Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Administration is primarily used as an alternative to which process?

1. Bankruptcy

2. Liquidation

3. Merger

4. Acquisition

The correct answer is: Liquidation

Administration serves as an alternative to liquidation in situations where a company's financial distress can potentially be resolved without fully dissolving the business. The primary objective of administration is to rescue the company and keep it viable, allowing it to continue its operations while sorting out its debts. During the administration process, an appointed administrator takes control of the company to reorganize its structure, negotiate with creditors, and implement a turnaround plan. If successful, administration can lead to the company emerging as a healthier entity, thereby allowing it to avoid the complete cessation of operations associated with liquidation. In contrast, liquidation often entails selling off the company's assets to pay creditors, leading to the end of the business. Therefore, administration acts as a crucial step that focuses on recovery and restructuring, instead of merely winding down operations. Other processes like bankruptcy, mergers, or acquisitions do not directly relate to the intention of administration. Bankruptcy typically refers to the legal state of being unable to pay debts and may lead to liquidation if not resolved. Mergers and acquisitions involve the joining of businesses but do not inherently address the distress of a single company that administration seeks to mitigate.