Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What financial condition must be met for a business to be considered for compulsory winding up?

1. The business is experiencing decreased sales

2. The business is insolvent and unable to pay debts

3. The business has issued new shares

4. The business has halted all operations

The correct answer is: The business is insolvent and unable to pay debts

A business is considered for compulsory winding up primarily when it is insolvent and unable to pay its debts. This means the liabilities of the business exceed its assets, or it cannot settle its debts when they are due. Compulsory winding up is a legal process initiated by creditors, and it serves to protect their interests by ensuring that the assets of the business are liquidated and distributed among them. Other factors mentioned, such as decreased sales or issuing new shares, do not specifically indicate that a company is in a financial position that warrants winding up. Furthermore, halting all operations does not automatically lead to compulsory winding up unless it also correlates with insolvency and an inability to settle debts. Thus, the key condition for triggering this legal process is the business's inability to meet its financial obligations, affirming that insolvency is indeed the critical factor in this context.