insolvent and unable to pay debts.

3) Acquisition. This involves one company purchasing another to resolve financial issues.

When a company faces financial difficulty, some of the main options available include administration to potentially rescue the company or liquidation to wind up the company. Merger, bankruptcy, and acquisition are not the primary options typically considered in such situations.

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About This Quiz

ACCA F4: Understanding Insolvency And Liquidation Procedures - Quiz

Explore the critical aspects of insolvency under the ACCA F4 curriculum, focusing on legal principles, debtor and creditor rights, and insolvency procedures. This assessment is designed to enhance your understanding and application of insolvency law, crucial for finance and legal professionals.

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2. What triggers a voluntary liquidation according to s84 of the Insolvency Act (IA 1986)? What type of resolution is required for a voluntary liquidation?

A voluntary liquidation occurs automatically after a certain timeframe without any resolution needed.

A voluntary liquidation can only occur if all creditors agree to the liquidation.

1 Voluntary liquidation: s84 Insolvency Act (IA 1986) A voluntary liquidation occurs where the members pass a resolution to go... 1 Voluntary liquidation: s84 Insolvency Act (IA 1986) A voluntary liquidation occurs where the members pass a resolution to go into liquidation. - Where the period fixed for the duration of the company expires or an event occurs upon which the articles provide that a company should be wound up, an ordinary resolution must be passed.- A special resolution must be passed if the company is being wound up for any other reason.

A voluntary liquidation requires a simple majority vote of the board of directors.

In a voluntary liquidation, the company's members must pass a resolution to go into liquidation. Different types of resolutions are required based on the circumstances specified in the company's articles of association or if the company is being wound up for any other reason.

Explanation

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3. What are the two types of voluntary liquidation according to s84 of the Insolvency Act (IA 1986)?

1) Administration is used where the company is solvent 2) Company Administration is used where the company is insolvent.

1) Receivership is used where the company is solvent 2) Liquidation by the court is used where the company is... 1) Receivership is used where the company is solvent 2) Liquidation by the court is used where the company is insolvent.

1 Voluntary liquidation: s84 Insolvency Act (IA 1986) 1) A members' voluntary liquidation is used where the company is solvent... 1 Voluntary liquidation: s84 Insolvency Act (IA 1986) 1) A members' voluntary liquidation is used where the company is solvent 2) A creditors' voluntary liquidation is used where the company is insolvent

1) Compulsory liquidation is used where the company is solvent 2) Members' voluntary arrangement is used where the company is... 1) Compulsory liquidation is used where the company is solvent 2) Members' voluntary arrangement is used where the company is insolvent.

Voluntary liquidation under s84 of the Insolvency Act (IA 1986) specifically refers to the two types - members' voluntary liquidation for solvent companies and creditors' voluntary liquidation for insolvent companies. The incorrect answers provided do not align with the correct types of voluntary liquidation outlined in the Act.

Explanation

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4. What is the process described in section 84 of the Insolvency Act (IA 1986) for voluntary liquidation?

1 Voluntary liquidation: s84 Insolvency Act (IA 1986)

Compulsory winding up by the court

Creditors' voluntary winding up

Administration

Section 84 of the Insolvency Act (IA 1986) specifically deals with Members' voluntary winding up, which is initiated by the members of a company.

Explanation

Section 84 of the Insolvency Act (IA 1986) specifically deals with Members' voluntary winding up, which is initiated by the members of a company.

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5. What does s84 of the Insolvency Act (IA 1986) pertain to?

Creditors' voluntary winding up

Administrative receivership

Compulsory liquidation

1 Voluntary liquidation: s84 Insolvency Act (IA 1986)

Section 84 of the Insolvency Act 1986 specifically relates to voluntary liquidation, which allows a company to wind up its affairs voluntarily with the oversight of a liquidator.

Explanation

Section 84 of the Insolvency Act 1986 specifically relates to voluntary liquidation, which allows a company to wind up its affairs voluntarily with the oversight of a liquidator.

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6. What are the effects of a winding-up petition in a compulsory liquidation?

