What’s the difference between dissolution and liquidation?

Liquidating a company is a formal method of closing a solvent or insolvent incorporated business. There are two methods of liquidation - Members’ Voluntary Liquidation (MVL) for solvent companies and Creditors’ Voluntary Liquidation (CVL) for those that cannot pay their creditors in full.

Dissolution also closes down a company, but this is an unofficial route that’s only suitable for solvent companies. It carries certain risks – you need to be sure of the company’s solvent financial position, and if you don’t inform all creditors of your intention to close down, the company can be reinstated at a later date.

This isn’t the case with liquidation, as a licensed insolvency practitioner carries out the procedure and ensures you meet all your statutory obligations as a director.

What does company dissolution involve?

This informal process involves voluntarily striking off your company name at Companies House. It’s a cheap company closure process costing £10, but there are considerable risks if it’s not carried out in the correct way.

You must wind down your company by closing your payroll scheme, submitting final accounts, informing all creditors, and ensuring business assets are transferred out of company ownership.

Form DS01 is sent to Companies House along with the £10 fee, and if no creditors object, the company is struck off the register. As we’ve mentioned, however, if you omit to inform all your creditors the company can be returned to the register and treated as if dissolution hadn’t taken place.

Company liquidation

Solvent liquidation

Members’ Voluntary Liquidation is typically used for companies with £25,000 or more of excess profit for distribution. It’s extremely tax efficient, as distributions are treated as capital gains rather than income tax.

Asset Disposal Relief can further reduce the tax liability to an effective rate of 10 per cent if you’re entitled to claim. The process is more expensive than dissolution, however, as a licensed insolvency practitioner must be appointed.

In addition to the tax benefits, a significant advantage of using MVL over dissolution is the IP’s involvement, which gives you peace of mind that the company will not be reinstated in the future.

Insolvent liquidation

Some company directors apply to dissolve their company, even though it cannot pay its bills. This is extremely risky, as creditors will object to the application and could take legal action to recover their money, even after the company has been closed.

Creditors’ Voluntary Liquidation, however, protects your creditors and demonstrates your intention to repay as much of the company’s debts as possible through the sale of assets. CVL also enables you to claim director redundancy if you’ve worked as an employee as well as a director, and meet other eligibility criteria.

Claiming director redundancy isn’t possible with company dissolution, and as the average director claim is around £9,000, entering CVL offers distinct advantages. You could use the redundancy sum to pay for the CVL, process and also to support your own financial position following the closure of your company.

Which is better - company liquidation or dissolution?

Clearly there are significant advantages to formally liquidating your company rather than taking the dissolution route. It’s important to consider the future ramifications if you attempt to unofficially close a company with debts. You could face disqualification as a director for up to 15 years, and personal liability for failing to prioritise your creditors.

UK Liquidators has extensive experience of helping directors liquidate their company, and can provide reliable unbiased advice. Please get in touch with our partner-led team to arrange a same-day consultation free-of-charge. We operate an extensive network of offices throughout the UK, so you’re never far away from professional support.