The difference between dissolve and liquidate

What do we mean when we talk about dissolving a company?

Dissolving is the process of removing or “striking off” a company from the register at Companies House.

In situations where a company has become surplus to requirements (i.e. it has fulfilled the purpose it initially set out to achieve) and is no longer trading. The most cost-effective and simple way forward for a director may be to apply to the Registrar to be struck off and dissolved.

So then, what does liquidate mean?

Liquidation is when a company’s assets are extracted and used to pay off any remaining debts before that company is dissolved.

When it comes to liquidation, there are three main types:

  • Compulsory liquidation: where creditors force you into going into liquidation as a way of recovering the debt owed.
  • Creditors’ voluntary liquidation (CVL): generally appropriate in situations where you and your shareholders conclude that the company is unable to pay its debts. The process is managed by a liquidator and requires the input of your creditors. Your company’s assets are sold and any surplus is distributed to its members.
  • Members’ voluntary liquidation (MVL): this is an option where the company is capable of paying its debts, but there is nevertheless a desire on the part of (at least) three-quarters of the company’s members to wind up the company. Once again a liquidator is appointed. Assets are realised (that is, to convert the assets into cash) and any resulting balance is distributed amongst shareholders.

With compulsory liquidation, your hand is forced, and you have to appoint an insolvency practitioner who will guide you through the process. In other situations you could be faced with more than one option for shutting down your company.

What situations might lead to dissolution and/or liquidation, and what’s involved in either process? Let’s find out.

 

Voluntary strike-off and dissolution

When is it a good idea?

This process can be useful where the company has served its purpose, is no longer active and is unlikely to be required in the future (i.e. if you’re retiring). If there’s a chance that you may wish to use the company again you should consider keeping it as dormant (it can remain dormant indefinitely, provided you keep up with simple reporting requirements).

Dissolution is not a process for trying to evade creditors. If it is found you have failed to notify a creditor of your application to dissolve the company you could be prosecuted and, in certain circumstances, barred from holding future directorships for a period of 15 years.

You can close your company by simply applying to have it struck off the Companies House register if:

  • It hasn’t traded or sold off any stock in the last 3 months.
  • It hasn’t changed names in the last 3 months.
  • It isn’t threatened with liquidation and has no agreements in place with creditors, such as a ‘company voluntary arrangement’ (CVA), which is a legally binding agreement that lets a company freeze its unsecured debts and repay them with future profits.

What’s involved?

  • Before you apply to strike off your company you must tie up any loose ends, such as paying any remaining creditors, disposing of any remaining assets and closing the company’s bank account. From the date of dissolution any assets of a dissolved company are frozen and any credit balance will belong to the Crown.
  • You must notify HMRC.
  • Complete the application to strike off (form DS1). You must send this to Companies House and to anyone who could be affected within 7 days, including members, creditors still to be paid, employees, pension fund managers and/or trustees.
  • If no objection is received within 3 months, the company is dissolved.

 

Creditors’ voluntary liquidation  (CVL)

When is it a good idea?

CVL tends to be appropriate when business owners realise that carrying on is no longer viable: where debts cannot be paid as they fall due and/or where liabilities exceed assets. If you believe you fit into either of these categories you should seek advice from an insolvency practitioner immediately to avoid falling foul of the rules concerning wrongful trading.

This can be an effective way of ‘taking matters into your own hands’: of engaging with creditors and putting forward your position before they take formal action themselves.

What’s involved?

  • A meeting of shareholders is required and 75% of these shareholders (by value of the shares) must agree to a winding-up resolution.
  • A liquidator (i.e. an authorised insolvency practitioner) is appointed. The resolution is sent to Companies House and is published in the publication ‘The Gazette’, which is the UK’s official public record.
  • You must also hold a creditors’ meeting where you present a statement of affairs setting out the state of the company and where those creditors may question you about the company’s failure.
  • The liquidator realises the company’s assets. These are distributed according to the priority of the debt (secured creditors first, followed by unsecured creditors).
  • On completion of the process the company is dissolved.

 

Members’ voluntary liquidation (MVL)

When is it a good idea?

This is an option where the company is solvent (i.e. able to meet any debts), but there is still a desire to have it wound up. One common example is a family business where the directors wish to retire, or where a business owner wishes to free up assets from an existing company to fund a new venture.

  • You may still have outstanding debts, but you are extremely confident that these will be discharged in full within 12 months from the beginning of the process of winding up the company. You are required to give a statutory declaration to this effect.
  • You may be faced with a choice between MVL and applying for voluntary stike-off. All assets extracted from the company via liquidation are treated as capital for tax purposes. With voluntary strike off, assets after the first £25,000 are treated as income. If your company structure is relatively complex, if you’re a higher rate tax payer or the value of your company assets, after creditors have been paid, is likely to exceed £25,000, MVL may be the preferred way forward.

What’s involved?

  • In a similar way to CVL a liquidator is appointed and, after creditors have been paid, net liquid assets are distributed amongst company members.
  • Because of the involvement of a liquidator the administrative costs associated with MVL tend to be higher than with voluntary strike off. However, especially when it comes to tax considerations, this option may still make better financial sense.

Looking for further tips on how to structure your business with tax efficiency in mind? Check out our specialist company formation guides for step-by-step advice, or browse our help centre for more general information.

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