Deck 33: Insolvency and Liquidation

Question 1

After receiving the statement of affairs from the directors, the liquidator must submit a preliminary report to ASIC within:

A) 14 days.
B) 2 months.
C) 6 months.
D) 12 months.

Answer 1

B

Question 2

refers to when a company is unable to pay its debts as they become due and payable.

A) Liquidation.
B) Insolvency.
C) Receivership.
D) Administration.

Answer 2

B

Question 3

Under s. 461 of the Corporations Act, general grounds on which the court can order a winding up include:
I. The company has no members.
II. The court is of the opinion that it is just and equitable that the company be wound up.
III. The company has not commenced business within twelve months of its incorporation.

A) I, II and IV
B) II, III and IV
C) II and III only
D) I, II, III and IV

Answer 3

I, II, III and IV

Question 4

A declaration of solvency is required to be signed by the directors of the company in order for:

A) the court to make an order for liquidation.
B) the company to borrow more money from a bank.
C) the company to issue more shares to its shareholders.
D) the liquidation to proceed as a members' voluntary winding up.

Question 5

Which of the following is entitled to make an application to the court for an insolvent company to be wound up?

A) ASIC.
B) A court appointed receiver.
C) Employees of the company.
D) The company's external auditor.

Question 6

Which of the following is not a form of external administration prescribed by the Corporation Act?

A) insolvency.
B) liquidation.
C) receivership.
D) administration.

Question 7

Under a members' voluntary winding up, the directors of the company are required to prepare which of the following documents?
I. Summary of affairs
II. Statement of affairs
III. Declaration of solvency
IV. Preliminary liquidation report

A) II and III.
B) I, II and III.
C) I, II and IV.
D) I, III and IV.

Question 8

The receiver's role normally includes the following except for:

A) collecting and selling enough of the charged assets to repay the debt owed to the secured creditor.
B) paying out the money collected in the order required by the Corporation Act.
C) liquidating the insolvent company.
D) reporting to ASIC any offenses or other irregular matters they discover in performing their duties.

Question 9

An administrator's role is to:
I. control the company's business, property and affairs.
II. carry on the business and manage the property and the affairs of the company.
III. terminate or dispose of all or part of the business or the property of the company.

A) I, II and III
B) I and II only
C) I and III only
D) II and III only

Question 10

A receiver should be:

A) a registered liquidator.
B) a secured party in relation to any property of the corporation
C) an auditor or a director, secretary, senior manager or employee of the corporation.
D) an auditor or a director, secretary, senior manager or employee of the body corporate related to the corporation.

Question 11

Which of the following provides the basis for a voluntary winding up of a company?

A) The company is unable to pay its debts.
B) The company directors vote to wind up the company.
C) A special resolution is passed by the company to wind up.
D) ASIC submits a request for the company to be wound up.

Question 12

Which of the following is not an example of how a receivership can end.

A) The receiver can resign.
B) A voluntary administrator can be appointed to take over from the receiver.
C) The receivership can progress to liquidation and the receiver can be appointed as liquidator.
D) The receivership can progress to liquidation and a separate party can be appointed as liquidator.

Question 13

Under the Corporations Act, tasks of a liquidator include which of the following?
I. Determine the creditors and order of priority of payment.
II. Bring about the dissolution of the company.
III. Take possession of the company's assets.

A) I, II and III
B) I and II only
C) I and III only
D) II and III only

Question 14

An administrator may be appointed by:

A) the liquidator, but only if the company is solvent.
B) the company's shareholders, as a means of dismissing the managers.
C) the company's directors, but only after the company becomes insolvent.
D) a secured creditor who is entitled to enforce a charge on the whole of the company's property.

Question 15

The report as to affairs (Form 507) is required to be prepared by the:

A) liquidator.
B) members of the company.
C) directors of the company.
D) creditors of the company.

Question 16

Which of the following statements is incorrect?

A) receivers have power to do whatever is necessary to achieve the objectives for which they were appointed.
B) receivers are normally appointed by the court or by secured creditors.
C) secured creditors have a 'charge' over some or all of the company's assets.
D) receivers are responsible to the company.

Question 17

Which of the following statements is incorrect?

