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What is the difference between liquidation and dissolution?

Both liquidation and dissolution are ways of closing down a business you no longer need. However, there are some key differences between the two processes which affect the manner in which the company is closed and also your ability to claim director redundancy. Here are some of the key differences you should be aware of:

Cafe Business Closed Down

The process

  • Dissolving a company – also known as striking off – is a relatively straightforward process which is achieved by completing a DS01 form and sending this to Companies House. A notice of your intention to dissolve will be published in the Gazette and if no objections are received, your company will be struck off two months after this has been posted. If you have outstanding creditors, be prepared for them to object to your strike off application if they are still actively chasing money from you.
  • Formally liquidating your company through a process known as Creditors’ Voluntary Liquidation (CVL) requires the input of a licensed insolvency practitioner who you can choose yourself. Once appointed the insolvency practitioner will take over the running of the company and will take steps to close it down. This involves dealing with outstanding creditors and ensuring they get a fair share of any company assets.

Outstanding liabilities

  • If your company is insolvent, meaning it owes more than it has in assets, then it is highly recommended that you formally liquidate your company by placing it in a CVL rather than applying to dissolve your company. This is because outstanding creditors will be correctly dealt with in a CVL meaning you do not run the risk of making a preference payment, nor can those creditors left out of pocket at the end of the process continue to chase you for the money owed.  
  • The problem with the dissolution method is that it is an informal process and consequently creditors have the right to pursue you for the money you owe even after the dissolution has been finalised. This is because they are able to petition for your company to be restored to the register so that they can recommence recovery action against the business. Restoring an already dissolved company does come at a significant cost and so this action is only likely to be instigated by an individual or company that are owed a sizeable amount of money.

Cost

  • Due to the involvement of a licensed insolvency practitioner, formal liquidation comes with a price tag around the £4,000 mark. Dissolution on the other hand costs just £10 which is paid when you submit the DS01 form.
  • Despite the obvious difference in price at first glance, weighing up the cost of liquidation should always be done with the potential of a redundancy pay out in mind.

Redundancy

  • Directors are able to claim redundancy and other statutory entitlements following the insolvent liquidation of their company. The amount you may be in line to receive will depend on a range of factors including your age, salary, and years of service with the company, however, the average amount claimed by company directors is £12,000. The most important thing to remember here is that redundancy can only be claimed following a formal liquidation process, such as a CVL; dissolving your company using the DS01 form will make you ineligible to claim. In many cases therefore, the redundancy payment can not only pay for the cost of the liquidation but also leave a significant amount left over which is yours to do whatever you want with.

If you are considering closing your company you should make it a priority to learn the level of redundancy you may be entitled to before you make any firm choice about how to proceed. Use our redundancy calculator to discover your potential entitlement, or alternatively call our expert team on 0800 063 9261 who will be happy to validate your claim.

Many directors don't consider themselves to meet the criteria and don't claim when they have a legitimate right to.

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