Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What happens to creditor rights during the administration process?

1. They are enhanced

2. They are transferred to the administrator

3. They are suspended

4. They remain unaffected

The correct answer is: They are suspended

During the administration process, creditor rights are suspended. This means that the normal rights and actions that creditors would normally have to pursue debts owed to them are put on hold while the company is undergoing administration. The purpose of this suspension is to allow the administrator to assess the company's financial situation and determine the best course of action to rescue the company or, if that’s not possible, to achieve the best possible return for the creditors as a whole. While in administration, creditors cannot initiate legal proceedings against the company without the permission of the court, which helps create a stable environment for the administration process to proceed. This enables the administrator to take control of the company and explore options for its future, whether that's restructuring or a controlled winding down in an orderly fashion. In contrast, other choices might suggest a situation where creditor rights are either increased, transferred to the administrator, or remain unchanged, which does not accurately reflect the legal framework that surrounds administration proceedings. The main goal is to prioritize the collective interests of creditors over individual claims during this critical period.