If you decide that you’d like to close your company, you will need to make a choice between dissolving or liquidating. Both options will result in the eventual closure of your company, but via very different processes.
The key distinction lies in your company’s financial health and the complexity of winding up. Dissolution is an administrative process for companies that can pay their debts, whilst liquidation is a formal procedure commonly utilised by companies that cannot. There are situations in which a solvent company can opt for liquidation, which are explained below. The route you choose affects not only the time and cost involved but also has implications for directors’ future responsibilities and potential personal liability.
Your choice will also determine how creditors, employees, and other stakeholders are treated, and whether you’ll need professional insolvency assistance or can handle the closure yourself.
Who are they for?
UK based private companies, regardless of size or sector. This includes everything from small owner-managed businesses to larger private limited companies with multiple shareholders.
The procedures apply to companies incorporated under the Companies Act 2006, whether they’re actively trading, dormant, or have recently ceased operations. However, the company’s financial position will determine which option is legally available.
How do they work?
Deciding whether to opt for a dissolution or liquidation is dependent on the circumstances surrounding the closure of your business.
Liquidation is most commonly used in circumstances where a business has become insolvent or cannot pay its debts. The process involves appointing a licensed insolvency practitioner who takes control of the company, sells its assets, and pays creditors according to legal priorities.
However, there are circumstances where a company can choose to liquidate, even though they are solvent and able to settle their debts. This is referred to as a Members’ Voluntary Liquidation.
Depending on how many assets the company has, and the scale of the insolvency, the process of liquidation can be a lengthy one, often taking many months or even years. Liquidation is a formal procedure that requires the appointment of a licensed insolvency practitioner, and there are usually significant fees involved. During liquidation, directors lose control of the company, and the insolvency practitioner will investigate the company’s affairs and the directors’ conduct.
Voluntary Dissolution (sometimes referred to as “voluntary striking-off“) is a process only available to solvent companies that have ceased trading and can be instigated by the directors. It involves applying to Companies House to remove the company from the register.
Generally, it is a much quicker process and can be completed 2-3 months after the initial application is submitted. It is not necessary to appoint a licensed insolvency practitioner to dissolve your company, so the significant fees that can be involved in a liquidation can therefore be avoided.
However, there are strict conditions which must be met before a company may apply to dissolve voluntarily. The company must not have traded for at least three months, must have no outstanding debts, and cannot have been threatened with liquidation within the preceding three months.
What should I do next?
If you intend to close your company, you should consider whether a dissolution is appropriate. If your company has become insolvent, then you must opt for liquidation – attempting to dissolve an insolvent company can result in personal liability for directors.
If you are choosing to voluntarily wind down your company, then you should make sure that you communicate this to all interested parties, as well as any person or entity that becomes an interested party in the time between application and closure. This includes all employees and shareholders, but also other external parties such as suppliers and banks.
You must also settle any outstanding company debts, as failure to do so could result in an objection being raised to the dissolution which would delay the company’s closure. Any monies or assets that the company has or owns at the point of dissolution will pass to the ownership of the crown, so consider distributing these to shareholders beforehand if appropriate.
Given the legal implications of choosing the wrong route, it’s worth seeking professional advice to ensure you comply with all requirements and choose the most suitable option for your circumstances.