What is the Difference Between Dissolution and Liquidation?

When a company in the UK ceases to exist, it usually goes through a dissolution or liquidation. Both processes are used to close a company but they refer to different processes which have distinct legal and financial implications.

Understanding the difference between dissolution and liquidation is essential for any business owner, especially as choosing the right process depends on the company’s circumstances. Some businesses close voluntarily, while others need to meet certain criteria, such as settling outstanding debts before they close.

In this guide, we’ll break down dissolution v liquidation, explaining when each process is applicable, how they work and what business owners need to consider. 

What is Liquidation?

Liquidation is the process of closing a company by selling all assets to repay the debt the company owes. After this, the company is removed from the Companies House register and ceases trading. It usually happens when a company can no longer pay its debts, this is known as insolvency. Liquidation is often done by a licensed insolvency practitioner (liquidator). The liquidator oversees the process and makes sure that each creditor is paid as much as possible from the remaining assets. Liquidation is also referred to as ‘winding up’.

When Does Liquidation Happen? 

A company may enter liquidation when it is faced with severe financial difficulties and can no longer meet its financial obligations. Such as:

• Unpaid debts to suppliers, lenders or HMRC
• Inability to cover operational costs such as wages, rent, or stock purchases 
• Legal action from creditors

A liquidator is responsible for managing the process, selling assets and equally distributing funds to creditors. Once this is done, the liquidator will make sure the company is properly closed down. 

Types of Liquidation

There are two main types of liquidation:

• Compulsory Liquidation: This happens when creditors force a company into liquidation through a court order, usually because of unpaid debts.
• Voluntary Liquidation: This occurs when company directors or shareholders choose to close the business due to insolvency or no longer needing the company. There are two types:
  • Creditors’ Voluntary Liquidation (CVL): Used when a company cannot pay its debts and directors voluntarily seek liquidation to protect creditors’ interests.
  • Members’ Voluntary Liquidation (MVL): Used when a solvent company chooses to close, often for tax-efficient distribution of funds to shareholders.

The Liquidation Process 

Liquidation is a straightforward process, with the steps involving:

• A licensed insolvency practitioner will be chosen to manage the process. 
• Assets will be assessed, valued and sold. 
• The money raised from sold assets will be distributed to creditors in order of priority. 
• Any remaining funds are distributed to shareholders.
• The company will be formally removed from the Companies House Register and ceases to exist. 

What is Dissolution? 

Dissolution, or striking off a company, is a much simpler process. When dissolving your company you’ll need to have no outstanding debts or liabilities and you simply apply to close your company through a form via Companies House. 

When Does Dissolution Happen?

Directors and shareholders may choose to strike off, close or dissolve a company if it is no longer needed, no longer profitable or has fulfilled its purpose. Voluntary dissolution can only happen when a business has stopped trading, has no outstanding debts, and the owners prefer to close it rather than keep it dormant. Strategic changes such as merging with another company, can also be a reason for dissolution.

In some cases, Companies House may choose to dissolve your company if it no longer meets its compliance standards. This is called involuntary dissolution. If a company is struck off the register in this way, directors may face legal and financial consequences, especially if the business has outstanding debts or unresolved matters.

No matter the case, directors must ensure that all liabilities are settled before applying to Companies House for closure.

The Dissolution Process 

Make sure you are eligible for dissolution: You’ll need to confirm that your company has ceased trading, has no outstanding debts, and meets the criteria for a voluntary strike off.

• Complete and Submit a DS01 Form. It will need to be signed by the majority of directors and then submitted along with the required fee.
• Within seven days of submitting the DS01 form, you’ll need to inform all relevant parties, including shareholders, creditors, employees, and any directors who did not sign the form.
• At this point make sure all of your debts and obligations are fully paid. If you fail to do this it can lead to objections from creditors.
• Companies House will publish a notification of dissolution in the Gazette. 
• If no objections are raised within two months of the notice being published in the Gazette, Companies House will strike your company off the register, and it will cease to exist.

