Deck 16: Insolvency and Liquidation

Question 1

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

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

Answer 1

A

Question 2

When a company is unable to pay its debts when they fall due and payable, this is referred to as:

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

Answer 2

D

Question 3

A voluntary winding up commences when:

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

Answer 3

A

Question 4

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

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

Question 5

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

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

Question 6

Who is required to prepare the report as to affairs (Form 507)?

A) Members of the company
B) Directors of the company
C) Creditors of the company
D) The liquidator

Question 7

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

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

Question 8

Which of the following is the journal entry recorded on realisation of the assets by the liquidator?

A) DR Cash, CR Liquidation
B) DR Liquidation, CR Cash
C) DR Cash, CR Revenue from sale of assets
D) DR Shareholders' distribution, CR Cash

Question 9

Under a court ordered winding up, a liquidator does not have the power to:

A) enter into legal proceedings on behalf of the company.
B) dispose of the property of the company.
C) use any legal methods to obtain money from a debtor.
D) pay the company's shareholders before paying the creditors.

Question 10

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

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

Question 11

What is the timeframe within which the liquidator must submit a preliminary report to ASIC after receiving the statement of affairs from the directors?

A) 12 months
B) 2 months
C) 3 months
D) 14 days

Question 12

When an administrator is appointed to a company they must give an opinion as to the best of three options available to creditors. Which of the following is not one of the options available?

A) To end the voluntary administration and return the company to the director's control.
B) To end the voluntary administration and appoint a receiver.
C) To 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.
D) To wind up the company and appoint a liquidator.

Question 13

Which of the following is a task of a liquidator under the Corporations Act?

A) To determine the creditors and order of priority of payment.
B) To bring about the dissolution of the company.
C) To take possession of the company's assets.
D) All of the above.

Question 14

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:

A) of no more than 30 days.
B) of not more than 6 months.
C) not exceeding 12 months.
D) more than one year but less than two years.

Question 15

Which of the following is not a general ground under s. 461 of the Corporations Act on which the court can order a winding up?

A) The company has no members.
B) The company has not commenced business within three months of its incorporation.
C) The court is of the opinion that it is just and equitable that the company be wound up.
D) The company has by special resolution resolved that it be wound up by the court.

Question 16

Which of the following is a ground under s. 461 of the Corporations Act on which the court can order a winding up? I. The company has no members.
II) The company has not commenced business within one year of incorporation.
III) The court is of the opinion that it is just and equitable that the company be wound up.
IV) The company has resolved that it be wound up by the court.

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

Question 17

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

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

Question 18

The basis for a voluntary winding up of a company is:

A) the company directors voting to wind up the company.
B) the company is unable to pay its debts.
C) the passing of a special resolution by the company to wind up.
D) a request from ASIC for the company to be wound up.

Question 19

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) none of the above.

Question 20

Which of the following statements is incorrect?

A) 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.
B) Past members must contribute money for company debts which have been incurred after they cease to be members.
C) Most liquidations in Australia do not have sufficient funds to pay creditors.
D) 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.

Question 21

The details below were extracted from the accounting records of Great South East Ltd (a company in the process of liquidation). $\begin{array}{ll}&\$\\40000 \$ 1 \text { preference shares fully paid } & 40000 \\ 120000 \$ 1 \text { ordinary shares paid to } 50 \text { cents } & \underline{60000} \\ & \underline{100000}\\\\ \text { Cash available (after payment of all creditors)}&10000\end{array}$

Assume that the constitution of Great South East 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, what is the amount of the actual refund or call?

A) A refund of $17 500
B) A call of $17 500
C) A refund of $10 000
D) A call of $22 500

Question 22

The details below were extracted from the accounting records of Great South East Ltd (a company in the process of liquidation). $\begin{array}{ll}&\$\\40000 \$ 1 \text { preference shares fully paid } & 40000 \\ 120000 \$ 1 \text { ordinary shares paid to } 50 \text { cents } & \underline{60000} \\ & \underline{100000}\\\\ \text { Cash available (after payment of all creditors)}&10000\end{array}$


Assume that the constitution of Great South East 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, what is the amount of the actual refund or call?

