What is the difference between liquidation and dissolution?

David Tattersall, of Handpicked Accountants, compares and contrasts methods used to close a company.

Companies in the UK may be closed down in a number of ways, depending on their financial position. Whether a business is solvent or insolvent is the first issue to consider, but in both cases, business assets are sold and the company closes.

Three types of liquidation procedures exist in the UK:

The first two processes are relevant only to insolvent companies that can't pay their creditors in full, and which are no longer viable.

The third option, an MVL, is a potential route for solvent companies to close down, along with dissolution.

Company dissolution is usually voluntary, but in cases where businesses have continually failed to meet their filing obligations, Companies House also has the authority to strike them off the register.

What does solvency mean?

To be considered solvent, a company must be able to pay its current and contingent liabilities, plus interest, within 12 months of closing. The value of the company’s assets must also exceed the total of its balance sheet liabilities.

Contingent liabilities are payments that might become due depending on the outcome of a court case for compensation, for example, or an employment tribunal. So, assuming that a company is solvent, what are the main differences between MVL and dissolution procedures?

MVL vs dissolution

The first notable difference between liquidation and dissolution is that liquidation requires the involvement of a licensed insolvency practitioner (IP).

Instigating proceedings

MVL

This requires the agreement of at least 75 per cent of the company’s members before it can go ahead. A meeting is called during which the members vote and a resolution is passed if sufficient numbers vote in favour.

Dissolution

As long as other eligibility requirements of dissolution have been met, directors can instigate the dissolution process themselves via a downloadable, online form.

Potential for director liability

MVL

Because an MVL is administered by a licensed professional, the risk of personal liability for the directors is reduced. The IP will ensure that all statutory requirements are met.

Dissolution

There is a higher potential for legal action against directors, should they fail to observe the rules and regulations of company dissolution. If the company is later found to be insolvent, directors could face disqualification, and even prosecution.

Cost

MVL

The cost of an MVL is much higher than dissolution, due to the professional fees involved. There are several advantages, however, to using an MVL, including ensured compliance with statutory requirements.

Dissolution

The fee for dissolving a company is currently only £10, making this process an attractive proposition for directors approaching retirement, or when a business no longer serves a useful purpose, and there is no doubt about its financial status on closure.

Ease of process

MVL

When shareholders vote to close their company via an MVL, the procedure is administered by a licensed IP. This removes much of the stress from directors, in terms of carrying out the process, and minimises the risk of personal liability.

Dissolution

Directors must take specific steps to wind down their company’s operations, including selling assets, repaying creditors in full, finalising the company payroll and filing the final tax returns. This process can be onerous at times, and directors must be certain that all the requirements have been carried out before the company is dissolved.

When a company is insolvent

MVL

If a company is found to be insolvent after going into a MVL, the procedure converts to an insolvent liquidation process called creditors’ voluntary liquidation (CVL).

In this case, if the directors have signed a declaration of solvency knowing that the company was insolvent, the Insolvency Service will investigate their actions. Under these circumstances, directors could be disqualified, and potentially, prosecuted.

Dissolution

A dissolved company can be restored to the register if a creditor later makes a claim. The creditor would need to apply for a court order to restore the company, and if successful, it would be treated as if dissolution had not occurred.

Whether dissolving or liquidating a company via an MVL, the result is the same. The company closes down following the realisation of assets and distribution of funds to the shareholders.  

About the author

Written by David Tattersall of Handpicked Accountants, part of Begbies Traynor Group plc. David has a wealth of experience in the financial and B2B sectors and connects business owners with the best professional services.