A) A receiver must obtain permission from the company before selling any assets.
B) A receiver is required to open a special bank account and must lodge a statement of receipts and payments every 6 months.
C) Within 14 days of the receiver's appointment, the company is required to submit a report to the receiver detailing the affairs of the company.
D) Wages, superannuation contributions, the superannuation guarantee change, long service leave, sick leave and retrenchment payments are to be given priority over circulating security interests when the company is in receivership, but not yet in the process of being wound up.

Question 18

The administrator of a company under administration has power to do which of the following?
I. appoint a person as director.
II. remove from office a director of the company.
III. execute a document, bring or defend proceedings, or do anything else, in the company's name and on its behalf.

A) I, II and III
B) II and III only
C) I and II only
D) I and III only

Question 19

At the commencement of a members' voluntary winding up, a written declaration must be provided by directors stating that all debts will be able to be paid in full within a period of no more than:

A) 30 days.
B) 6 months.
C) 12 months.
D) 2 years.

Question 20

When an administrator is appointed to a company they must give an opinion as to the best of three options available to creditors. These three options are:
I. Wind up the company and appoint a liquidator.
II. End the voluntary administration and appoint a receiver.
III. End the voluntary administration and return the company to the director's control.
IV. Approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts.

A) I, II and III
B) I, II and IV
C) I, III and IV
D) II, III and IV

Question 21

Claims against a company whereby the creditor has a charge against specific property is known as a:

A) floating charge.
B) specific debt covenant.
C) circulating security interest.
D) non-circulating security interest.

Question 22

Which of the following statements is correct?
I. Debts may be admitted by the liquidator without formal proof.
II. All creditors' claims are admissible to proof against the company in liquidation.
III. The size of any debts is calculated for the purpose of the winding up as at the day on which the winding up is taken to have begun.

A) I only
B) II only
C) III only
D) I, II and III

Question 23

Which of the following is not grounds under s. 461 of the Corporations Act on which the court can order a winding up? I. $\quad$$\quad$ The comparyy has no members.
III. $\quad$ The compary has resolved that it be wourd up by the court.
III. $\quad$ The compary has not commenced business within three months of its incorporation.
IV. $\quad$ The court is of the opirion that it is just and equitable that the compary be wourd up.

A) III only
B) IV only
C) I and II only
D) III and IV only

Question 24

The details below were extracted from the accounting records of Capricorn Ltd (a company in the process of liquidation). $\begin{array}{ll}\text {\( 100000 \$ 1 \) preference shares fully paid }&\$ 100,000\\\text {\( 200000 \$ 1 \) ordinary shares paid to 50 cents }&100,000\\&\$200,000\\\text { Cash available (after payment of all creditors) }&\$20,000\end{array}$
Assume that the constitution of Capricorn Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency.
What will be the deficiency or surplus apportioned to preference shareholders?

A) A surplus of $40 000.
B) A surplus of $60 000.
C) A deficiency of $60 000.
D) A deficiency of $100 000.

Question 25

The details below were extracted from the accounting records of Capricorn Ltd (a company in the process of liquidation). $\begin{array}{ll}\text {\( 100000 \$ 1 \) preference shares fully paid }&\$ 100,000\\\text {\( 200000 \$ 1 \) ordinary shares paid to 50 cents }&100,000\\&\$200,000\\\text { Cash available (after payment of all creditors) }&\$20,000\end{array}$
Assume that the constitution of Capricorn Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency.
For ordinary shareholders, the amount of the actual refund or call is:

A) A call of $220 000.
B) A call of $100 000.
C) A refund of $20 000.
D) A refund of $100 000.

Question 26

Which of the following statements is incorrect?

A) Most liquidations in Australia do not have sufficient funds to pay creditors.
B) Past members must contribute money for company debts, which have been incurred after they cease to be members.
C) In the absence of any guidance in the company's constitution, calls in advance with related interest will be repaid before any payments are made to shareholders.
D) If the company is limited by shares, members do not have to contribute more than the amount unpaid on the shares for which each is liable as a past or present member.

Question 27

A voluntary winding up commences when:

A) the company is unable to pay its debts.
B) ASIC applies to the court for the winding up.
C) the members of the company pass a special resolution to wind up.
D) an application is filed with the court by the company's external auditor.

