Closing a Business – Why directors should consider liquidation over dissolution

Liquidation vs Strike Off - What's the difference?

When a company is dissolved, although it is struck off the register at Companies House, it can be restored at a later date should a creditor make a claim, or assets come to light that need to be dealt with.

This is why it is better for directors to consider liquidating their company rather than closing it down via dissolution. Although the liquidation process requires the involvement of a licensed insolvency practitioner (IP), it offers valuable peace of mind to directors that the company is irrevocably closed.

Furthermore, directors may be able to claim redundancy when their company is liquidated. It is a little known fact that directors can also be employees of their company under certain circumstances, and therefore entitled to the same statutory payments as members of staff when the company is closed down via liquidation.

Begbies Traynor is the leading professional services practice in the UK. We have extensive experience of company liquidation, and are available for appointment as liquidators.

Liquidation vs company dissolution: the main points

• Although the dissolution process is relatively straightforward, it is not necessarily as cost-effective as it first appears. The fee to dissolve a limited company is only £8, but a crucial consideration is the possibility that future creditor claims could force the company’s reinstatement to the register.
• To use company dissolution a business should not owe money to creditors. Although existing creditors must be informed of the company’s plans for dissolution as part of the due diligence procedures associated with this method of closure, some creditors may be omitted in error, potentially disrupting the directors’ original plans. In fact, outstanding creditors have the right to apply to reinstate a company for up to 20 years, and will then be able to take action to recover their debt. Directors may also face investigation by the Insolvency Service. If any serious irregularities are discovered, directors could receive financial penalties, or even a prison sentence of up to seven years.
• A further consideration which is of great significance to directors who are also employees of the company, is that when a company undergoes insolvent liquidation, directors taking a salary through PAYE may be entitled to claim redundancy. 
• As the average director redundancy claim is £9,000, liquidation is likely to be a more cost-effective choice than dissolution.

Liquidation procedures

If the company is solvent, it may be liquidated via the Members’ Voluntary Liquidation process, or MVL. Directors must swear a Declaration of Solvency in the form of an affidavit, stating that the business can pay all its liabilities plus the costs of liquidation within a 12-month period from the date of liquidation.

If this is not possible, an insolvent liquidation procedure called Creditors’ Voluntary Liquidation (CVL) can be used.

Liquidating a business requires the appointment of a licensed insolvency practitioner. In the case of an MVL they are appointed by company shareholders, whereas in a CVL the liquidator is appointed by the members. The appointment is typically supported by creditors but they are able to appoint their own liquidator subject to certain criteria. 

Directors’ rights to redundancy when a CVL is used

When the company enters a Creditors’ Voluntary Liquidation, directors may be able to claim redundancy and other statutory payments such as arrears of salary, holiday pay, and pay in lieu of notice.

This claim can constitute a substantial sum which will probably make liquidation more cost-effective overall. Eligibility criteria for claiming redundancy as a company director includes:

• Having a contract of employment
• Working for a minimum of 16 hours per week for a continuous period of two years or more
• Taking a salary under PAYE
• Fulfilling a role that is more than advisory

The amount of redundancy pay is calculated using a director’s age, length of service, and salary level. Claims are sent to the Redundancy Payments Service (RPS) which is a division of the Insolvency Service, and are generally made from the National Insurance Fund (NIF) approximately six weeks from the date of liquidation.

If you are considering the closure of your company, Begbies Traynor can offer professional advice on the best way to do so. Our licensed insolvency practitioners have vast industry experience, and will ensure you understand all your options. We work from over 70 offices around the UK - call one of the team for a free same-day consultation.