Which term best describes a situation where a business is unable to pay its debts?

• A. Bankruptcy
• B. Liquidation
• C. Voluntary Administration
• D. Involuntary Cessation

Answer: (A)

The situation tested is insolvency—the business can’t meet its obligations as they come due. Bankruptcy is the formal label for this state, signaling that the entity cannot pay its debts and that a legal process will address those debts. That direct link to not being able to pay what is owed is why it’s the best fit here.

Liquidation describes the process of selling assets to wind up the business and repay creditors, which is a consequence that can follow insolvency but doesn’t itself name the state of owing money and being unable to pay. Voluntary administration is a step to try to reorganize and keep trading, not simply the condition of insolvency. Involuntary cessation isn’t a standard formal term for insolvency either; it just means stopping operations, which might result from insolvency but doesn’t define the situation.