Question 28

The details below were extracted from the accounting records of Capricorn Ltd (a company in the process of liquidation). $\begin{array}{ll}\text {\( 100000 \$ 1 \) preference shares fully paid }&\$ 100,000\\\text {\( 200000 \$ 1 \) ordinary shares paid to 50 cents }&100,000\\&\$200,000\\\text { Cash available (after payment of all creditors) }&\$20,000\end{array}$
Assume that the constitution of Capricorn Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency.
For preference shareholders, the amount of the actual refund or call is:

A) A call of $20 000.
B) A call of $100 000.
C) A refund of $20 000.
D) A refund of $40 000.

Question 29

Under a voluntary winding up, a liquidator cannot:

A) make concessions on any debts except as under s. 477(2A) of the Corporation Act.
B) exercise the power of the court of fixing a time when debts and claims must be proved.
C) exercise any power the Corporation Act confers on a liquidator in a winding up by the court.
D) convene a general meeting of the company to obtain agreement for matters as the liquidator thinks fit.

Question 30

The journal entry to record the distribution of cash to shareholders includes which of the following?

A) CR Liquidation.
B) CR Shareholders' distribution.
C) DR Shareholders' distribution.
D) DR Liquidator's receipts and payments.

Question 31

Under a court ordered winding up, a liquidator has the power to:
I. dispose of the property of the company.
II. use any legal methods to obtain money from a debtor.
III. commence legal proceedings on behalf of the company.
IV. pay the company's shareholders before paying the creditors.

A) II, III and IV.
B) I, III and IV.
C) I, II and IV.
D) I, II and III

Question 32

Which of the following is an example of an ordinary unsecured creditor?

A) Trade creditors.
B) Liquidator's remuneration.
C) Workers' injury compensation claims.
D) Retrenchment payments payable to employees of the company other than a director or a relative of a director.

Question 33

Which of the following is not one of the main accounts used for liquidation?

A) Liquidation.
B) Liquidator's distribution.
C) Shareholders' distribution.
D) Liquidator's receipts and payments.

Question 34

The main purpose of the liquidation account is to:

A) record additional calls made on shareholders.
B) show the capital amount due to contributories.
C) calculate the deficiency or surplus on liquidation.
D) show the final cash payment to each class of contributory.

Question 35

In relation to the order of priority of payment of debts upon liquidation, which of the following statements is correct?

A) Deferred creditors are paid before secured creditors.
B) Deferred creditors are paid before ordinary unsecured creditors.
C) Preferential unsecured creditors are paid before deferred creditors.
D) Ordinary unsecured creditors are paid before preferential unsecured creditors.

Question 36

Which of the following is an example of a preferential unsecured creditor?

A) Trade creditors.
B) Liquidator's fee.
C) Arrears of preference dividends.
D) Audit fees payable for normal year-end audit prior to insolvency.

Question 37

A voluntary winding up may be put in place by either:

A) the company's members or creditors.
B) the company's directors or creditors.
C) ASIC or the company's members.
D) ASIC or the company's creditors.

Question 38

The details below were extracted from the accounting records of Capricorn Ltd (a company in the process of liquidation). $\begin{array}{ll}\text {\( 100000 \$ 1 \) preference shares fully paid }&\$ 100,000\\\text {\( 200000 \$ 1 \) ordinary shares paid to 50 cents }&100,000\\&\$200,000\\\text { Cash available (after payment of all creditors) }&\$20,000\end{array}$
Assume that the constitution of Capricorn Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency.
What will be the deficiency or surplus apportioned to ordinary shareholders?

A) A surplus of $40 000.
B) A deficiency of $100 000.
C) A surplus of $100 000.
D) A deficiency of $120 000.

Question 39

Which of the following is an example of a deferred creditor?

A) Trade creditors.
B) Audit fees payable.
C) Liquidator's remuneration.
D) Arrears of preference dividends.

Question 40

Which of the following journal entries will be recorded upon realisation of the assets by the liquidator?

A) DR Liquidation; CR Liquidator's receipts and payments
B) DR Liquidator's receipts and payments; CR Liquidation
C) DR Shareholders' distribution; CR Liquidator's receipts and payments
D) DR Liquidator's receipts and payments; CR Revenue from sale of assets