Preparing for dissolution is crucial, if you miss anything it can lead to your application being rejected. 

Key Differences Between Liquidation and Dissolution

While both liquidation and dissolution result in a company being removed from the Companies House register, they serve different purposes and apply in different situations.

• Liquidation is used when a company is insolvent, meaning it cannot pay its debts and must sell assets to repay creditors before closing.
• Dissolution is for solvent companies that no longer wish to trade and have no outstanding liabilities or have been forced to close for non-compliance. 

The key distinction is that liquidation is often necessary due to financial distress, whereas dissolution is (mostly) a voluntary choice for businesses that are solvent. 

Role of the Liquidator vs. Company Directors

One of the biggest differences between the two processes is who is responsible for managing them:

• In liquidation, a licensed insolvency practitioner (liquidator) is appointed to handle the company’s closure, ensuring debts are repaid and legal requirements are met.
• In dissolution, the company’s directors oversee the process. It is the director’s responsibility to make sure all debts are settled, assets are distributed, and final tax returns are submitted before applying to close the company.

Impact on Company’s Assets

A company’s assets are handled differently between liquidation and dissolution. Liquidation involves the sale of company assets to raise funds to pay creditors. Any remaining funds (if any) are then distributed to shareholders. Dissolution, on the other hand, does not require selling off assets unless there are outstanding liabilities. Instead, directors should distribute all assets before applying for dissolution. If any assets remain unclaimed after dissolution, they become bona vacantia, meaning they pass to the Crown.

Legal Implications

The legal processes for liquidation and dissolution vary in complexity and consequences:

• Liquidation is legally binding and involves formal insolvency procedures. Directors may face investigations into their conduct, especially if the company is insolvent.
• Dissolution is an administrative process, generally simpler and quicker, provided all debts are settled and requirements met.

If a dissolved company is later found to have unpaid debts, creditors can apply to have it restored to the register to reclaim what they are owed. In contrast, liquidation ensures all liabilities are addressed before closure, making it a more final process.

Choosing Between Liquidation and Dissolution

Deciding whether to close a company through liquidation or dissolution depends on the company’s ability to pay its debts. Essentially, if a business is insolvent and unable to pay its debts and operating expenses then it must go through liquidation. However, a solvent company should dissolve due to the simpler process.

When to Choose Liquidation 

Liquidation is the right option if a company meets certain hardships such as:

• If a company cannot pay its debts as they fall due
• It has creditors who have threatened to take legal action or have taken legal action, such as filing a winding up petition
• The business is no longer viable and directors want to close it (after all debts are settled)
• Directors want to avoid personal liability by choosing an official insolvency process

When to Choose Dissolution

Dissolution is a more suitable option if:

• The company is no longer trading 
• All debts are settled or can be settled, and there are no more outstanding liabilities 
• The business has no ongoing contractual obligations or any legal disputes 
• The directors want a quick and cost-effective way to close the company without the complexity of liquidation

Dissolution is typically used when a company has naturally come to an end, such as after completing a project or when directors are retiring without plans to sell or transfer the business.

A few factors to consider before deciding between the two processes are whether your company is solvent or not, if you may have any legal obligations such as creditor action, whether you’ll want to restore your company in the future and the complexity of the two processes. 

Which Process is Right for Your Business? 

Ultimately, liquidation is often not a choice but a solution to bankruptcy, whereas, dissolution is a choice. Therefore, it is more important to evaluate your company’s debts and finances before deciding on which process to use. If your company is solvent, then dissolution is the better method.

Dissolving a limited company online can be a fast and straightforward method, particularly if you use professional help. Our company dissolution experts can guide you through the process and minimise any mistakes.

Disclaimer: This blog's purpose is to inform the reader about the differences between dissolution and liquidation. Please consult an insolvency professional or accountant before making any decisions.