Dissolution vs Liquidation: Which Is the Right Exit Route for a Solvent Company?

At the end of the life of a solvent company its directors are often faced with a choice between liquidation (MVL) or dissolution (other options are available). Different considerations and options will apply if the company is insolvent.

While dissolution is often quicker and less expensive, it is not always the clean break that directors expect. Where there are significant assets, contingent liabilities, creditor issues or concerns regarding potential claims, a solvent liquidation may provide greater certainty and finality notwithstanding the additional cost.

Comparison: Dissolution vs Liquidation (MVL)

Dissolution

Dissolution is a largely administrative process used by companies that have ceased trading and have limited assets and liabilities. A company can only apply for strike off and dissolution if it has not at any time in the previous 3 months:

• changed its name;
• traded or otherwise carried on business - paying down liabilities or selling off items no longer needed (not stock) is fine;
• engaged in any other activity not necessary or expedient for the purposes of seeking to be struck off and dissolved; or
• (broadly speaking) been involved in any other legal or insolvency proceedings.

Any dissolution application already filed should be immediately withdrawn if the company undertakes any of the above after filing an application. It is an offence to make an application or to fail to withdraw it if the above circumstances apply to the company punishable by a fine imposed upon the directors.

Failure to properly notify those entitled to notice of the proposed dissolution (broadly directors, creditors (including contingent or prospective creditors), members and employees) will also amount to the commission of an offence potentially punishable by a term of imprisonment in serious cases.

It should be noted that creditors (including HMRC) will have an opportunity to object to the proposed strike off and dissolution, if for example they consider that there are outstanding sums owed to them or they have claims against the company.

Creditors will also have the right to apply to have the company restored to the register (typically for up to 6 years after its dissolution) to bring claims against it or to have it placed into liquidation. Dissolution is therefore not necessarily the end of the story.

Although dissolution does not routinely involve the scrutiny associated with liquidation, the Insolvency Service may investigate former directors of dissolved companies where complaints or evidence of misconduct arise - typically where liabilities have been left unresolved.

Directors should ensure all company assets have been identified and dealt with before dissolution as any remaining assets may vest in the Crown as bona vacantia upon dissolution.

Liquidation (MVL)

As above we have assumed that the relevant company is solvent and that any liquidation will necessarily be a solvent liquidation or MVL.

In order to be able to go into MVL, the directors of the company will have to sign a declaration of solvency, declaring that, having made a full inquiry into the company's affairs, they are satisfied that the company will be able to pay its debts in full, together with any interest, within a specified period not exceeding 12 months. Directors who make a declaration of solvency without having reasonable grounds for making it may be subject to a fine or imprisonment or both.

The directors will then have to put a special resolution to the company’s shareholders. That resolution must be passed within 5 weeks of the statutory declaration of solvency, by a majority of 75% of those voting.

A liquidator (who must be a licensed insolvency practitioner) is then appointed. It is at this point that the directors’ powers will typically cease.

The liquidator will collect in and realise the company’s assets and distribute the proceeds to the company’s creditors. Contingent and prospective liabilities will be assessed by the liquidator and appropriate provision made. This can provide greater certainty than dissolution where unresolved liabilities simply remain outstanding. Creditors who do not submit a claim in time may not be able to challenge any distributions paid later on, including any distributions to members in the event there is a surplus. All creditor claims are therefore typically paid or compromised in the liquidation process.

The liquidators’ fees are typically paid out of the assets of the company.

Any available surplus will then be distributed to shareholders. Such distributions may in certain circumstances receive more favourable tax treatment than distributions made outside of an MVL prior to dissolution.

Following the conclusion of the liquidation, the company will be automatically dissolved three months after the final account is filed by the liquidator.

Conclusion

Directors should always consider the specific circumstances that apply to their company to assess which of the above options is more appropriate. Issues that the directors should consider include whether there are:

1. any remaining assets which would vest in the Crown upon dissolution;
2. any outstanding creditor claims whether or not contingent or prospective;
3. any potential claims as against the directors – dissolution will not necessarily draw a line under these given that dissolved companies can be restored; and
4. more tax-efficient exit strategies available.