Free Independant Advice

Specialist Insolvency Practitioners

Liquidation vs Dissolution – The Key Facts

Get in Touch Today to Speak to a Specialist Adviser

Liquidation and dissolution are both processes for ending a company, but they have distinct differences. Liquidation involves selling a company’s assets to pay off creditors, while dissolution is the legal process of ending a company’s existence.

When choosing between liquidation and dissolution, it is important to consider the company’s solvency. If the company is insolvent, liquidation may be necessary to pay off creditors. If the company is solvent, dissolution may be the better option.

Professional involvement in liquidation can include insolvency practitioners, auctioneers, and valuers. It is important to choose a reputable professional with experience in a specific situation.

Introduction to Liquidation and Dissolution

When it comes to business insolvency, it is crucial to understand the differences between liquidation and dissolution. In this section, we will examine the fundamentals of each process and their nature.

Specifically, we will delve into the notion of a close company and how it can influence the choice to proceed with either liquidation or dissolution.

Understanding Close Company

A close company is a type of private limited company that has less than fifty shareholders. To successfully carry out the liquidation or dissolution processes of a close company, it is important to understand its unique characteristics.

Liquidation and dissolution are two different procedures. When a close company undergoes liquidation, all its assets are sold to settle any outstanding debts or claims with creditors. On the other hand, dissolution occurs when the company ceases to exist. Voluntary dissolution happens when there are no outstanding debts or claims against the company while involuntary dissolution, which is carried out by Companies House, occurs when a company fails to file annual accounts or returns.

During liquidation, all assets are sold off to pay off liabilities, while taking care of any preferential claims. Solvency plays a vital role in both processes, as it determines whether liquidators will conclude solvent or insolvent procedures. The involvement of several professionals, such as insolvency practitioners and solicitors, is crucial during this time.

In summary, having a good understanding of close companies is crucial to have a solid foundation for an effective liquidation or dissolution process if needed. For firms experiencing financial difficulties that may eventually lead to insolvency, it is imperative to seek professional support as soon as possible, before matters get out of hand.

Differences Between Liquidation and Dissolution

Liquidation and dissolution are two important terms used in the business world when a company is closing down.

Although both processes refer to ending a company’s existence, they have crucial differences. Liquidation happens when a company is insolvent or unable to pay its debts, and involves the sale of the company’s assets to pay off debts to creditors.

On the other hand, dissolution is the formal process of ending the legal existence of the company.

To understand the distinctions between liquidation and dissolution, a comparison chart is helpful. The following table shows the differences between liquidation and dissolution:

Liquidation Dissolution
Objective To pay off creditors To terminate legal existence
Appointment of liquidator Required Not required
Voluntary or compulsory Voluntary or compulsory Voluntary or administrative

It is significant to note that liquidation and dissolution are used in different circumstances.

Liquidation is used when a company cannot pay its debts, while dissolution may be voluntary or administrative and occurs when a company no longer needs to exist or when their owners want to retire.

Therefore, it is crucial to understand the differences between these two processes to decide which one is the appropriate choice for a specific situation.

Dissolution – Process and Procedures

Dissolving a company can be a daunting experience for anyone. In this section, we’ll discuss the ins and outs of the dissolution process, including the sub-sections of voluntary dissolution and compulsory liquidation by the court.

From the criteria required for voluntary dissolution to the procedures involved in compulsory liquidation, we’ll explore this challenging topic with helpful facts and figures to guide you through the process.

Voluntary Dissolution and its Criteria

Voluntary dissolution is a process that a company or its shareholders may choose to pursue in order to close the business voluntarily. The criteria for voluntary dissolution can vary, depending on the laws of the country, but it typically involves settling all debts and obligations, as well as ensuring that there are no remaining assets or liabilities. To initiate the process of voluntary dissolution, the shareholders must pass a resolution and file it with Companies House.

Prior to dissolving the company, the shareholders must ensure that it meets several requirements set out in the Companies Act of 2006. This includes signing a declaration of solvency, which confirms that they have evaluated the company’s ability to pay off its debts as they come due. HM Revenue & Customs (HMRC) must also be notified of the company’s intention to dissolve, and the shareholders must advertise their intentions in newspapers that circulate in areas where the company did business. The advertising period usually lasts for three months and can range from national newspapers to trade publications, depending on how well-known the company was.

