What is the Difference Between Liquidation and Dissolution?

For those not familiar with company law, terms such as “liquidation” and “dissolution” are often confused or used interchangeably. In practice, liquidation and dissolution have different meanings. Dissolution, also referred to as “striking off”, refers to the formal closure of a company and its removal from the Companies House register. Liquidation refers to the process of realising and distributing the value of a company’s assets to repay debts before it is dissolved. In this article, we will discuss what is meant by company dissolution and liquidation and the different types.

Company Dissolution

A company will normally be struck off the register of companies and dissolved when it has served its purpose, business activity has ceased, and there is no plan to resume business activity. This may occur, for example, if the owner of a business decides to retire and no one is going to take over the running of the company. Dissolution may also be requested if the company is a subsidiary which is no longer required, or the company was established for a business purpose that is no longer viable or required.

Can I dissolve my company?

In order to have your company struck off the Companies House register (referred to as a voluntary strike-off), certain criteria must be met. The Companies House rules state that a company can be struck off from its register as long as, within the 3 months prior to applying, the company has not:

  • traded
  • changed its name
  • engaged in any other activity – there are some exceptions, including any activity necessary for making an application to strike off, deciding whether to strike off, concluding the affairs of the company (i.e. repaying debts), or complying with any statutory requirements.

In addition, a company cannot be dissolved if it is subject to potential insolvency proceedings or an agreed arrangement to repay creditors, such as a “company voluntary arrangement” (CVA).

If you decide to proceed with dissolution, you are legally required to notify anyone with an interest in the company, including any remaining company creditors, members, or employees. This gives them a chance to raise an objection to the striking off if they wish to do so. Failure to notify may result in prosecution and being barred from holding future directorships for up to 15 years. The rules also state that you should not resign from your role as a company director before requesting the strike off.

How do I dissolve my company?

To dissolve your company, you will need to complete the following steps:

  1. Before dissolution – Pay your outstanding creditors, dispose of any business assets, and close your company’s bank account. This step is important because once your company is dissolved, any remaining assets are frozen, including any remaining bank funds.
  2. Complete the online application form to close your company – you will need to log in to the Companies House WebFiling system with your registered email address and password.
  3. Send a copy of the application form to the following within 7 days:
    • Members (i.e., company shareholders), and
    • Outstanding creditors (e.g. HMRC, banks, suppliers, former employees who are owed money, landlords, or guarantors)
    • Employees
    • Managers or trustees of any employee pension fund, and
    • Any directors who have not signed the form

On receipt of the application to dissolve your company, assuming all is in order, Companies House will then:

  • register the details and place them on public record
  • send an acknowledgement to the address provided on the application form
  • send a notification to the company at the registered office address
  • publish a notice of the proposed striking off in the Gazette (this gives any interested parties the opportunity to object to the striking off), and
  • place a copy of the Gazette notice on the company’s public record

If no objection is received by Companies House within 2 months, they will strike off the company from the register and place another notice in the Gazette confirming the dissolution.

Should I keep my company dormant rather than request dissolution?

It is important to note that if there is a possibility that a company will resume activity in the future, it may be preferable to leave it in a “dormant” state. A company is considered to be “dormant” by Companies House if there are no “significant accounting transactions”, i.e. ones that must be entered into the company’s accounting records. Significant accounting transactions does not include filing fees paid to Companies House, penalties for late filing of accounts, or money paid for shares when the company was incorporated. Leaving a company dormant does, however, mean that basic filing requirements (i.e. filing “dormant accounts”) must be met each year, and failure to do so may result in a late filing penalty.

Company Liquidation

Liquidation is a formal process whereby a company’s assets are realised (i.e. converted into cash) and distributed to creditors to satisfy any debts owed. The order in which creditors are repaid is laid out in the Insolvency Act 1986 (IA 1986). Once the liquidation is complete, the company is dissolved. Company liquidation takes two main forms; compulsory liquidation and voluntary liquidation. Voluntary liquidation can be instigated by the members of a company (a members’ voluntary liquidation or MVL) or by its creditors (a creditors’ voluntary liquidation or CVL).

Members’ voluntary liquidation (MVL)

An MVL requires the directors of the company to swear a “statutory declaration of solvency” and the passing of a special resolution agreeing that the company should be wound up in accordance with section 89 of the IA 1986. In doing so, the directors confirm that the company can pay its debts in full (including any interest owing) no later than 12 months from the commencement of the liquidation. MVLs are typically used to wind up a company that is sufficiently solvent to repay any debts. This may happen, for example, if the directors of a company want to retire or release the liquidity of one company to fund a new business. 

Creditors’ voluntary liquidation (CVL)

In the case of creditors’ voluntary liquidation (CVL), company directors do not make a statutory declaration of solvency. This may happen if a company is no longer viable (i.e., where assets exceed liabilities). In common with an MVL, in order for a CVL to be commenced, 75% of members must pass a special resolution confirming that the company should be wound up. It is important to note that a company’s creditors are more likely to be negatively impacted by a CVL compared to an MVL. This is because, in the case of a CVL, there is less certainty that the company can repay any debts owed. For this reason, in a CVL, creditors play an active role in the engagement of a liquidator and are legally entitled to receive updates on the progress of the liquidation in accordance with section 104A of the IA 1986. It is then the liquidator’s duty to act in the best interests of the creditors of the company. Once the liquidator has realised the company’s assets, the funds are distributed to creditors in a strict order, with secured creditors taking priority over unsecured creditors.

Compulsory liquidation

Unlike the voluntary liquidation procedure, compulsory liquidation is a court-based process whereby a company’s assets are realised to satisfy any debts owed. Compulsory liquidation is typically initiated by a company’s creditors, however, in some cases, it may be the company’s directors who start the process.

Compulsory liquidation commences when a winding-up petition is presented to the court. On receipt of the winding-up petition, the court arranges a hearing. In accordance with section 135 of the IA 1986, the court may then appoint a provisional liquidator between when the petition is issued and the date of the hearing to ensure the assets of the company are preserved. During a winding-up petition hearing, it is the role of the judge to determine whether to proceed with a winding-up order or dismiss or adjourn the petition.

A judge will only issue a winding-up order if, in accordance with section 122(1) of the IA 1986, among other reasons:

  • the company has, by special resolution, resolved that the company be wound up by the court,
  • the company is unable to pay its debts, or
  • the court is of the opinion that it is just and equitable that the company should be wound up.

In most cases, the court will agree to a winding-up order on the basis that the company cannot pay its debts. Once a winding-up order has been made by the court, the Official Receiver is asked to carry out the role of liquidator. The liquidator then reports to the members and creditors and submits a final return to Companies House when the winding-up process is completed.

Final words

We hope this article has provided you with some insight into company dissolution and liquidation, the differences between each, and the different types. If you are considering the company dissolution or liquidation of your company, it is always important to seek expert advice before proceeding to protect your financial and legal interests and those of the company and its members.

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