What Is The Difference Between Liquidation And Dissolution?

Liquidation and dissolution are two terms that often come up when a business is addressing financial challenges or closing down operations. While these terms might sound interchangeable, liquidation and dissolution are two distinct processes with their own implications for the business involved. 

If you are close to winding up your business, it is essential to understand why and when these processes are undertaken, as well as what they may mean for various stakeholders. By understanding the differences between liquidation and dissolution, your business will be better equipped to make an informed decision about its future.

What Is Liquidation?

Liquidation is a formal process that occurs when a company is unable to pay its debts to creditors. The liquidation process ensures that the assets of a business in this position are sold or redistributed to creditors and shareholders in a fair and legal manner before the company is closed down.

Depending on business circumstances, liquidation can be initiated voluntarily or involuntarily through one of the following processes:

1. Compulsory Liquidation

Compulsory liquidation usually occurs when creditors are owed large amounts of money and petition the court to wind up a company. If the court approves and issues the winding-up petition, a liquidator is appointed to oversee the sale of all remaining business assets and funds to creditors.

2. Creditors Voluntary Liquidation

Creditors voluntary liquidation (CVL) is the most common type of voluntary liquidation and is initiated when company directors believe the company is no longer able to pay its debts. To initiate the CVL process, directors and shareholders will vote to appoint a liquidator. Assets can then be sold and distributed to protect the best interests of creditors where possible.

3. Members Voluntary Liquidation

Another method of voluntary liquidation is members voluntary liquidation (MVL). The MVL process is usually used by solvent businesses wishing to extract assets efficiently before closing down, for example when business owners wish to retire.

What Is Dissolution?

Dissolution, on the other hand, marks the end of a company’s formal existence. Where liquidation involves the sale and distribution of assets to prepare for business closure (whether forced or otherwise), dissolution is the administrative process of closing down a solvent company that no longer serves a purpose.

This may seem similar to the MVL process, however dissolution typically occurs when the business purpose has been fulfilled and there are no outstanding debts or liabilities to resolve. The business is then dissolved through a relatively simple process whereby it is removed from the Companies Register at Companies House.

Key Differences Between Liquidation & Dissolution

As we have already addressed, the main difference between liquidation and dissolution is objective. Whereas liquidation involves selling business assets, dissolution only involves closing down the company and is generally deemed a less complex process. In most cases, this means that dissolution is both quicker and less expensive than liquidation.

The other key difference between liquidation and dissolution is that a licensed Insolvency Practitioner must be appointed for the liquidation process. The Insolvency Practitioner acts as a liquidator to ensure that the process is legal, whereas external help is not required for the dissolution process. Directors themselves can apply to have their company struck off the Companies Register providing the business meets eligibility requirements.

How To Make The Right Decision For Your Business

As both liquidation and dissolution have their own unique purpose and implications, it is essential that you make the correct choice should you wish to close your business. Whether you are under pressure from creditors or want to close a business while solvent, seeking expert advice from sure a licensed Insolvency Practitioner is the appropriate next step. In many cases, only one option will be suitable but an Insolvency Practitioner will tell you the options available in your circumstances.

The expert team at My Liquidation can help you to fully uncover and understand the best course of action for your business and are able to act as the nominated liquidator should  CVL or MVL be an appropriate outcome. Get in touch with us today for clear and honest support for your business.

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