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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

A company is insolvent and its directors are considering an administration rather than an immediate liquidation. Which statement best describes the primary advantage of administration under the typical insolvency framework studied in AFM?

Administration provides a moratorium on creditor enforcement, giving an appointed insolvency practitioner time to rescue the company or obtain a better return for creditors than an immediate winding up. It does not cancel debts or change the priority of claims.

  1. AIt gives a moratorium on creditor action, allowing time to rescue the company or achieve a better result than immediate winding upCorrect
  2. BIt guarantees that unsecured creditors are paid in full before secured creditors
  3. CIt automatically cancels all the company's debts so it can continue trading debt-free
  4. DIt removes the need for any insolvency practitioner to be appointed

Explanation

Administration places the company under the protection of a moratorium while an insolvency practitioner seeks to rescue the business or achieve a better outcome for creditors than a liquidation. It does not reverse priority of claims, write off debts automatically, or dispense with an appointed practitioner.

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