Here at Walsh Taylor we are keen not to bombard clients with technical jargon. After advising numerous people in precarious financial situations over the years, our insolvency practitioners understand that one of the last things they would want is to be confused.
Having said that, there are terms that business owners would find helpful to know. In addition to possessing a glossary page on our website, that is exactly why today we are outlining the key differences between liquidation and dissolution.
To do this we will split it into five key sections: ‘prompting proceedings’, ‘likelihood of director liability’, ‘cost’, ‘ease’ and ‘when an organisation is insolvent’.
Firstly, however, we should make a few things clear. Compulsory liquidation, creditors’ voluntary liquidation (CVL) and members’ voluntary liquidation (MVL) are the three types of liquidation procedure that exist here in the UK.
The first two can only be applied to insolvent businesses that cannot pay their creditors in full and which are no longer viable, whereas MVL is – as well as dissolution – is a possible route for solvent companies to close down.
An MVL allows for assets within the company to be realised and distributed to the shareholders in a tax efficient way and is therefore the preferred route for shareholders of companies with assets rather than dissolution.
A MVL needs the agreement of at least 75% of the company’s members before proceeding, whereas with dissolution, providing the other eligibility requirements have been met, the directors are able to start the process themselves.
Likelihood of director liability
As a result of a MVL being administered by a licensed insolvency practitioner, the likelihood of personal liability on behalf of the directors is lessened. Dissolution, on the other hand, can carry a higher risk.
Due to the cost of the professional fees involved, a MVL is typically more expensive than a dissolution however the tax benefits that an MVL provides generally make this a cost effect route for companies with net assets of over £25,000.
Once the shareholders have opted to close their business through a MVL, the procedure is carried out by an insolvency practitioner. Conversely, dissolution involves directors taking specific and careful steps to ensure that all aspects have been completed in the correct manner.
When an organisation is insolvent
Should a company be found to be insolvent after going into a MVL then the procedure changes into a CVL. If it is found out that directors have signed a declaration of solvency in full knowledge that the organisation was insolvent, their actions will be investigated. Comparatively, a dissolved business can be restored back to the register if a creditor makes a claim later. That creditor would have to apply to have it restored, and if accepted, the situation would be treated as though the dissolution had never occurred.
With an excellent reputation for supporting UK companies and their directors through both routes, Walsh Taylor can help clients with MVL and dissolution.
If you would like any more information on the above then please feel free to get in touch with our Leeds, Harrogate, Bradford or Darlington teams today by calling our head office on 03300 244 660.