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ACCA Applied Skills · Corporate and Business Law (Global)

Insolvency and Administration for ACCA Corporate and Business Law

Insolvency law covers what happens when a company cannot pay its debts. You must know the insolvency tests, how liquidation works, who gets paid first, how administration rescues a business, and when directors become personally liable. In the LW exam, you apply these rules to short scenarios and pick the right outcome.

What this chapter covers

This chapter deals with a company that is failing. It starts with how to tell whether a company is insolvent. It then covers the main outcomes: liquidation, where the company is wound up and ended, and rescue routes such as administration and company voluntary arrangements.

The chapter also looks at the people involved. You study the liquidator and administrator, the creditors who are paid in a set order, and the directors whose past conduct can be challenged. Transactions made shortly before failure can be set aside, and directors who trade carelessly or dishonestly can be made to contribute personally or be banned.

This links to other parts of the LW paper. Company directors' duties, company capital, and the types of security a lender holds all feed into insolvency questions. A floating charge holder's ranking, for example, depends on what you learned about charges. Treat this chapter as the place where earlier company law gets tested under pressure. Rules differ between jurisdictions, so follow the Global variant as ACCA presents it and focus on principles rather than local detail.

Insolvency is a rich source of scenario-based questions because one short fact pattern can test several rules at once: the test of insolvency, the order of payment, and a director's liability. Objective questions are marked all or nothing, so you need precise rules, not a general feel. The chapter is also very learnable. It is built from clear lists, sequences and conditions, so careful revision converts directly into marks.

Insolvency and administration: topics in the order to study them

  1. 1Corporate Insolvency Basics and Insolvency TestsEvery later topic depends on knowing what insolvency means and how it is shown.
  2. 2Liquidation: Compulsory and Voluntary Winding UpLiquidation is the main end-of-life process, so learn its routes before the people and payments within it.
  3. 3Role and Duties of the LiquidatorOnce you know how a winding up starts, you need to know who runs it and what they must do.
  4. 4Order of Payment of Creditors in LiquidationThis needs the liquidator's role first, since the liquidator distributes the assets in this order.
  5. 5Administration and AdministratorsAdministration is the rescue-focused alternative, easier to grasp once you have seen liquidation.
  6. 6Antecedent Transactions: Voidable TransactionsThese are challenges to past deals, usually brought by a liquidator or administrator, so learn them after both roles.
  7. 7Fraudulent and Wrongful Trading and Director DisqualificationThis covers personal consequences for directors and builds on the earlier idea of what the company owed and when.
  8. 8Company Voluntary Arrangements and ReceivershipThese are narrower procedures that are best learned last, by comparing them with liquidation and administration.

How to prepare Insolvency and administration

Insolvency has many similar-sounding procedures, so your preparation should focus on telling them apart and on applying exact conditions.

  1. Read each topic once to understand the purpose of each procedure: end the company, rescue it, or compromise with creditors.
  2. Build a one-page comparison of liquidation, administration, a company voluntary arrangement and receivership: who starts it, who runs it, and the aim.
  3. Memorise the insolvency tests and the order of payment as lists, then write them from memory until you can do it without error.
  4. For each antecedent transaction and director liability rule, note the conditions and the person who can bring the claim.
  5. Practise objective questions in short scenarios. For each wrong answer, note which condition you missed.
  6. Revisit the topics where procedures overlap, such as who can appoint an administrator and when a floating charge matters.
  7. Do a timed mixed set at the end, including questions from related chapters on directors and charges.

Common mistakes in Insolvency and administration

  • Confusing liquidation with administration.

    Fix: Remember the aim: liquidation ends the company and sells assets, while administration tries to rescue it or achieve a better result for creditors.

  • Getting the order of payment wrong.

    Fix: Write the full order as a ranked list and test yourself daily until it is automatic.

  • Treating wrongful and fraudulent trading as the same.

    Fix: Link fraudulent trading to dishonest intent and wrongful trading to a failure to take steps to protect creditors.

  • Ignoring time limits and conditions for challenging past transactions.

    Fix: For each transaction type, note the relevant period, the required state of the company and any defence.

  • Assuming any insolvent company must be wound up.

    Fix: Check the facts for signs the creditors or directors want a rescue, then consider administration or a voluntary arrangement.

Last-day revision: Insolvency and administration

  • A company is insolvent if it cannot pay its debts as they fall due (cash flow test) or its liabilities exceed its assets (balance sheet test).
  • Liquidation ends the company; administration aims to rescue it or get a better result for creditors than liquidation.
  • Winding up can be compulsory, by court order, or voluntary, started by a members' resolution. A voluntary winding up is either a members' voluntary winding up (a solvent company, with a directors' declaration of solvency) or a creditors' voluntary winding up (an insolvent company, with the creditors involved).
  • A liquidator collects assets, pays creditors in the correct order, and distributes any surplus to members.
  • In liquidation, holders of fixed charges are paid from the proceeds of the charged asset, outside the general order of payment.
  • After fixed charge holders are paid from their charged asset, the general order is: liquidation expenses; preferential creditors; floating charge holders (after the prescribed part is set aside for unsecured creditors, where applicable); unsecured creditors, who rank equally (pari passu); then members.
  • Unsecured creditors rank equally and share the prescribed part and any funds left after the earlier claims. Interest and deferred debts come next, and members are paid last, only if a surplus remains.
  • An administrator acts as agent of the company and must act in the interests of creditors as a whole.
  • Transactions at an undervalue and preferences may be set aside if made within the relevant period before insolvency.
  • Wrongful trading needs a director who knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, and who did not take every step to minimise potential loss to creditors.
  • Fraudulent trading requires intent to defraud creditors, which makes it harder to prove than wrongful trading.
  • A court can disqualify a director from managing companies for unfit conduct.

Insolvency and administration practice questions

Insolvency and administration in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Insolvency and administration: frequently asked questions

How are insolvency questions asked in the LW exam?

They appear as objective questions in short scenarios, including the multi-task questions in Section B. You may need to identify the correct procedure, the order of payment, or whether a director is liable. Marking is all or nothing, so accuracy matters.

What is the difference between liquidation and administration?

Liquidation ends the company by selling its assets and paying creditors. Administration gives the company breathing space so the business can be rescued, or so creditors get a better result than in liquidation.

Do I need to memorise the order of creditors?

Yes. Questions often give a list of creditors and ask who is paid first or who is likely to receive nothing. Learn the order as a ranked list and practise applying it to figures.

How is wrongful trading different from fraudulent trading?

Fraudulent trading needs dishonest intent to defraud creditors. Wrongful trading is about a director failing to take proper steps to protect creditors once insolvent liquidation was unavoidable, so it does not need dishonesty.