What’s The Difference Between Dissolution And Liquidation?

What’s the difference between dissolution and liquidation? A key difference between dissolution and liquidation is whilst they are both legally approved processes for closing a limited company, only liquidation can be guaranteed to shut down an insolvent company without any objections from creditors blocking it. Dissolution is a procedure under the Companies Act 2006 that can be exclusively processed by directors, whereas liquidation is a procedure under the Insolvency Act 1986, although started by the directors, has to be implemented by a liquidator. 

When it comes to closing down a company, the two most common routes are dissolution and liquidation. While both ultimately lead to the company being wound up, the way they operate,and the situations they’re best suited to are quite different.

A choice between dissolution and liquidation depends on two key things:

1. Who undertakes the procedure.
2. Whether the company is solvent or insolvent.

Dissolution: Company’s Voluntary Strike-Off

Dissolution is a simpler, more administrative process, governed by Part 31 Chapter 1 of the Companies Act 2006, specifically, Section 1003. It allows directors to apply to have a company struck off the Companies House register.

It’s often used by directors of solvent companies, where all debts are paid, there are no outstanding obligations, and there are no assets left to distribute.

To initiate this process, directors can enable it by using a DS01 form to strike off a company at Companies House. This form includes declarations confirming:

• The company hasn’t traded for at least three months
• It isn’t involved in any formal insolvency process
• It has not changed its name in the last three months

Provided these conditions are met and no objections are raised (particularly from creditors like HMRC), the company is dissolved.

No Unfinished Business

Dissolution does not work well if your company is insolvent or if it owes creditors. In such cases, creditors can and often will object to the dissolution. They may even apply to restore the company to the register so they can recover the debt. Directors who try to use dissolution to sidestep obligations may also face personal consequences if they fail to follow legal procedures.

Generally, the path to dissolution assumes that a company is not subject to disputes that have yet to be resolved and it is really ready to be closed down.

Liquidation: Formal Wind-Up Under Insolvency Law

Liquidation is a more formal process governed by the Insolvency Act 1986. It can be used for both solvent and insolvent companies, though it’s particularly appropriate for insolvent ones.

There are different types of liquidation:

• Members Voluntary Liquidation (“MVL”) for solvent companies
• Creditors Voluntary Liquidation (“CVL”) for insolvent companies
• Compulsory Liquidation, typically started by creditors through the courts

In the case of an MVL (where the company is solvent), the process is initiated under Section 84 of the Insolvency Act 1986, where shareholders pass a special resolution for voluntary liquidation (75% majority required).

In all types of liquidation, a licensed insolvency practitioner must be appointed as liquidator. This is a crucial difference from dissolution: you cannot liquidate a company yourself; it must be overseen by a qualified professional whose role is to realise the assets and after the costs of liquidation are paid any surplus can be paid to the creditors and the shareholders as set out in the statutory order of payment in insolvency proceedings.

If the company is insolvent, and you proceed with a CVL, the appointment of a liquidator is to be made by virtue of Section 100 of the Insolvency Act 1986. The liquidator will take control of the company’s affairs, sell off assets, and distribute proceeds (if any) to creditors in a legally defined order of priority.

Unfinished Business

Generally, in a liquidation, there is a lot more to do due to the regulations and processes that a liquidator has to undertake. Such processes include scrutinising the conduct of the directors and assessing whether all company creditors have been adequately identified.

Once a liquidation is complete, the company will then go into dissolution automatically.

Dissolution vs Liquidation: Key Differences

What If Your Company Has Assets Over £25,000?

Here’s an important tip: If your company is solvent and has assets exceeding £25,000, liquidation may actually be more tax-efficient than dissolution. That’s because, under HMRC rules, distributions made via a formal MVL can qualify for Capital Gains Tax treatment, and potentially Business Asset Disposal Relief, meaning a much lower tax bill than if you simply took the money out before dissolving the company.

Liquidate A Company