A) A refund of $10 000
B) A refund of $7500
C) A call of $7500
D) A call of $60 000

Question 23

Which of the following is not a way in which a receivership can end?

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

Question 24

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

A) Liquidator's distribution
B) Liquidator's cash
C) Shareholders' distribution
D) Liquidation

Question 25

The existence of accumulated losses at the commencement of a winding up will:

A) increase any deficiency calculated in the liquidation account.
B) decrease any deficiency calculated in the liquidation account.
C) have no effect on any deficiency calculated in the liquidation account.
D) increase cash available.

Question 26

Winding up of a company only ever arises from the issuing of an order from the court.

Question 27

Voluntary winding up can only take place where a company is solvent.

Question 28

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

A) DR Shareholders' distribution
B) DR Cash
C) CR Liquidation
D) CR Shareholders' distribution

Question 29

The report as to affairs shows which of the following?

A) Estimated realisable values of assets.
B) Potential payments to creditors.
C) Estimated surplus or deficiency for contributories.
D) All of the above.

Question 30

Past holders of shares in a company are able to make an application to the court for an insolvent company to be would up.

Question 31

The details below were extracted from the accounting records of Great South East Ltd (a company in the process of liquidation). $\begin{array}{ll}&\$\\40000 \$ 1 \text { preference shares fully paid } & 40000 \\ 120000 \$ 1 \text { ordinary shares paid to } 50 \text { cents } & \underline{60000} \\ & \underline{100000}\\\\ \text { Cash available (after payment of all creditors)}&10000\end{array}$


Assume that the constitution of Great South East 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 $17 500
B) A deficiency of $17 500
C) A surplus of $67 500
D) A deficiency of $67 500

Question 32

Under a creditor's voluntary winding up, the company must provide each creditor with a copy of the statement of affairs.

Question 33

The court is only able to make an order for a company to be wound up if the company is insolvent.

Question 34

In the case of a company being wound up by the court, the liquidator may carry on the business of the company so far as is necessary for its beneficial disposal or winding up.

Question 35

The main purpose of the liquidation account is to:

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

Question 36

In the case of a member's voluntary winding up, the directors of the company are required to prepare both a statement of affairs and a declaration of solvency.

Question 37

The liquidator is required to lodge a preliminary report with ASIC within 14 days of their appointment setting out details of capital issued, estimated assets and liabilities and causes of the company's failure.

Question 38

The details below were extracted from the accounting records of Great South East Ltd (a company in the process of liquidation).
$\begin{array}{ll}&\$\\40000 \$ 1 \text { preference shares fully paid } & 40000 \\ 120000 \$ 1 \text { ordinary shares paid to } 50 \text { cents } & \underline{60000} \\ & \underline{100000}\\\\ \text { Cash available (after payment of all creditors)}&10000\end{array}$


Assume that the constitution of Great South East 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 $22 500
B) A deficiency of $22 500
C) A surplus of $67 500
D) A deficiency of $67 500

Question 39

A declaration of solvency is required to be signed by directors of the company in order for the liquidation to be classified as a member's voluntary winding up.

Question 40

The shareholders of a company are liable for prosecution under the Corporations Act 2001 if they allow the company to trade while it is insolvent.

Question 41

A court has the power to appoint a receiver to a company.

Question 42

A mortgage is an example of a creditor secured by a circulating security interest.

Question 43

A liquidator is required to keep proper records, containing entries and proceedings of meetings.

Question 44

Past members do not have to contribute money for a company's debts which occurred after they ceased to be members.

Question 45

The main purpose of the Liquidation account is to calculate the deficiency or surplus on liquidation to show how it is distributed between the shareholders.

Question 46

The liquidator must arrange for their statement of receipts and payment to be audited on the completion on the liquidation.

Question 47

It is the responsibility of the directors of the company to realise the assets, and pass the proceeds to the liquidator to enable distributions to be made to creditors.

Question 48

Debts may be admitted by a liquidator to a liquidation without formal proof of the debt.

Question 49

Ordinary unsecured creditors have no preferential treatment and are the last to be paid before funds are returned to contributories.

Question 50

Salaries and wages and employee entitlements owing to staff always rank above the payment of creditors secured by a circulating security interest.