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Advantages of company liquidation over dissolution

Posted on: Monday 18th September, 2017

Advantages of company liquidation over dissolution

If your business is facing financial decline and you’re not sure how to proceed, you may be considering closure in order to minimise losses. This is generally achieved using a liquidation process called Creditors’ Voluntary Liquidation (CVL), which writes off any unpaid debts at the end of the process, and is administered by a licensed insolvency practitioner (IP).

Some directors mistakenly choose to use the company dissolution process, however, knowing that money is still owed to creditors. This is often because the procedure is relatively straightforward and inexpensive, but the full implications are not always understood.

Why company dissolution isn't suitable for insolvent businesses

Company dissolution is not available for companies subject to insolvency proceedings - such as a winding-up petition - and is likely to be objected to by creditors (such as HMRC) if there are outstanding liabilities. 

Even if no creditors object at the time of application, a company can subsequently be restored to the register if one or more of its creditors object further down the line. Company restoration following dissolution can result in additional liability and filing penalties in some instances, and the company is treated as if dissolution hadn’t occurred. In contrast, once a company has undergone a formal liquidation process and is closed down, it is far less likely to be restored.

Entitlement to director redundancy

By entering into a Creditors’ Voluntary Liquidation, you may be eligible to receive redundancy pay in the same way as your members of staff. This can relieve the considerable financial pressure placed on the business, yourself, and other directors, by covering the liquidation costs and potentially repaying some of the company’s debts.

Company dissolution offers no such entitlement to redundancy, and can, in fact, result in serious financial issues for you on a personal basis if you’re held accountable for the company’s debt situation at a later date.

Timescale to initiate proceedings

New rules have been introduced to make the Creditors’ Voluntary Liquidation process easier to initiate as a director - a valuable benefit when you’re struggling to meet the company’s financial obligations. The procedure can now be started online, and you have more control over a previously onerous and time-consuming system.

As far as dissolution is concerned, in order to dissolve your company you must cease trading for three months and follow a strict series of measures in preparation. Any diversion from these regulations could result in the company being restored – a situation that presents serious issues if it is insolvent.

Debts are written off

When a company is liquidated using a CVL, business assets are sold for the benefit of creditors, but any debts remaining are written off. This provides closure in more than one sense – on a practical level, but also on an emotional one for directors.

Redundancy Claim can help to establish your eligibility for director redundancy, and also help connect you with a licensed insolvency practitioner for a free consultation on whether a Creditors’ Voluntary Liquidation is best suited for your needs. 

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