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What is the difference between solvent liquidation and dissolution?

2019-02-01T00:00:00+00:00
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What is the difference between solvent liquidation and dissolution?

There are various ways to close down a limited company in the UK, but whether or not the business is solvent dictates the most appropriate options. Solvent businesses have two methods of closure, Members’ Voluntary Liquidation and dissolution, but there can be confusion between them.

Members’ Voluntary Liquidation (MVL) and company dissolution both realise business assets and distribute the proceeds to members, so what are the differences and when might a client choose one procedure rather than the other?

Professional input

MVL

Members’ Voluntary Liquidations must be carried out by licensed insolvency practitioners (IPs). The input from an insolvency professional offers several benefits, including peace of mind for directors that they’ve carried out their statutory obligations.

Dissolution

Company dissolution requires no professional involvement, and can be completed entirely by the company’s directors.

Starting the process

MVL

Members vote on whether to enter Members’ Voluntary Liquidation. If 75% or more (by value of shares) vote in favour, a resolution is passed and an IP appointed to start the process.

Dissolution

As long as all eligibility requirements of dissolution are met – one condition is that the company must not have traded for three months - directors can instigate the process online.

Cost

MVL

Due to the professional fees incurred, Members’ Voluntary Liquidations are much more expensive than company dissolution. There are benefits to choosing this process, however, including a reduced risk of personal liability for directors.

Dissolution

At the time of writing the cost of company dissolution is £10 – incomparable in price with solvent liquidation, but as we mentioned there may be significant advantages to taking the MVL route for some businesses.

Director liability

MVL

One of the IP’s obligations during the process is to ensure all legal requirements are met, which reduces the risk for directors and ensures they fully comply with the statutory conditions.

Dissolution

Directors must follow a number of rules and regulations with regard to dissolution, both prior to and during the process. If they fail in this respect, they could be held personally responsible at a later stage.

How easy is each process?

MVL

As Members’ Voluntary Liquidation is administered by a licensed IP, company directors aren’t involved in a formal capacity once the initial member vote has been taken. Although timescales vary with each case, in general terms it can take around six months to complete an MVL, including sanctioning of the case by HMRC.

Dissolution

Company dissolution takes a minimum of three months but it can take far longer in some cases depending on the complexity of the business’ affairs - the type of assets and number of creditors, for example.

Which process to choose?

MVL

Members’ Voluntary Liquidation is generally appropriate for companies with complex affairs and/or a high number of assets. As the process is undertaken by a licensed professional, it protects directors from personal liability in the main.

Dissolution

Company dissolution is often the preferred option when businesses own few assets, and their affairs are relatively straightforward. It can also be appropriate if a business serves no further purpose, hasn’t been active for some time, or when a director wishes to retire. If the company may be needed in the future, however, making it dormant might be a better option.

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