Dissolution Vs Liquidation – What Are The Differences?

Dissolution

Dissolution

Company dissolutions and liquidations are common in the UK. However, many people who run British firms – even some highly qualified financial directors – are unaware of the differences between the two procedures. According to a firm of professional insolvency practitioners, Salient Insolvency, many businesspeople continue to use the two terms interchangeably as though they mean the same thing even though they do not. Under UK law, dissolutions are reserved for solvent companies only. This means that they are only possible to enter into if the company concerned has sufficient assets to clear all of its debts.

Consequently, you might be forgiven for thinking that liquidations are designed only for insolvent firms. However, this is only partially true because liquidations come in three different forms. As such, it will be best to explain what formal liquidation processes are before dealing with company dissolutions separately.

 

Company Liquidations

All three types of liquidation procedures need to be undertaken by a licensed insolvency practitioner, not the company’s directors or partners. One of the most straightforward to explain is compulsory liquidation. This occurs when a creditor seeks a court order to force an insolvent company into liquidation, usually against the wishes of the owner(s). If this occurs, directors have very little say about the outcome. On the other hand, creditors’ voluntary liquidation (CVL) proceedings are entered into when the directors of a firm realise they need to protect the financial position of their creditors. Sometimes, a CVL will be sought when a firm has not been paid by a big client and it can therefore no longer continue to trade. A CVL will mean that the remaining assets of the firm are split up among the creditors in the fairest way possible.

The third type of company liquidation is different. This type, known as a members’ voluntary liquidation (MVL), is for solvent companies that can pay off any debts they might currently owe. The members being referred to are the shareholders – or owners – of the firm concerned. MVLs tend to be sought when a company is no longer needed because it has fulfilled all of its requirements under the contract it was working under. Some business owners opt for an MVL when they retire because they do not wish to pass the enterprise on or sell it. Please note that with all three options, limited companies will end up being removed from the official register at Companies House.

 

Company Dissolutions

Unlike liquidation proceedings, company directors can undertake a dissolution process. That said, it is often preferable to turn to professional guidance on offer from an insolvency practitioner anyway, even if the firm is solvent. This is because there are a number of specific legal actions that are required to dissolve a company formally and if you miss any of them, then the costs can be quite high to sort them out later. Equally, creditors can object to a company dissolution and they often do. Furthermore, HMRC may stop a dissolution proceeding if they think there is a sound reason to object to it. Consequently, seeking help when deciding whether to liquidate or dissolve a company is highly recommended, not least from the perspective of winding up a business in a tax-efficient manner.

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