Dissolution vs. Liquidation Explained

February 5, 2021 / Business Insolvency

The terms dissolution and liquidation can often be confused as meaning the same thing. This is understandable as both indicate the closing of a company.

However, there is a key distinction between the two terms which mean they shouldn’t be used interchangeably.

In this guide, Clarke Bell looks at dissolution vs liquidation, explaining what each term means and how they differ, so you can find the best option for you.

What is dissolution?

Dissolution marks the end of a company as a legal entity.

This can be a voluntary process that is initiated by the director who wishes to close the company. To do this, the director will need to complete a DS01 form at a cost of £10 paid to Companies House.

A company can be dissolved so long as it:

  • Hasn’t changed its name for the last 3 months
  • Hasn’t traded or sold off any stock in the last 3 months
  • It isn’t being threatened with liquidation and doesn’t have any other agreements in place with creditors like a Company Voluntary Arrangement (CVA)

There are several reasons why a company may wish to dissolve.

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It might be the case the director no longer has a need for the company as it has served its purpose. Or, the director may decide that the time is right for them to retire. Whatever the reason, this is a way of closing a company and striking it off the companies house register.

However, it is important to note that this is not a way to close a company that has debts in a bid to write them off.

As we have mentioned, dissolution is a process that can be entered into voluntarily. However, a company can also be forced to dissolve for ‘non-compliance.’ This might occur because a company doesn’t have a director in place, has failed to file annual returns or as failed to file annual accounts.

What is liquidation?

That is what dissolution means, so what about liquidation?

Liquidation is a means of closing a company which still has assets and liabilities to be dealt with. This is a process that breaks down the company’s assets and liabilities, redistributing them to the shareholders and creditors of the company.

This is a formal insolvency procedure and as such, a licensed Insolvency Practitioner must be appointed to carry out the process.

There are a few different types of liquidation, including compulsory liquidation and voluntary liquidation.

Voluntary liquidation

Voluntary liquidation is when a director voluntarily decides to put the company into liquidation.

There are two types of voluntary liquidation:

Creditors’ Voluntary Liquidation (CVL) 

Creditors’ Voluntary Liquidation is a good route for insolvent companies that can’t afford to pay their debts, bills or daily costs. These companies will no longer be sustainable or viable, and therefore winding-up and closing the business is the best option.

To enter into Creditors’ Voluntary Liquidation, 75% of shareholders must agree to proceed.

Creditors’ Voluntary Liquidation is a great way for a company director to take control of the situation and close the company in a way that will ensure all assets and liabilities are dealt with correctly and all creditors are paid back what they are owed.

To undergo Creditors’ Voluntary Liquidation, an Insolvency Practitioner (IP) must be appointed who can be chosen by the company. The IP will organise the company’s affairs, overseeing the liquidation process and ensure the best outcome for creditors.

Members’ Voluntary Liquidation (MVL)

The other form of voluntary liquidation is a Members’ Voluntary Liquidation. Unlike a CVL, however, this is a route that is open only to solvent companies – typically with assets of £25,000 or more.

A company director will usually choose to close their business with a Members’ Voluntary Liquidation because it is a great way to close a business in a tax-efficient manner.

The director might no longer have use for the business, may wish to retire or move abroad and therefore wants to place the company into liquidation and free up funds in return.

Any money taken out of a business through a Members’ Voluntary Liquidation is subject to Capital Gains Tax rather than income tax, meaning it is far more tax-efficient. This is because you will be charged just 10% on profits over the lifetime of your business, rather than 18% at the basic level of income tax or 28% at the higher level.

There are also further benefits for those who are eligible for Business Asset Disposal Relief, previously known as Entrepreneur’s Relief until 6th April 2020. This can save the director a small fortune on their tax bill.

Compulsory liquidation

In contrast to voluntary liquidation, compulsory liquidation is when a company is forced to close.

Although both forms of liquidation have the same outcome, the ways in which they are brought about are very different.

Whereas in cases of voluntary liquidation the directors have made the decision to undergo the process, when it comes to compulsory liquidation the decision has been forced on the company by creditors who are owed money.

Creditors must be owed at least £750 and have had repayment demands ignored for at least 21 days.

These creditors will issue a winding-up petition to the court. If successful, the court can then forcibly close and wind-up the company.

Just as it sounds, this is the most severe form of liquidation that can bring serious consequences for a director.

To find out more about compulsory liquidation and how it can impact your business, check out our handy guide.

Let Clarke Bell help with the next steps

Whether you are looking to dissolve your company or place it into liquidation through a CVL or MVL, Clarke Bell is here to help.

We will work closely with your company looking at your particular circumstances to advise on the best way forward. Our team of experts have over 25 year’s experience, so you can rest assured that you are getting only the best insolvency advice.