Which of the following statements regarding compulsory liquidation is correct?

The statement that the company must be insolvent is correct because compulsory liquidation, also known as winding-up, is initiated when a company is unable to pay its debts as they fall due. Under the relevant laws, particularly the Insolvency Act in many jurisdictions, a creditor may petition the courts for the compulsory winding-up of an insolvent company. This is a protective measure for creditors, ensuring that they have a legal avenue to recover debts owed to them from the company’s assets.

The process of compulsory liquidation is distinct from voluntary liquidation, where members or directors might initiate the process themselves, often when the company is solvent. In compulsory liquidation, it is the court that orders the wind-up, typically at the request of creditors. This highlights the difference in initiation between the two types of liquidation. The appointment of the liquidator in a compulsory liquidation is also made by the court rather than by the directors, who do not have this power under the compulsory process.

Thus, understanding the context of compulsory liquidation in terms of insolvency and creditor protection clarifies why the assertion that the company must be insolvent stands correct.