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Dissolution v Liquidation – What is the difference?

There are two ways of formally closing a limited company, which is no longer viable and must cease trading.  These are dissolution (also known as striking-off) and voluntary liquidation.

The two processes are sometimes confused, however, it is important to understand that they are entirely different.  The purpose of this article is to help you understand the key differences between dissolution, compared to liquidation, so that you are able to determine which is the best option for your company.

Dissolution

Dissolution is not a formal insolvency process.  It is only an appropriate course of action in certain circumstances, for example if the company is dormant, or perhaps the directors wish to retire and therefore the company has reached the end of its useful life.

Dissolution should never be viewed as an alternative to formal insolvency proceedings, if appropriate.  Before applying for a company to be struck off notice must be given to creditors, employees and shareholders and any other organisation which might have an interest, such as HMRC. 

If the correct procedure is not followed it is likely that the proposed action will be objected to.  Even if the company is successfully struck off and dissolved, the creditors and others could apply for the company to be restored to the register.

New rules on Dissolution

The Insolvency Service has extended its powers relating to dissolved companies.  The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act was given Royal Assent in December 2021.  Under the new rules, where a company is dissolved, The Insolvency Service will have the power to investigate the conduct of the directors dissolved companies, and impose sanctions as it sees fit.

Previously, their powers of investigation were limited to directors of companies that entered into an insolvency process (such as administration or liquidation), and the affairs of active companies.

Importantly, the new law will apply retrospectively.  This means that The Insolvency Service will be able to review past cases, with particular focus on those where a dissolved company had failed to repay sums owing in relation to Covid-19 support schemes.

Liquidation

Creditors’ Voluntary Liquidation (CVL) is a formal insolvency process and is usually entered into on a voluntary basis.  It is appropriate for a company which has unpaid liabilities, and no prospect of financial recovery.  It also ensures that all unpaid liabilities are treated fairly, and an orderly closure of the business is managed by a Licensed Insolvency Practitioner.

How can Insolvency Practitioners at Keywood Group help?

Keywood Group is a Licenced Insolvency Practice with offices in Birmingham and London.  Our team has over 20 years’ experience in advising businesses on their options, and dealing with company closure.  Our friendly team will work with you to assess the options available and guide you through the process. 

If you want further information, please contact us for a no obligation chat.

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