ACCA LW · Chapter 11
Insolvency and administration MCQs with Answers
10 multiple-choice questions on Insolvency and administration for ACCA LW Corporate and Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following types of winding up requires the directors to make a statutory declaration of solvency?
- A) A creditors' voluntary winding up
- B) A compulsory winding up on a creditor's petition
- C) A compulsory winding up on the just and equitable ground
- D) A members' voluntary winding up
Show answer & explanation
Answer: D) A members' voluntary winding up
A members' voluntary liquidation 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 period not exceeding twelve months. If no such declaration is made, a voluntary winding up proceeds as a creditors' voluntary liquidation. Compulsory liquidation is ordered by the court on a petition.
Question 2
Under s122 Insolvency Act 1986, which of the following is a ground on which the court may order a company to be wound up?
- A) The company has made a loss in one financial year
- B) The court is of the opinion that it is just and equitable that the company should be wound up
- C) The company has changed its name
- D) A director has resigned
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Answer: B) The court is of the opinion that it is just and equitable that the company should be wound up
The grounds in s122 include a special resolution of the company to be wound up by the court, a public company not obtaining a trading certificate within a year, failure to commence or suspension of business for a year, inability to pay debts, and the just and equitable ground. A single year's loss, a change of name or a director's resignation are not grounds in themselves.
Question 3
In Ebrahimi v Westbourne Galleries, a company was formed on the basis of mutual trust between members who all expected to participate in management. One member was removed as a director and excluded from management. What remedy did the House of Lords grant?
- A) A winding-up order on the just and equitable ground
- B) Reinstatement of the member as a director under s168
- C) Damages for wrongful dismissal against the other members
- D) A declaration that the removal was void because it breached the articles
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Answer: A) A winding-up order on the just and equitable ground
The removal was lawful under the Companies Act and the articles, but the company was a 'quasi-partnership' formed on mutual confidence and an understanding that all would participate in management. The House of Lords held that equitable considerations made it just and equitable to wind the company up. Today a petition for unfair prejudice under s994 is often an alternative remedy.
Question 4
In a compulsory winding up, which of the following is paid FIRST out of the proceeds of assets subject to a fixed charge?
- A) The fixed charge holder, after the costs of realising that asset
- B) Preferential creditors
- C) The general expenses of the liquidation
- D) Unsecured creditors
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Answer: A) The fixed charge holder, after the costs of realising that asset
Assets subject to a fixed charge are applied first to pay the costs of realising them and then the fixed charge holder. Liquidation expenses, preferential creditors, the prescribed part for unsecured creditors and floating charge holders are paid out of the remaining assets, including those subject to a floating charge. Unsecured creditors rank after all secured and preferential claims, and members are paid last.
Question 5
Arrange the following claims in the order in which they would be paid from assets subject to a floating charge in a company's liquidation, from FIRST to LAST: (1) unsecured trade creditors; (2) liquidation expenses; (3) the floating charge holder; (4) preferential creditors such as employees' unpaid wages within statutory limits.
- A) 4, 2, 3, 1
- B) 2, 4, 3, 1
- C) 3, 2, 4, 1
- D) 2, 3, 4, 1
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Answer: B) 2, 4, 3, 1
From floating charge assets the liquidator first pays the expenses of the liquidation, then preferential creditors, then (after setting aside the prescribed part for unsecured creditors) the floating charge holder, and finally the unsecured creditors. Preferential debts include certain employee wages and holiday pay up to statutory limits. Members receive any surplus only after all creditors have been paid in full.
Question 6
Eighteen months before going into insolvent liquidation, and at a time when it was already unable to pay its debts, a company repaid an unsecured loan from a director's brother in full while its other creditors remained unpaid. Under s239 Insolvency Act 1986, what is the liquidator most likely to be able to do?
- A) Nothing, because a preference can only be challenged if it was given within six months before the onset of insolvency
- B) Recover the payment as a transaction at an undervalue under s238, because the company received nothing in return
- C) Apply to the court to set aside the payment as a preference
- D) Disqualify the director's brother
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Answer: C) Apply to the court to set aside the payment as a preference
A preference is something done by a company, while unable to pay its debts, that puts a creditor in a better position on insolvent liquidation than it would otherwise have been, where the company was influenced by a desire to do so. A director's brother is a relative and therefore an associate and a connected person (ss249 and 435), so the relevant period is two years before the onset of insolvency rather than six months, and the desire to prefer is presumed unless rebutted. The liquidator can therefore apply for an order restoring the position. Repaying a genuine debt is not a transaction at an undervalue, because the company receives a discharge of its liability, and disqualification applies to directors, not to the creditor who was paid.
Question 7
What is the primary objective of an administrator under Schedule B1 to the Insolvency Act 1986?
- A) To realise property to make a distribution to secured creditors only
- B) To wind up the company as quickly as possible
- C) To rescue the company as a going concern
- D) To achieve the highest possible dividend for shareholders
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Answer: C) To rescue the company as a going concern
The administrator must perform their functions with the objective of rescuing the company as a going concern. If that is not reasonably practicable, the objective becomes achieving a better result for creditors as a whole than in a winding up, and only if neither is practicable may property be realised to distribute to secured or preferential creditors. The administrator acts in the interests of creditors as a whole.
Question 8
Which of the following is an effect of a company entering administration?
- A) All the company's employees are automatically dismissed
- B) The directors remain in full control of the company's business
- C) A moratorium arises, so that creditors generally cannot enforce security or begin legal proceedings against the company without consent of the administrator or the court
- D) All contracts of the company are automatically terminated
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Answer: C) A moratorium arises, so that creditors generally cannot enforce security or begin legal proceedings against the company without consent of the administrator or the court
A key feature of administration is the statutory moratorium, which protects the company from creditor action while the administrator pursues the statutory purpose. The administrator takes over management and the directors' powers can be exercised only with the administrator's consent. Contracts and employment are not automatically terminated by entering administration.
Question 9
Who may appoint an administrator out of court, without first obtaining a court order?
- A) Any unsecured creditor owed a debt
- B) Any single shareholder holding 5% of the shares
- C) The holder of a qualifying floating charge, or the company or its directors
- D) The auditor of the company
Show answer & explanation
Answer: C) The holder of a qualifying floating charge, or the company or its directors
Under Schedule B1 to the Insolvency Act 1986, an administrator may be appointed by the court on an application, or out of court by the holder of a qualifying floating charge or by the company or its directors. An unsecured creditor may apply to the court for an administration order but cannot appoint out of court. Shareholders and auditors have no power of appointment.
Question 10
A company created a floating charge in favour of an unconnected lender to secure an existing unsecured loan, eight months before going into insolvent liquidation. No new money was provided. At the time the charge was created the company was unable to pay its debts. Under s245 Insolvency Act 1986, what is the status of the charge?
- A) It is valid, because it was created more than six months before liquidation
- B) It is invalid, because it was created within 12 months before the onset of insolvency to secure existing debt, and the company was insolvent at the time
- C) It is valid, because the lender is not connected to the company
- D) It is invalid only if the lender knew the company was insolvent
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Answer: B) It is invalid, because it was created within 12 months before the onset of insolvency to secure existing debt, and the company was insolvent at the time
Section 245 invalidates a floating charge created within 12 months before the onset of insolvency in favour of an unconnected person (two years for a connected person), except to the extent of new value such as money paid or goods supplied at or after its creation. For an unconnected person, the company must have been unable to pay its debts at the time or have become so as a result. Here the charge secured only pre-existing debt and the company was insolvent, so it is invalid. The lender's knowledge is irrelevant.