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Company Dissolution vs Company Liquidation

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Company Dissolution vs Company Liquidation

Although there are various procedures available for directors wishing to close down a business, the choice is often narrowed by the demanding eligibility criteria. Several factors come into play when deciding on your best option, but the main one is whether or not your company is solvent.

You’ll also need to think about the tax implications and cost of each of these procedures, but the route that’s chosen will depend first and foremost on your company’s financial position.

Insolvency means being unable to pay the bills as they become due, or that the company’s liabilities have exceeded the total of its assets. Continuing to trade whilst insolvent can lead to disqualification as a director, so this is a decision that generally requires guidance from a professional insolvency expert.

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Solvent liquidations

Company dissolution

Company dissolution involves voluntarily striking the company off the register at Companies House. It is a cost-effective way to close down your company, and doesn’t need to be overseen by an insolvency practitioner.

In order to be eligible, however, the company must be solvent. If an insolvent company decides to take this route and applies for dissolution, it is unlikely to be successful as creditors such as HMRC will veto the application.

Even if they initially succeed, creditors can still apply for the company’s reinstatement to the register, and as a director you may face investigation for misconduct. Restoration to the register requires a court order, after which the company will be treated as if it had not been struck off - becoming liable for all unpaid debts that were in existence prior to the dissolution.

Other eligibility criteria for voluntarily striking off a company include not trading or changing the company name during the three months prior to an application. Additionally, there must be no cases of litigation pending against the company.

Members’ Voluntary Liquidation (MVL)

Directors must sign a declaration of solvency before entering a Members’ Voluntary Liquidation - this asserts that the business will repay all creditors in full within 12 months of closure.

Directors could become personally liable for an insolvent company’s debts, which is why it’s important to seek the help of a licensed insolvency practitioner (IP) who can verify the company’s financial position prior to taking this route.

Although the involvement of an IP may appear to be a large expense, they will ensure that all statutory requirements are met, and so reduce the risks for directors.

Prior to the recent changes in legislation, an MVL was the most popular way to close a business for shareholders wishing to minimise their tax liability. Now the funds distributed to individual shareholders may be treated as income rather than capital, which attracts a much higher rate of tax.

Insolvent liquidations

Creditors’ Voluntary Liquidation (CVL)

A Creditors’ Voluntary Liquidation can help you avoid allegations of wrongful trading or other types of misconduct as a director, as it places creditor interests ahead of your own and those of the company. Creditor pressure will cease if a majority of 75% (by value of shares) agree to proposals put forward by the appointed insolvency practitioner.

Although investigations into your conduct may still take place, the fact that you’ve chosen to maximise creditor returns makes it less likely that you’ll face the severe penalties which can be imposed following compulsory liquidation.

Directors often choose a CVL to limit the damage to their own professional reputation, as well as that of the company name. It can be an escape from unmanageable business debt, and unrelenting pressure from creditors.

Compulsory liquidation

Compulsory liquidation involves a creditor taking action to forcibly wind-up your company. It often follows a period where the creditor has been unable to collect in their debt despite various attempts, and they then decide to apply for a winding-up petition as a last resort.

If a winding-up order is granted by the court, the Insolvency Service will undertake an investigation into the circumstances leading up to insolvency, including the conduct of all directors. This is to establish what happened within the company, and whether the actions of directors were to blame.

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