Liquidation vs Dissolution: What’s The Difference?

When it comes to closing a business, there is a common misunderstanding that dissolution and liquidation are the same thing. However, this is not the case. Although these are two methods one can use to close a company under the right circumstances, they should not be adopted in the same way. 

In this article, we’ll take you through a comprehensive guide on the key differences between liquidation and dissolution, and under which circumstances your company will have the right to exercise either one, should it be a necessary next step for your business. 

What is dissolution?

Dissolution is a process by which a company can remove itself from the Companies House register in the simplest way possible. It is also the most cost-effective way to close a company should you need to. There are very specific circumstances under which a company can undergo dissolution. It is therefore necessary that you are familiar with these before starting down the road of dissolving your company. You can only proceed with dissolution if the following are true for your company: 

• Your business has no outstanding debts that need to be paid. 
• Your company is no longer trading and has not traded in the last three months. 
• The company has not changed its name in the last three months. 
• Your business has no active agreements in place with current creditors. 
• If the company has served its initial purpose and is not redundant for business operations. 
• There is no director in place or the current directors are seeking retirement options. 

If you think dissolution may be the right fit for you, then get in touch with an expert who can help you navigate the process to ensure time efficiency and a smooth transition. 

What is liquidation?

There are several types of liquidation, however, in a nutshell, liquidation is the process of closing a business even when the company still has assets and liabilities in their name that need to be wrapped up before closure. These assets and liabilities have to be properly distributed between the shareholders and directors of the company. This process is usually a result of the company reaching bad debtor status, which may incur creditors taking action against your business. 

A company may also opt for liquidation if there are regular cash flow problems within the business. The below are the different types of liquidation companies can undergo, and are dependent on the individual circumstances of the business. 

Members voluntary liquidation (MVL)

Members’ Voluntary Liquidation (MVL) is a voluntary process initiated by solvent companies. In this scenario, shareholders choose to close the business, typically when they decide to retire or move on to other ventures. The company must be able to settle its debts within 12 months to qualify for MVL. However, if the company has no debts and they opt for MVL, then this may also be the best way to close the company for tax purposes. 

This is because, once a company is liquidated, they are no longer obligated to pay income tax on the company’s profits. This instead becomes capital gains tax, which has a far lower taxation rate than income tax. Therefore, if the directors or the board of the company want to close the business, then this MVL is one of the best ways forward. 

Creditors’ voluntary liquidation (CVL)

Creditors’ Voluntary Liquidation (CVL) is another voluntary process, but it applies to insolvent companies, which is when a business is unable to pay its debts as they fall due, directors can opt for CVL. It is also an option for companies that have liabilities, the values of which are greater than the company’s assets. 

In the case of undergoing CVL, a professional Insolvency Practitioner must be appointed at the discretion of the director. The appointed liquidator takes charge of selling assets, and the proceeds are used to satisfy creditors’ claims as far as possible. 

Compulsory liquidation

Compulsory Liquidation is an involuntary process initiated by external parties, often creditors, through a court order. This type of liquidation is the most serious form and should be avoided at all costs. The process occurs when a company cannot meet its financial obligations, and legal action is taken to force the liquidation process. 

A court-appointed official Insolvency Practitioner oversees the disposal or selling of assets to settle outstanding debts as far as possible. This is also the process that holds the most gravity for shareholders and directors in terms of their possible financial obligations. 

What are the differences between liquidation and dissolution?

While dissolution is the overarching process that signals the end of a company’s existence, liquidation is a specific component of that process. Dissolution encompasses various legal and administrative steps, such as notifying authorities of the company’s closure, terminating contracts, and addressing legal obligations such as employment termination and asset and liability management. Liquidation, on the other hand, specifically involves the sale of assets and the distribution of funds to stakeholders. 

Dissolution can occur without liquidation in cases where a company is solvent and has no outstanding debts or assets to distribute. However, liquidation is an integral part of the dissolution process when there are assets and liabilities to address. Another key difference is that dissolution can take place without the appointment of an insolvency practitioner, however, liquidation cannot. 

How do I know which formal insolvency process is right for my business?

Choosing the right formal insolvency process requires careful consideration of your business’s financial health and obligations. The correct solution for you and your business depends on various factors, including its financial standing, the ability to pay debts, and the preferences of stakeholders. Seeking professional advice is crucial in making an informed decision tailored to your specific circumstances. 

This is where Braant Accountants can help you. We have extensive experience in financial services and can guide you through the intricacies of both of these processes. Whether you are considering voluntary liquidation, addressing creditors’ claims, or navigating compulsory liquidation, the experts at Braant are equipped to provide personalised solutions for your unique situation. For professional assistance and expert advice, reach out to Braant and take the first step towards a smooth and well-managed business closure process.