Involuntary Dissolution by Companies House

Companies House has the authority to initiate the involuntary dissolution of a company if they have reasonable cause to believe that it is no longer active. This process is conducted under Section 1003 of the Companies Act 2006. The primary triggers for this action are if a company fails to submit its annual returns or accounts, there is no response from the company after a formal query, or it has been dormant for an extended period.

The first step in the process involves sending a warning notice by post to the registered office address of the company. Failure to respond within two months can lead to the publication of a second notice in The Gazette, offering a further three months for creditors and other interested parties to object or raise concerns. If no response is received, then Companies House will strike off the company from their register, publishing it in The Gazette as well.

It is essential for companies that have lost contact with peripatetic directors/shareholders or failed to maintain records up-to-date to take remedial measures promptly. Those interested should seek professional advice from independent chartered accountants or business support services provided by HMRC and UK government agencies. It would be best practice to avoid breaching rules that inevitably lead to dissolution.

Prepare for a fire sale as we delve into the process and procedures of liquidation.

Liquidation – Process and Procedures

In this section, let’s take a closer look at the process and procedures involved in liquidation. We’ll explore the selling of assets to pay creditors and the different types of liquidation. When a company or organization goes into liquidation, it means that it’s unable to pay its debts. Let’s dive into the details and find out together.

There are two types of liquidation – voluntary and involuntary. In voluntary liquidation, the company or organization chooses to liquidate its assets and pay its debts. In involuntary liquidation, a court orders the company or organization to liquidate its assets to pay its debts.

During the liquidation process, the creditors of the company or organization are paid first. If there’s any money left over after all the creditors have been paid, the shareholders or owners of the company are paid. However, in most cases, there isn’t enough money to pay everyone, and the company or organization may cease to exist.

Selling of Assets to Pay Creditors

When a company undergoes liquidation, its assets must be sold in order to pay off its creditors in a legal process that follows strict procedures. There are three ways to sell assets: auction, private treaty, or through a broker. Auctions sell assets to the highest bidder, while private treaty sales involve negotiating with interested parties for an agreed-upon price. Brokers who specialize in selling assets can also assist in the sale.

The sale of assets must be conducted in a transparent and fair manner, with proceeds used initially to settle outstanding debts before being distributed among shareholders. If the funds from selling assets are insufficient to pay all creditors, secured creditors are paid first, followed by unsecured creditors.

The liquidation process can be complex and requires various professionals such as insolvency practitioners and lawyers to ensure proper procedures and legal requirements are met. Ultimately, the sale of assets during liquidation is crucial to ensure that creditors are paid, and remaining funds are distributed equitably among shareholders. The Three Ways of Liquidation provides multiple options for liquidation, ensuring a fair and just process for all parties involved.

The Three Ways of Liquidation

Liquidation is a process that can be approached in three distinct ways, as outlined below.

It is crucial to note that during any type of liquidation, daily business operations cease, employees may lose their jobs, and creditors are paid based on their priority. Secured creditors are entitled to claim first on any assets sold.

In situations where a company is unable to pay its debts as they fall due or liabilities exceed assets, liquidation may be the best course of action instead of dissolution. By understanding the different approaches to liquidation and dissolution, companies can make informed decisions about the best way forward for their situation.

Importance of Solvency in Dissolution and Liquidation

Solvency is a vital factor to consider in both dissolution and liquidation of a company. In liquidation, having solvency means that the company can pay off its debts as they become due, while an insolvent company cannot fulfill its liabilities and needs to be liquidated. In dissolution, solvency means the ability of the company to pay off its debts and liabilities before it terminates its legal existence. To avoid any legal and financial complications during these processes, companies must ensure their solvency before undergoing dissolution or liquidation.

It is essential to distinguish between dissolution and liquidation. Dissolution is the end of a company’s legal existence and is often an alternative to liquidation. In dissolution, the company distributes its assets to shareholders and pays off its debts before termination. In contrast, the liquidation process involves selling the company’s assets to pay off debts, and any remaining assets are distributed among shareholders. In both cases, it is critical for the company to be solvent during the processes to avoid any legal or financial consequences.

