Dissolution vs. Liquidation: What’s The Difference?

February 20, 2021 / Business Insolvency

Dissolution and liquidation are terms that can sometimes get confused and be used interchangeably. However, they are two different processes that mean different things.

To help you understand the difference between liquidation vs. dissolution, Clarke Bell has put together this handy guide outlining what each term means as well as the key differences between both, so you know which option is right for you.

What is dissolution?

Dissolution means the end of the company as a legal entity. A director of a company can choose to voluntarily dissolve their company by completing a DS01 form at a cost of £10 which is paid to Companies House. This can be done if the company:

  • Hasn’t traded or sold off any stock in the last 3 months
  • Hasn’t changed names in the last 3 months
  • Isn’t threatened with liquidation and has no agreements in place with creditors, such as a Company Voluntary Arrangement (CVA)

Dissolution can be useful when the company has served its purpose, is no longer active and is unlikely to be required in the future. For example if the director decides to retire.

It is, however, not a way to close down a company which has business debts – in the hope of writing them all off.

However, Companies House can also dissolve a company involuntarily for “non-compliance.” Non-compliance can be given as a reason for:

  • Not having a director appointment in place
  • Failure to file annual returns
  • Failure to file annual accounts

When a company is dissolved, it remains on the Companies House register marked as “dissolved.” It will stay this way for 20 years at which point it will be archived and will no longer be present on the register.

Why dissolve a company?

Dissolving a company is useful when the company no longer has a use and has fulfilled its purpose. This could be because the director chooses to move abroad, no longer has a purpose for the business or wishes to retire.

Dissolution is not a way to close down a company that has debts in hope of writing them off, however.

Although this is usually a voluntary process initiated by the company director, Companies House can also dissolve a company involuntarily for ‘non-compliance.’

This can be because the company:

  • Does not have a director in place
  • Has failed to file annual returns
  • Has failed to file annual accounts

What is liquidation?

On the other hand, liquidation is a formal means of closing a company when there are still assets and liabilities to be dealt with. These assets and liabilities will need to be broken down and redistributed to the shareholders and creditors of the company.

To liquidate a company, a licensed Insolvency Practitioner must legally be appointed to oversee and carry out the process.

Meetings will need to be held with company shareholders and creditors, 75% of which must agree to the liquidation for it to proceed.

Confusion between liquidation vs dissolution may occur due to the fact that when a company goes into liquidation it is ultimately dissolved and struck off the Companies House register. However, it is worth bearing in mind that you can dissolve a company without going through liquidation.

When it comes to liquidation, there are 3 main types. Next, we will look at each type of liquidation in more detail.

1. Members’ Voluntary Liquidation (MVL)

Unlike with both compulsory liquidation and Creditors’ Voluntary Liquidation, a Members’ Voluntary Liquidation is a route open only to solvent companies.

Here, a company director will choose to close their company, whether that is because they are planning on retiring, moving abroad, taking a step back within the company or no longer has use for the company.

Again, as a formal insolvency procedure an Insolvency Practitioner must be appointed to carry out the MVL.

This is an easy way to close a company and free up funds. However, perhaps the main benefit of this option is that it allows directors to close their company in a tax-efficient way.

This is due to the fact that any funds taken out of the business through a Members’ Voluntary Liquidation are subject to Capital Gains Tax rather than Income Tax. This means a rate of just 10% rather than 18% or 28%.

Furthermore, there are extra tax benefits for those that qualify for Business Asset Disposal Relief, previously known as Entrepreneur’s Relief until 6th April 2020. This can save the director a significant sum on their tax bill.

For more information on Members’ Voluntary Liquidation, check out our complete guide.

2. Creditors’ Voluntary Liquidation (CVL)

Unlike Compulsory liquidation, Creditors’ Voluntary Liquidation is a voluntary process initiated by a company director.

Creditors’ Voluntary Liquidation is a route open to insolvent companies, meaning those that can no longer pay their bills, cannot repay their debts, cover their daily costs or have liabilities that are greater than their assets.

A CVL is a way to close an insolvent company when it does not have a viable future that ensures creditors are paid back what they are owed.

An Insolvency Practitioner must be appointed to oversee and carry out the process. However, in the case of a CVL, the director is free to choose which Insolvency Practitioner they work with, unlike in cases of compulsory liquidation.

With this form of liquidation any legal action being taken against the company will be stopped and directors will be free to move on or start a new company in the future.

3. Compulsory Liquidation

Compulsory liquidation is the most serious form of liquidation and can have the most negative consequences for the company’s director.

Here, a company is forced to liquidate and close by the courts. This is a process that is initiated by creditors that are owed money of £750 or more, and have had several repayment methods gone unfulfilled for 21 days.

The creditors will issue a winding-up petition to the court. If successful, the court will appoint a licensed Insolvency Practitioner to forcibly liquidate the company.

To find out more about a winding-up petition and what this could mean for your company, check out our handy guide.

More Information on closing a company

Whatever route is right for your company, whether that is liquidation or dissolution, Clarke Bell is here to help with the next steps.

Our team will work closely with you to offer expert insolvency advice geared towards your situation. Whether the right path is Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation or closing your company through dissolution, we are here to get the best possible outcome for you.