What is the Difference Between a Dissolution and a Liquidation?
The different processes of closing a business
One question that we often receive when helping businesses sell off their assets is if they are participating in a dissolution or a liquidation. Many times, these two words are used interchangeably as they both indicate the closing of a company, however there is a very important distinction between these two words. Simply put, a dissolution is a (typically) voluntary legal closure of a business while a liquidation involves the selling of a company’s assets in order to pay creditors.
What is a Dissolution?
A company is dissolved when it has served its purpose and will not be started again. This often occurs when the head of a company retires, or simply when it is decided that the organization is no longer needed. The dissolution itself is the legal closure of the business, filling out the paperwork necessary to end the company and alert the government that they do not exist for tax purposes. A company is able to dissolve if:
1. It hasn’t traded or sold off any stock in the last 3 months.
2. It hasn’t changed names in the last 3 months.
3. It isn’t threatened with liquidation and has no agreements in place with creditors, such as a ‘company voluntary arrangement’ (CVA), which is a legally binding agreement that lets a company freeze its unsecured debts and repay them with future profits.
*regulations noted from The Formations Company
Of course, a company must also wrap up any loose ends and pay any creditors before they officially close.
Dissolutions are typically seen in a more positive light than liquidations. Most of the time, a company is dissolved by the voluntary choice of the director, while liquidations are often necessary closures to pay debts to creditors.
So What is a Liquidation?
A liquidation is the selling of company assets to pay debts owed to creditors before a company is closed either out of necessity or choice. Most liquidations are not voluntary, and often occur when a business is not able to continue profitably and/or owes debts to multiple creditors. They are forced to shut down but must first pay back their investors. There are several types of liquidations that a company may participate in:
Members’ Voluntary Liquidation – a company decides to liquidate their assets of their own choosing in order to have more liquid assets for future business endeavors. This type of liquidation is often used in the dissolution process, as anyone voluntarily closing their business will need to liquidate their assets.
Creditors’ Voluntary liquidation – this occurs when the director or head of the company realizes that they will not be able to pay creditors and choses to liquidate company assts of their own accord. They will work with their shareholders, creditors and a liquidator throughout the process.
Compulsory Liquidation – creditors force a company to liquidate its assets in order to pay the debts owed to the creditors. These liquidations are often regulated by a court.
Liquidations can be a hard process to go through, but we hope that we can make it easier for you. Contact us today if you have further questions about dissolutions and liquidations, or if you are interested in liquidating your items with us!