Liquidation Vs Dissolution

Companies go through liquidation or dissolution when they are no longer able to keep the business going. However, 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 company 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 is a very different approach to winding up a company and liquidating. One is informal, has very little administration attached to it, can be done by a company director and costs about £10. This procedure is known as striking a company off the register and dissolving it (company 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 £2,850 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. As mentioned above, this has a £10 administration fee attached to it. Nevertheless, there are several conditions that must be met 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
  • 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. 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 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 £2,850 (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. 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 are 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 due to the outstanding debts. 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. There are other options which can help reduce the costs of liquidation as detailed here.

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. However, due to recent changes in insolvency practice, this is much less onerous than it ever was. Given the potential benefits involved, it’s not particularly time-consuming. We outline the process and the timescales in more detail here.

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

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