Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is one effect of winding up a company?

1. Business operations continue without change

2. Debt recovery against the company is halted

3. All company employees are immediately terminated

4. All outstanding contracts are voided

The correct answer is: Debt recovery against the company is halted

Winding up a company, also known as liquidation, involves ceasing its operations and distributing its assets among creditors and shareholders. One significant effect of this process is that debt recovery against the company is halted. When a company is in the process of winding up, it cannot incur further debts or engage in new business transactions. Instead, the focus shifts to the orderly settlement of outstanding debts and liabilities. Creditors must submit their claims, and the liquidator prioritizes these claims according to legal guidelines, which usually favor secured creditors first, followed by unsecured creditors, and finally shareholders. While it may sound like debt recovery activities could continue amidst the winding up process, legal protections are put in place to ensure that no new claims can arise against the company, nor can creditors independently pursue recoveries without following the orderly procedure established under insolvency law. This halt is essential to create fairness among creditors and to allow the liquidator to manage the distribution of assets in an organized manner. The other options suggest outcomes that do not accurately represent the winding-up process. Business operations come to a halt rather than continuing unchanged, employees might not be terminated simultaneously, as it may take time to finalize the liquidation, and outstanding contracts are typically not automatically voided but may be subject to