What is the difference between solvent liquidation and dissolution?
A couple of options are available if you’re thinking of closing down a solvent company. One of these is a formal liquidation process called Members’ Voluntary Liquidation (MVL); the other being company dissolution which can be carried out by company directors.
Both of these methods result in the company being struck off the register at Companies House, but there are several differences between the two processes. Here we look at the basics of each procedure, before moving on to the differences in more detail.
What is solvent liquidation?
Solvent liquidation is a formal procedure that requires the appointment of a licensed insolvency practitioner (IP). Business assets are sold, with the proceeds being distributed to shareholders once all the company’s liabilities have been paid.
As a director you’ll need to sign a Declaration of Solvency, after which a meeting of shareholders takes place - 75% of members are required to vote in favour of the MVL for it to proceed.
… and company dissolution?
Company dissolution is instigated by directors, and is typically used for businesses that have lain dormant for some time, or that are otherwise no longer required. Companies House can also forcibly strike off a company for failing in its filing obligations.
You must follow a strict timeline when undertaking company dissolution. This includes ceasing trade for three months prior to the company being struck off, finalising the payroll, and meeting all statutory filing requirements.
How do you know whether your company is solvent?
When determining solvency, you need to consider:
- If the company can pay all existing and contingent liabilities, and any interest, in full within 12 months of closure
- Whether the company’s assets are greater in value than its liabilities
It’s crucial to include any potential future liabilities when calculating solvency. Contingent liabilities might include an employment claim with a tribunal that’s scheduled in the future, for example, or pending litigation.
Apart from the fact that a licensed insolvency practitioner is required to administer an MVL, what are some of the other differences between solvent liquidation and dissolution?
Responsibility for the process
Members’ Voluntary Liquidation
An MVL is administered by a licensed professional who ensures that statutory requirements are met. This takes much of the pressure off directors, and reduces their risk of personal liability.
Company dissolution
The dissolution process is carried out by the company’s directors who are responsible for ensuring all necessary steps are taken, and that no creditors exist when the company is eventually struck off.
Cost
Members’ Voluntary Liquidation
An MVL is more expensive than dissolution due to the professional fees involved. There is a significant advantage, however, as you’ll be certain that all statutory requirements have been met, and that no claims will be made against the company in the future.
Company dissolution
The cost of dissolution is only £10, and it can be a good option if there’s no possibility that the company owes money to any creditors, but you need to ensure that all parties have been informed.
Potential reinstatement to the register
Members’ Voluntary Liquidation
This is an official liquidation procedure, so when the company is removed from the register at Companies House, it won’t be reinstated in the future.
Company dissolution
There’s a risk that the company could be reinstated if all the necessary parties haven’t been notified, or if the directors undertook the procedure knowing that their company owed money. Creditors can make claims against a company for up to 20 years following the dissolution of a company.
Handpicked Accountants has longstanding relationships with a nationwide network of accountants, and can help you find a fully qualified professional in your area. All our recommendations are based on knowledge of their standards of service and professional expertise.
Your accountant will be able to offer trustworthy advice on all areas of business, including the tax implications for directors of closing down a solvent company. If you require further specialist guidance, they may also refer you to a licensed insolvency practitioner. Call one of the team at Handpicked Accountants for more information.
