Liquidation Vs Dissolution

Companies go through liquidation or dissolution when they are no longer able to keep the business going. Because closing a business isn’t as simple as just ceasing to conduct business. If you feel it is time to close your business, liquidation and dissolution are two alternatives. Understanding the two can make business closure a lot smoother. However, this process is more complicated than just ceasing to conduct business.

How to close a limited company: strike off or liquidation?

Applying to have a company struck off the register and dissolving it, and winding up a company and liquidating it are two very different approaches to closing a business. One is informal, has very little administration attached to it, can be done by a company director and costs about £10; this is known as striking a company off the register and dissolving it (dissolution). The other has much more formal administration involved, must be carried out by a licensed insolvency practitioner and costs can begin anywhere from in the region of £2,500 plus VAT, up to several thousand pounds, depending on the complexity of the case. So why would a company director, who needs to close a business, choose liquidation over dissolution? Or perhaps, have to liquidate the company rather than dissolve it? And what are the costs and benefits of choosing liquidation vs dissolution?

Key facts: striking off V winding up a company

In order to have a company struck off the register, all, or a majority of the company’s directors must file a DS01 form with Companies House, which as mentioned above has a £10 administration fee attached to it. Nevertheless, there are several conditions that must be met in order for the dissolution to be successful. Our article, ‘company dissolution: how to do it’ outlines this fully. However, in brief:

  • The company must not have traded or carried on any business activity except for those involved in concluding the company’s affairs and striking the company off the register, in the 3 months prior to dissolution
  • It must not have changed its name in the last three months
  • It must not be the subject of any insolvency proceedings such as liquidation
  • Or still be subject to any compromises or agreements with creditors, such as a section 895 scheme, CVA, any HP agreements or leases
  • And there can be no legal actions outstanding against the company

It’s very common for the last three points to be most relevant to companies that have outstanding debts; and for most directors considering whether to strike a company off the register or wind it up, the reality of whether or not the company has outstanding debts (or indeed assets that need distributing) will be the most important concern in the decision making process.

Dissolution Vs liquidation of a company with debts: winding up and liquidating

As we mentioned above, winding up and liquidating a company is a formal procedure that needs to be carried out by a licensed insolvency practitioner – this is true for a solvent liquidations when there are assets to be distributed (called Members Voluntary Liquidation – find more details here) and insolvent liquidations, where there are debts that need to be dealt with (Creditors Voluntary Liquidation). Liquidation is a considerably more costly process, however, there are also substantial financial benefits to opting for liquidation over dissolution.

Liquidation vs dissolution: dealing with debt

The first financial benefit obviously relates to debt. A CVL is the formal insolvency process to deal with the outstanding debts of a company that is not viable moving forward and needs to close. As we mentioned above, liquidation can cost anywhere from £2,500 (plus VAT) to several thousand pounds; the price will vary according to the number of creditors that the business is owing money to, and whether the business has assets that need to be liquidated, and if so, the number of assets that need to be liquidated. (Feel free to try our free online cost calculator here if you would like to see how much it might cost to liquidate your business).

Whilst there is an initial cost involved, what liquidation offers over dissolution is that those debts that the company has been carrying are legally dealt with. After liquidation, they are written off and cannot be held against you personally, as director. Therefore you will be free to move on to your next chapter with a clean slate.

On the other hand, if you successfully dissolve the company whilst there is outstanding debt, it’s possible that the company can be resurrected by its creditors because of the outstanding debts, and if this occurs, the debts can then be held against you personally, as director.

Liquidation vs dissolution: when you can’t dissolve the company or get it struck off the register

If a company owes money – to HMRC, for example, HMRC can, and it is likely that it will, block the application to strike the company off the register until the debts are dealt with. When Companies House receives the application to strike the company off the register, it will advertise the application in the London Gazette. At this point, any of the company’s creditors can block the application and prevent the company being struck off. If this occurs, the directors will be forced to liquidate the company to close it.

Liquidation vs dissolution: getting paid, or liquidating for free

This is an important and somewhat surprising benefit of liquidation that many directors aren’t aware of. If a company is insolvent and needs to close, thereby making its employees redundant, if the company can’t afford to pay its employees their outstanding redundancy and employment entitlements, the employees can claim their monies from the National Insurance Fund. What most directors aren’t aware of, is that due to recent changes in case law, this option is also now available to them as an employee-director.

If you are a director of a company in which you are an employee-director, you typically:

  • Work more than 20 hours per week for the company
  • Take, or are entitled to, regular salary or dividend payments

If you have been in this role (or worked for the company) for more than 2 years, you are also entitled to claim redundancy and any unpaid employment entitlements such as unpaid wages, holiday pay and notice pay from the government’s National Insurance Fund. This is true for employees and also now, directors of limited companies.

In many cases we see, the payment sum from the NIF not only covers the cost of liquidation but also leaves the director with a final sum often of anywhere from £2000 to £13000, depending on the age of the company and of the director. Crucially, this option is not available for directors or employees if the company is dissolved; it is only available in circumstances of insolvency and thereby, liquidation.

Unpaid employment entitlements: what makes your company insolvent?

The interesting aspect of this change to case law is that it recognises the fact that many directors of limited companies that are closing down forego their own salary and redundancy entitlements to ensure that the company’s debts are paid off before it closes. Whilst this is the right sentiment, to meet the obligations the company has to its creditors, it is not necessarily right that the company doesn’t meet its financial obligations to you as director. If you are an employee director i.e. you work more than 20 hours a week for the company and you are entitled to take salary or dividend payments, the company’s inability to pay you any final employment entitlements such as salary payments, notice pay or redundancy does not mean that you are not entitled to them. Actually, it makes the company insolvent, even if there are no other debts.

Strike off vs liquidation: what other costs are there?

The only other cost of liquidation vs dissolution will be time costs. There is undoubtedly more administration involved in liquidation vs dissolution, but due to recent changes in insolvency practice, this is much less onerous than it ever was and given the potential benefits involved, not particularly time-consuming. We outline the process and the timescales in more detail here, ‘Voluntary liquidation: process’.

If you are thinking about liquidation vs dissolution and have any questions, try our FAQ’s here, or feel free to contact one of our business rescue experts directly for more tailored advice.

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