Both liquidation and dissolution are ways to close down a business. However, it is a common misconception that they are one and the same thing and in reality that could not be further from the truth.
In fact, there are several key differences between dissolving and liquidating a company which affect the circumstances and processes involved in their closure.
What is the Difference Between Dissolving and Liquidating a Company?
The simple answer is that dissolving a limited company often takes place when the company is no longer trading. This may occur when the business owner retires or decides they do not want to carry on the firm.
Liquidation (or winding up as it is also known) is usually due to the company being in financial difficulty and unable to keep up with their debts. A business owner can either choose to liquidate their company voluntarily or will be forced down that route by their creditors through the use of Winding Up Orders.
Company directors looking to dissolve their business have the option to do so themselves without any outside assistance. This is not the case for liquidation, which needs to be carried out by a licensed insolvency practitioner.
Dissolving a Company
The dissolution of a business involves striking it off or removing it from the Companies House register. It is usually applicable for situations where the firm has served its purpose in full or has become surplus to requirements.
The process of dissolving a company can also be carried out if the firm is no longer active or trading and is unlikely to be needed in the future. Dissolving the business can be initiated by completing a DS01 form.
A company can be dissolved if it conforms to a number of rules, including:
- It has not traded or sold any stock in the last three months
- The business has not changed its name in the last three months
- There are no debts or payment arrangements in place with creditors
Although the dissolution of a business is usually voluntary, it can be struck off by Companies House for non-compliance of its rules. Examples of this include:
- Not having a director in order
- The failure to file annual returns
- Not filing annual accounts
It is important to note that the process of dissolving a company is an informal one, so should only be taken if you have absolutely no outstanding debts. This is because an outstanding creditor will have the right to pursue you for the money they are owed, even after the dissolution has taken place.
Your creditors will be able to petition for your business to be restored to the Companies House register so they can begin debt recovery action against your firm. In reality, this is only likely to happen if the creditor is owed a significant amount of money, since the costs of restoring a company can be quite expensive.
The Dissolution Process
Once the process of dissolving a company has begun, the request to close down the firm will be published in the local gazette. If there are no objections to this, the enterprise will formally be struck off the register after two months have passed.
A second notice will then be published in the Gazette to confirm that the business has officially been dissolved. The firm will then remain in a dissolved state on the Companies House register for a period of 20 years, until it is then archived and will not appear on the register.
Liquidating a Company
The process of liquidating a business is usually carried out when there are unpaid debts and liabilities to creditors, and the firm is not in a financial position to satisfy them. A company can either be closed down voluntarily or at the behest of its creditors via the use of a Winding Up Order.
There are three main ways of liquidating a company, which are:
- Compulsory Liquidation
- Member’s Voluntary Liquidation (MVL)
- Creditors’ Voluntary Liquidation (CVL)
As the name suggests, the assets of the company are all accounted for, before being liquidated and sold off at auction. The proceeds of the sale are then used to satisfy as many creditors as possible via a system of priority. This unfortunately means that some creditors may miss out.
The main difference between dissolving and liquidating a company is that you will need to seek out the services of a licensed insolvency practitioner, such as Inquesta, if the firm is to be liquidated. They will be able to guide you all the way through the process and ensure that everything is taken care of on your behalf. We have explained the processes of liquidating a business in a lot more detail in a previous blog post.
How Inquesta can Help
If you are looking to close down your company either via dissolution or liquidation, you can rely on Inquesta for assistance. We’ve amassed decades of experience in helping businesses from all areas of industry in closing down their operations – and we are perfectly placed to do the same for you.
We understand that no two businesses are ever the same, which is why we will gain a thorough understanding of your circumstances. We will then use this in-depth knowledge and our own expertise to achieve the best possible resolution for you.
The Inquesta team are even able to help before liquidation becomes a necessity. You can get in touch with us as soon as you spot the warning signs of trouble, and we’ll look into all the options available to you and recommend what we believe is the best solution to fit your circumstances.
For more information about Inquesta and how we can help your company, contact a member of our team today or book a free, no-obligation consultation.