Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Who has the authority to declare a company insolvent?

1. The company's management team

2. Shareholders at the AGM

3. The court

4. The external auditors

The correct answer is: The court

The authority to declare a company insolvent lies with the court. Insolvency is a legal state that arises when a company cannot pay its debts as they fall due or when its liabilities exceed its assets. In most jurisdictions, the process of declaring insolvency involves filing a petition with the court, where legal proceedings take place to evaluate the company's financial situation. The court has the power to determine the appropriate course of action, which may include appointing an administrator or liquidating the company, depending on the specific circumstances. This judicial involvement ensures that the rights of creditors and other stakeholders are protected and that the process adheres to established laws and regulations. While the management team may identify financial distress and stakeholders such as shareholders might have opinions about insolvency, the formal declaration must come through legal channels, specifically the court's authority. External auditors, on the other hand, may assess a company's financial health but do not have the power to declare insolvency themselves.