ACCA LW Companies in difficulty or crisis: practice questions with answers

Answer: A. Both types of voluntary liquidation start with a resolution of the members. In a members' voluntary liquidation, the directors make a statutory declaration of solvency, stating that the company will be able to pay its debts in full within a specified period. Because the company is solvent, the members control the process and appoint the liquidator. Without such a declaration, the liquidation is a creditors' voluntary liquidation. The creditors then have the main say, including over who acts as liquidator.

Answer: C. The court may order a company to be wound up on several grounds. These include that the company is unable to pay its debts, which is the most common ground and is usually relied on by creditors. Another is that it is just and equitable to wind up the company, which is usually relied on by members, for example where the company was formed on a basis of mutual trust that has broken down. Trading losses, unpaid dividends and the disqualification of a director are not grounds in themselves.

Answer: C. An administrator may be appointed either by the court (on an application by, for example, the company, its directors or one or more creditors) or out of court by: the holder of a qualifying floating charge (one over the whole or substantially the whole of the company's property), the company, or its directors. Out-of-court appointments are quicker and cheaper. Unsecured creditors must use the court route.

Answer: A. A members' voluntary liquidation (MVL) is available only where the directors make a declaration of solvency, stating that the company will be able to pay its debts in full within a specified period. The members then control the process and appoint the liquidator. If the liquidator later forms the opinion that the company will not be able to pay its debts in full within that period, the creditors must be informed and the liquidation is converted into a creditors' voluntary liquidation (CVL), in which the creditors have the main say, including on who acts as liquidator. A director who makes a declaration of solvency without reasonable grounds commits an offence.

Answer: B. When the court makes a compulsory winding-up order, the liquidation is treated as having begun when the petition was presented, and several consequences follow, including:

- no action or proceeding may be commenced or continued against the company or its property except with the leave of the court;
- any disposition of the company's property after the petition is void unless the court orders otherwise;
- the directors' powers cease and the company's affairs are controlled by the liquidator.

Mertz Co should normally prove its debt in the liquidation as an unsecured creditor rather than sue.

Answer: B. A fixed chargeholder is paid first out of the proceeds of the asset subject to its charge. If those proceeds are insufficient, the security is exhausted, but the debt is not extinguished: the chargeholder may prove for the shortfall as an unsecured creditor. Here Arden Bank is owed $500,000 and received $380,000 from the sale, so it claims the remaining $120,000 ($500,000 - $380,000) with the other unsecured creditors, after the liquidation costs, preferential creditors and floating chargeholders have been paid from the remaining assets.