What’s the difference between liquidation and dissolution of a company?

When your company gets into financial difficulty it can be tough deciding what to do. The best option will depend on the specific circumstances of the business, the debts that are owed and many other factors.

Two options are liquidation and dissolution. But what’s the main difference between liquidation and dissolution of a company and how can it affect your business?

Company liquidation or dissolution

Dissolving a company

When a company is dissolved, it involves closing the company down and having it ‘struck-off’ from the Companies House list of registered companies. This process may be suitable for companies who have decided to stop trading or want to close down the business and pay off all creditors. Alternatively, if a company cannot pay its debts and has no assets or money, dissolving a company is an option.

One of the benefits of doing this, is that an Insolvency Practitioner is not required so no additional expenses are required. It can involve simply filing a form with Companies House.

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Liquidating a company

Liquidating a company, whilst also closes down the company, can be a more difficult process. Liquidation involves instructing an insolvency practitioner to manage the process of selling off the company’s assets in order to pay off any creditors and close down the business.

There are three types of liquidation:

  • Members’ Voluntary Liquidation (MVL) –An agreement is made between your shareholders to enter into a liquidation process. The company will have enough money to pay off all debts, and any remaining funds will go to the shareholders.
  • Creditors’ Voluntary Liquidation (CVL) – When shareholders and the directors agree that the company is unable to fulfil paying their debts to creditors’, they can go to an insolvency practitioner who will assist in placing the company into liquidation. The liquidator will sell assets and generate funds to make payments to creditors if possible.
  • Compulsory Liquidation – When you are unable to pay a debt over £750 and choose not to enter into a voluntary liquidation process, the creditor can petition the court for the company to be wound up. The liquidation process is then dealt with by the Official Receiver, a department of the Government, who will deal with selling the assets etc.
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How do I know which situation is right for my business?

Deciding on the best course of action for your company when it is suffering financially can be difficult. Ultimately, getting the best advice from an insolvency practitioner can help you choose the right course of action.

An insolvency practitioner not only provides advice on the best course of action for the company, this will also help protect your position as a director to ensure you don’t do anything wrong.

You may also need to seek tax advice. If the company is no longer required and after settling all outstanding debts there will be a surplus available to shareholders, there may be tax implications for distributing this money.   You should also therefore speak to your accountant.

What steps should I take to dissolve the company?

When dissolving a company, you need to pay off remaining creditors, dispose of your assets and close any bank accounts. HMRC will need to be notified along with Companies House and any members, shareholders, employees and trustees. If there is no objection after 3 months, then the company will be successfully dissolved.

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What if I have to go into liquidation?

If dissolution is not an option and you are receiving pressure from creditors, then you will need to instruct an experienced and professional insolvency practitioner, such as Portland. They will be able to advise you on the best situation and assist with putting this in place.

It’s important to bear in mind that going into voluntary liquidation can ensure that the insolvency practitioner finds the best-case scenario for your business, and not just for your creditors.

Paying for liquidation

An Insolvency Practitioner will need to be paid for their services. If the company has assets, the fees will be paid out of the sales proceeds. However, if the assets will not cover it then you may need to pay any shortfall out of your own pocket. Therefore, it’s important to consider this before you enter into an agreement. It’s also advisable to understand the position of your business before deciding on the right option for you.

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Ensuring a successful CVA…

It’s always best to determine your decision based on your own individual circumstances. Obtaining professional advice is key to finding the right solution for you and you may be able to easily dissolve your business without suffering the financial consequences.

Call 01489 550 440 or complete the form for free advice or a no-obligation consultation

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