When the terms dissolution and liquidation are used, they can be easily confused as actions that mean the same thing. However, they are not interchangeable terms. Here we highlight the difference.
What is dissolution?
Dissolution means the end of the company as a legal entity. A director of a company can choose to voluntarily dissolve their company by completing a DS01 form at a cost of £10 which is paid to Companies House. This can be done if the company:
- Hasn’t traded or sold off any stock in the last 3 months
- Hasn’t changed names in the last 3 months
- Isn’t threatened with liquidation and has no agreements in place with creditors, such as a Company Voluntary Arrangement (CVA)
Dissolution can be useful when the company has served its purpose, is no longer active and is unlikely to be required in the future. For example if the director decides to retire.
It is, however, not a way to close down a company which has business debts – in the hope of writing them all off.
However, Companies House can also dissolve a company involuntarily for “non-compliance.” Non-compliance can be given as a reason for:
- Not having a director appointment in place
- Failure to file annual returns
- Failure to file annual accounts
When a company is dissolved, it remains on the Companies House register marked as “dissolved.” It will stay this way for 20 years at which point it will be archived and will no longer be present on the register.
What is liquidation?
Liquidation is the process of when the assets of the company are broken down and redistributed to the shareholders and creditors (if there are any). Where some confusion may lie is that when a company goes into liquidation the company is ultimately dissolved / goes into dissolution and comes off Companies House records. However, you can dissolve a company without doing a liquidation.
When it comes to liquidation, there are three main types:
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation (MVL) is an option where the company is solvent and the director(s) wish to close it down. Common reasons for this include where the directors wish to retire or free up assets from an existing company to fund a new business venture.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation (CVL) is usually used when a director realises that the company’s debts cannot be repaid, when liabilities exceed assets and carrying on is not a viable option. It is still a voluntary liquidation and acknowledges the director’s duties to the creditors.
A Compulsory Liquidation has the most negative consequences for the company’s directors. It is where creditors force a company into liquidation as a way of recovering the debt they are owed.
More Information on closing a company
For more information about closing your company, give Clarke Bell a call on 0161 907 4044 or email us at [email protected]