Association of Chartered Certified Accountants (ACCA) Certification Practice Test

When is a company considered unable to pay its debts for compulsory liquidation?

1. When liabilities exceed assets

2. When a creditor is owed at least £250

3. When a creditor is owed at least £750

4. When the company has negative cash flow

The correct answer is: When a creditor is owed at least £750

A company is considered unable to pay its debts for compulsory liquidation when it is unable to meet its obligations as they fall due. This situation is often evidenced by specific thresholds set by law or regulation. The correct response highlights the scenario where a creditor is owed a minimum of £750. This is the statutory threshold established in many jurisdictions, including the UK, which allows creditors to petition for compulsory liquidation. If a creditor can prove that the company owes at least this amount, they can initiate legal proceedings to liquidate the company, as it signifies that the company may be in financial distress and unlikely to resolve its debts. In contrast, simply exceeding liabilities over assets doesn't directly establish insolvency in the sense required for compulsory liquidation, as a company may have other means to cover debts or may not be in immediate default. The minimum threshold of £250, while potentially relevant for different aspects of financial assessment, is too low to trigger compulsory liquidation proceedings. Negative cash flow indicates potential issues with liquidity but does not, by itself, meet the strict legal criteria required for initiating liquidation proceedings. Therefore, the choice concerning the £750 threshold appropriately reflects the legal framework that governs compulsory liquidation processes.