Moreover, the insolvency of a company during dissolution or liquidation can have a significant impact on its directors and shareholders. Directors can become personally liable for the company’s debts in an insolvent company, while shareholders can lose their investment altogether. Therefore, it is necessary to ensure solvency during these processes to avoid such negative outcomes.

Professionals Involved in Liquidation

Liquidation is a legal process that requires the involvement of a group of professionals to ensure its proper and lawful conduct. These professionals include licensed liquidators, insolvency practitioners, lawyers, accountants, and valuers, who work together to verify creditor claims, manage company assets, and distribute proceeds. The insolvency practitioners assist the liquidators in investigating the financial affairs of the company, while the lawyers, accountants, and valuers ensure legal compliance throughout the process.

In exceptional cases where the company is in dire financial straits, the court may appoint provisional liquidators to take immediate control and safeguard the company’s assets. These liquidators will execute a recovery plan to help the company get back on its feet.

Conclusion – Choosing Between Liquidation and Dissolution

Choosing between liquidation and dissolution can be a difficult decision for business owners facing financial difficulties and seeking to close down their company. It is important to understand the key differences between these two methods in order to make an informed decision.

Liquidation involves selling off a company’s assets in order to pay off creditors and any outstanding debts. This is necessary when a company is deemed insolvent, meaning it cannot pay its debts as they become due. Dissolution involves a more straightforward process of closing down the company and distributing any assets among its shareholders. This option is only available to companies that have no outstanding debts and are financially solvent.

The decision to choose between liquidation and dissolution will depend on the company’s financial situation. In some cases, liquidation may be the only option if the company cannot pay off its debts. Dissolution may be a preferable option if the company has already paid off all its debts and wishes to avoid the costs and complexities of a liquidation process.

When considering liquidation versus dissolution, company directors must take into account the interests of both their creditors and their shareholders. It is important to seek professional advice from accountants or insolvency experts before making a decision on which route to take. A licensed insolvency practitioner can provide guidance and support throughout the process.

Some Facts About Liquidation vs Dissolution:

  • ✅ Dissolution is the legal process of bringing a company to an end, while liquidation is the process of converting a company’s assets into cash and distributing the proceeds to creditors and shareholders. (Sources:,,,,
  • ✅ Companies usually dissolve voluntarily when they have accomplished their purpose or have no reason to continue operating, while liquidation is often forced by creditors through selling off the company’s assets to repay debts. (Sources:,,,,
  • ✅ Liquidation is a costly and time-consuming last resort that can negatively impact a business’s reputation. (Sources:,
  • ✅ Dissolution is a cost-effective way to close a solvent company, and it involves the legal process of ending a company’s existence, which can’t be sued or collect money from clients. (Sources:,,,
  • ✅ Liquidation can only occur after the dissolution process has been completed. (Sources:,

FAQs about Liquidation Vs Dissolution – The Key Facts

What is the difference between dissolution and liquidation?

Dissolution and liquidation are two distinct concepts in business law, with dissolution referring to the legal process of bringing a company to an end and liquidation referring to the process of converting a company’s assets into cash and distributing the proceeds to creditors and shareholders.

What are the reasons for dissolving a company?

Common reasons for dissolving a company include retirement, the business serving its purpose, ceasing trading, or emigrating to another country.

Who can dissolve a company?

The decision to dissolve a company is made by the board of directors or business owners, but it can also be forced by creditors through liquidation.

What is the process of dissolution?

Dissolution is the legal process of ending a company’s existence. If directors choose to dissolve their business voluntarily, they must apply to Companies House and make legal declarations about the state of affairs of the business. Advertisements are placed in the Gazette to inform interested parties who may object. If no objections are raised, the Registrar will dissolve the company, cancel its registration, and remove its name from the register.

What is liquidation?

Liquidation involves selling off a company’s assets to pay creditors, and any remaining funds are distributed to shareholders. It is considered a last resort and can be costly and time-consuming, and it can negatively impact the business’s reputation. Liquidation can only occur after the dissolution process has been completed.

When is liquidation the best option?

Liquidation may be the best option for companies facing financial difficulty with creditors threatening to take action. In such cases, a licensed insolvency practitioner can help with the liquidation process.

Get In Touch With Our Team

We Aim To Reply To All Enquiries With-in 24-Hours