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Dissolution vs Liquidation - Don't lose your right to redundancy

Dissolving a company through a strike-off procedure (also known as dissolution) will invalidate a director redundancy claim. Here's what you need to know...

If you’re thinking of closing your company for financial reasons, or to relieve increasing creditor pressure, there are a couple of options open to you. One of these is entering a Creditors’ Voluntary Liquidation, or CVL, which involves the appointment of a licensed insolvency practitioner to realise and distribute your assets.

Some company directors feel the cost of this option is prohibitive due to the professional fees involved, so they decide to take a different route – company dissolution. Dissolving your own company costs very little to execute in financial terms, but when you look at the deeper issues involved, it could cost you considerably more in the long-run, both financially and personally. 

It could, in fact, invalidate a claim for director redundancy, of which the average pay-out is currently £12,000.

Significant drawbacks of company dissolution

Although the low strike-off fee for dissolving your company is a significant plus factor, there are strict rules that govern the dissolution procedure, one of which is solvency. If you attempt to follow through on this process knowing that you owe money to creditors, your application is likely to be rejected outright.

HMRC regularly challenge applications for dissolution made by company directors unaware of the full process and rules surrounding this procedure. It’s often the case that professional advice hasn’t been sought, and this leads to them making a bad decision.

Restoration to the register at Companies House

Even if your application does go through unchallenged, the company can be restored to the register at a later date if a creditor discovers that it has been closed down. In these cases, the company is restored as if no dissolution has taken place, and the creditor is free to resume legal action to recover their debt.

This can lead to investigations by the Insolvency Service against you and other directors, for instances of wrongful and illegal trading, for example, or other cases of misconduct. Although Creditors’ Voluntary Liquidation also involves investigation by the liquidator, the fact that you’ve prioritised creditors is a significant factor in your favour.

Aside from the future implications of dissolution, however, one of the most compelling reasons to avoid the process under these circumstances is that you won’t be able to claim redundancy pay as a director.

Voluntary liquidation and director redundancy

One of the main benefits of voluntarily placing your company into liquidation is that it gives you the ability to claim redundancy pay. In directorship, you may be entitled to make a claim for redundancy if you can prove your status as an employee of the company.

As we mentioned earlier, the average redundancy pay-out for a director is £12,000 - a significant sum that not only pays for the liquidation fees, but may also clear your company’s debt. A further benefit is that the company is closed irrefutably - there is no possibility of it being restored to the register in future, as is the case with company dissolution.

If you choose to enter a Creditors’ Voluntary Liquidation, in addition to redundancy pay you could be eligible for other statutory payments as an employee, including:

  • Unpaid wages
  • Arrears of holiday pay
  • Pay in lieu of notice

Claim redundancy and close down your company

Closing a company with debts can be a highly complex process. The potential for your actions to be investigated if you use an inappropriate method of closure is extremely high, and it’s imperative to seek professional advice from licensed insolvency practitioners with broad commercial knowledge and experience.  

Our experts at Redundancy Claim have more than 40 years’ experience of insolvency. We’ll provide the professional advice you need to remain compliant, and ensure that you close your company using the most appropriate method. Call one of the team to arrange a free initial consultation.

Our flowchart can help you understand whether you might qualify for director redundancy.
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