Liquidation Vs Dissolution: It is an unfortunate case that in the recent economic climate, post pandemic and with the cost of living crises and high inflation, that many businesses are struggling to survive and are having to take the decision to cease trade.
Many directors are thinking about dissolution (aka strike off) as a cheaper way of closing down a company but what is the difference between dissolution and creditors’ voluntary liquidation and which process is the better option?
In brief, a creditors’ voluntary liquidation (CVL) is a formal insolvency process, which means that the winding-up of the company has been handled/overseen by licenced insolvency practitioners. The directors can easily pass control of the process to liquidators. This means that that:
- A rescue and sale of any goodwill/business can take place
- Any company assets would be valued and sold by independent agents for fair value;
- Any investigations which would lead to further assets realisations could be pursued for the benefit of creditors;
- Employees are able to make claims in a liquidation and the redundancy payments office will pay those claims up to the capped rates (any surplus employee claims may be paid by the liquidators dependant on whether there are surplus funds in the liquidation estate after costs);
- Creditors would be treated fairly and any dividend will be paid in order of priority as set out by UK insolvency laws and regulations;
- The liquidators would also be required to submit a report on the directors’ conduct (reporting on facts only not opinions);
- The liquidators would handle all company matters to conclusion.
As such creditors, in addition to HMRC, have reassurance that the winding-up of the company has been overseen by professionals and any matters dealt with in the right way and in accordance with the law. Liquidators are highly regulated and as such have to comply with numerous regulatory requirements.
A dissolution is a legal process of ending a company’s existence without a formal insolvency procedure. The directors are able to make the application for a strike off providing they give 7 days’ notice to any relevant parties. Further details of the process and requirements for dissolution can be found on the government website as per the link below:
https://www.gov.uk/government/publications/company-strike-off-dissolution-and-restoration
Liquidation Vs Dissolution – Which is best?
Which route is best will depend on your company’s circumstance. The main differences being:
- That in a dissolution no employee claims are paid by the government;
- Directors are unable to apply for dissolution if the company has any live legal proceedings or government backed debts i.e. CBILS/BBLS.
- Creditor are able to object to the strike off
If there are assets in the company then liquidation could be the better route to take for winding up the company, as dissolution does not deal with any assets. The assets of the company in a dissolution, if not sold prior, would become Bona Vacantia (property of the Crown).
In conclusion, dissolution and liquidation are two distinct processes for closing down a company. Dissolution is the legal termination of a company’s existence, while liquidation involves selling a company’s assets to pay off its debts and/or deal with employee claims. Companies may choose one of these options to suit them depending on their financial situation, legal status and goals. If your company is in financial hardship and you are thinking of ceasing to trade or you think you would benefit from advice from BRI Business Recovery and Insolvency, please contact one our helpful management team for a free initial consultation with no obligation.