ACCA LW: compulsory liquidation and inability to pay

Answer: A, D. Rule: a winding-up petition is not a debt-collection tool. Where the debt is bona fide disputed on substantial grounds, the court will normally dismiss or stay the petition, because the creditor's standing and the company's inability to pay cannot be established. Using the petition to pressure payment is an abuse and may lead to costs orders. The proper route is ordinary civil proceedings, where the dispute is tried. A and D are correct. B is wrong because it uses the petition as leverage, which is the abuse the court will penalise. C is wrong because being in difficulty is not proof of insolvency, and a rescuable company is not liquidated on this basis. E is wrong because non-payment of a debt that is genuinely disputed does not establish inability to pay, so it cannot be conclusive proof.

Answer: A. Rule: the liquidator's role is to get in and realise the assets, investigate the company's affairs and the directors' conduct, and distribute the proceeds to creditors in statutory order, with any surplus going to members. Rescue as a going concern is not the main purpose of liquidation. It is the aim of procedures such as administration or a restructuring arrangement. Option A is therefore the false statement. B is true because it describes the core duty. C is true: the liquidator has power to sue and defend in the company's name and to investigate and report on directors' conduct. D is true: the liquidator may continue trading only where this helps a beneficial winding up, for example to sell the business as a going concern or complete work in progress. Candidates who pick A confuse liquidation with rescue procedures.

Answer: D. Rule: a company is unable to pay its debts if it fails the cash-flow test (it cannot pay debts as they fall due) or the balance-sheet test (its liabilities exceed its assets, taking account of contingent and prospective liabilities). Either test is sufficient. Applied here, Kestrel cannot pay a debt due today, so the cash-flow test is met. The balance-sheet test is not met, because assets exceed liabilities. Because only one test is needed, Kestrel can be treated as unable to pay its debts (option D). Why the others are wrong: A – a surplus is not conclusive, as the cash-flow test is an independent test. B – the cash-flow test looks at debts as they fall due, so cash expected later does not cure a debt that is due now. C – a surplus of assets over liabilities means the balance-sheet test is not met, so this option confuses the two tests.

Answer: B. Rule: Compulsory liquidation (winding up by the court) is a terminal process. A liquidator collects and realises the assets, pays the creditors in their statutory order and the company is then dissolved. Administration is a collective procedure that gives the company breathing space under an administrator. Its purposes are, in order, to rescue the company as a going concern, or failing that to achieve a better result for creditors as a whole than immediate liquidation would, or failing that to realise property to pay secured or preferential creditors. So option B is correct.
Why the others are wrong: A treats the two procedures as having the same objective, but administration is aimed at rescue or a better outcome, not simply at realisation and dissolution. C reverses the purposes. D wrongly says administration always ends in dissolution; it can end with the company rescued and handed back to its directors, or with a company voluntary arrangement, and it can also be followed by liquidation or dissolution. It also wrongly says liquidation lets the company continue to trade normally afterwards.