2 Compulsory liquidation - All actions for the recovery of debt against the company are stopped- Any floating charges crystallise.-... 2 Compulsory liquidation - All actions for the recovery of debt against the company are stopped- Any floating charges crystallise.- Any legal proceedings against the company are halted, and none may start unless leave is granted from the court.- The company ceases to carry on business except where it is necessary to complete the winding up, e.g. to complete work-in-progress.- The powers of the directors cease, although the directors remain in office.- The employees are automatically made redundant, but the liquidator can re-employ them to help him complete the winding up.

Employees are guaranteed continued employment with the company.

All debts of the company are immediately waived.

Directors gain additional powers to manage the company during liquidation.

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7. What are the subsequent procedures following compulsory liquidation?

2 Compulsory liquidation

Appointment of a liquidator to oversee the process

Selling off company assets to settle debts

Distribution of assets to creditors

Compulsory liquidation is the process by which a company is wound up by a court order. Subsequent procedures may vary depending on the specific circumstances of the case, but there is no specific set of procedures outlined for compulsory liquidation in general.

Explanation

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8. What is administration in the context of insolvency?

Administration refers to the process of filing for bankruptcy in court.

3 Administration Administration involves the appointment of an insolvency practitioner, known as an administrator, to manage the affairs, business and... 3 Administration Administration involves the appointment of an insolvency practitioner, known as an administrator, to manage the affairs, business and property of a company. It was first introduced by Schedule 16 IA 1986, but has subsequently been amended by the Enterprise Act 2002.

Administration is a term used to describe the day-to-day operations of a business.

Administration is a type of software used to manage office tasks and workflows.

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9. 3 Administration - What are the goals of administration?

3 Administration - rescue a company in financial difficulty with the aim of allowing it to continue as a going... 3 Administration - rescue a company in financial difficulty with the aim of allowing it to continue as a going concern - achieve a better result for the creditors than would be likely if the company were to be wound up - realise property to pay one or more secured or preferential creditors.

To liquidate the company and distribute assets evenly among all stakeholders.

To evade legal obligations and debts by closing the company.

To maximize profits for shareholders at all costs.

To rebrand the company and launch new products in the market.

The correct goal of administration is to rescue a financially struggling company, prioritize creditor interests, and potentially sell assets to pay off debts. Liquidation, maximizing shareholder profits, or evading debts are not the primary objectives of administration.

Explanation

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10. Who can appoint an administrator?

3 Administration - the court in response to a petition by a creditor, the directors or the company itself -... 3 Administration - the court in response to a petition by a creditor, the directors or the company itself - the holder of a qualifying floating charge over the company's assets - the company or its directors provided that winding up has not already begun.

A distant relative of the company's founder

A competitor company

Any random individual off the street

The appointment of an administrator is a legal process that requires involvement from specific parties related to the company's financial situation or legal status. Options suggesting unrelated or unauthorized individuals or entities are incorrect.

Explanation

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11. When will the court appoint an administrator?

The court appoints an administrator if the company is profitable.

The court appoints an administrator randomly without considering the financial status of the company.

3 Administration The court will only agree to appoint an administrator if it is satisfied that the company is or... 3 Administration The court will only agree to appoint an administrator if it is satisfied that the company is or is likely to become unable to pay its debts, and the administration order is likely to achieve its objectives

The court appoints an administrator based on seniority within the company.

The correct answer highlights the specific conditions under which a court will appoint an administrator based on the company's financial situation and the potential to achieve the objectives of the administration order.

Explanation

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12. When is administration ended?

3 Administration The administration will end when it is completed or when the administrator is discharged by the court: -... 3 Administration The administration will end when it is completed or when the administrator is discharged by the court: - The administration must normally be completed within 12 months of the date on which it commenced. However, this term can be extended with the consent of the court or the secured creditors. - The administrator may apply to the court for discharge at any time. He must make an application when the purpose of the order has been achieved. He must also notify the registrar and all of the creditors.

The administration will end after 6 months regardless of completion status.

The administration will end when the administrator decides to stop, regardless of court approval.

The administration will only end if all creditors are paid in full.

The correct answer provided outlines the conditions under which the administration ends, either upon completion or discharge by the court. The incorrect answers provided do not accurately reflect the standard procedures for ending administration.

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