Liquidation vs Dissolution – The Key Facts

When a limited company closes down, liquidation and dissolution are the processes by which directors bring business to an end and remove the company from the register at Companies House.

One of the main considerations when deciding whether to liquidate or dissolve a company is its financial position – essentially, whether it is solvent or insolvent. This is of huge importance as if solvency is misjudged and the wrong process used, it can have serious implications for directors. 

But although solvency is the initial consideration, there are other elements that need to be taken into account when closing down a company. So what are the key facts regarding these procedures, and how do you know whether to choose liquidation or dissolution?

Liquidation

Three types of liquidation

The three forms of liquidation are:

• Creditors’ Voluntary Liquidation (CVL) – for insolvent companies. Directors voluntarily place the company into liquidation in order to protect the interests of their creditors
• Compulsory liquidation – for insolvent companies. A creditor forces the company’s liquidation by way of a court order
• Members’ Voluntary Liquidation (MVL) – an option for solvent companies wishing to close down in an orderly manner

So what is an insolvent company? Insolvency means the business can’t afford to pay its debts as they fall due, but insolvency also applies when the total of the company’s liabilities is greater than its assets.

An important point about insolvency for you as a director is that if you carry on trading when you’ve entered insolvency you could be held liable for some or all of the company’s debts, and face potential disqualification.

This is why it’s important to seek professional help when you start to experience financial problems in the business, and when assessing the company’s solvency - you can protect yourself and your creditors, and choose the correct closure route.

Company liquidation is carried out by a licensed insolvency practitioner (IP)

Liquidation is a formal procedure that requires the appointment of a licensed IP. This is non-negotiable, but there are significant benefits for directors in doing so. You gain reassurance that the company is being closed down according to UK law - an important point, as once assets have been liquidated and the company removed from the register at Companies House, it cannot be reinstated later as it can with dissolution.

Liquidation incurs professional fees (but potentially also redundancy pay for directors)

Due to the involvement of a licensed IP, professional fees must be paid for company liquidation. Although this option might seem unattainable for insolvent companies, it’s sometimes possible to pay the fees from the proceeds of asset sales.

Furthermore, when entering a CVL you could be eligible to claim redundancy pay as a director if you’re also an employee of the company. Director redundancy can represent a considerable sum, which could be used to pay for this formal procedure.

Dissolution

Dissolution is a procedure for solvent companies only

Company dissolution is a cost-effective way to close a company, but you must be sure that your company is solvent. To be considered solvent you must be able to repay the company’s debts within 12 months of the closure date, but don’t forget to include contingent liabilities in your calculation. These are payments that might be required in the future – in relation to a pending employee or customer claim against the company, for example.

Directors can dissolve their own company

Dissolution can be instigated and carried out by company directors without the need to appoint a licensed IP. You have to carry out specific actions to comply with the laws on company dissolution, however, including ceasing trade three months before you apply, closing business bank accounts, and ending your payroll scheme.

Creditors can object to dissolution

If a creditor hasn’t been paid and is aware of the proposed dissolution, they can object to the Registrar - owing tax debts, for example, will result in an objection by HMRC. But it’s also possible to genuinely overlook a creditor. If this happens the creditor can apply to reinstate your company, potentially leading it from a solvent position into insolvency.

Liquidation vs dissolution – which to choose

The choice between liquidation and dissolution is initially based on your company’s financial status, but the options don’t end there. If your company is solvent you have a choice between closing it down yourself via dissolution and entering into an MVL, which ensures all statutory requirements are met.

Our experts at UK Liquidations can help you make the right choice, presenting the options in detail and providing professional guidance. We offer free same-day consultations and work from a network of offices around the country, so please contact one of the team to find out more.