Company Dissolution: a Realistic Alternative to Liquidation?

If your company is failing or has failed, there is something you should know – and it might bring relief at a very difficult time.

In this brief interview Rick Smith, our Managing Director, talks about the alternative closure options available to companies.

“Most directors, when they come to us, have very limited knowledge on closing companies, with or without assets and liabilities,” explains Rick. “We hear sentences containing words like ‘winding-up’, ‘calling in the receivers’, ‘going bust’ and liquidation”.

“Of course, all of the above have a meaning, and are related to the closure process, but they are not really being used in the right context. It’s sort of ‘pub-level education’ on a very complex topic.”

Can your company pay its debts?

Rick goes on to explain “The first job any director must do is to decide if the company they are lawfully in charge of is solvent, or not.” “Generally speaking, does it have the ability to pay off all of its debts, and on time?”

“From a legal standpoint, insolvent companies, or those that cannot pay their bills, are not allowed to trade.” “One of a director’s responsibilities is to identify if a company is long-term insolvent – by this it means a general longer-term outlook rather than a bad week or month because of an unusual event – and to take steps to ensure that the company is closed”.

“Although this sounds dramatic, it kind of makes sense” adds Rick, who has overseen 1000’s of small company closures in his career, which spans a wide range of industries. “I often speak with directors who make contact on, say, day 1 owing £10,000 who return on day 50 owing £20,000. Their business is like a leaking bucket.”

Rick’s biggest concerns are the general misconceptions that surround the steps taken towards closing down, and indeed the number of options that are available. “Liquidation. That’s all directors seems to know, and its advice that often comes from trusted financial experts.”

Many accountants don’t know about insolvency

“It’s obvious that a director will speak with their accountant. They are a trusted person who is expert in finances. However not all accountants are familiar with insolvency, and their advice to liquidate may not be correct or indeed the best option”

Rick explains “Liquidation is the process by which a company is brought to an end, and assets redistributed to its members” “It is a formal process and must be undertaken by an Insolvency practitioner at a fee starting from around £5000.”

“Liquidation is not always possible and an arrangement with creditors can be pursued. If the director or the company can’t afford a liquidation then administrative dissolution is the only option.”

Dissolution; an alternative to liquidation?

In insolvency terms, dissolution is the informal process of administering the closure of a limited company. Rick explains “Like liquidation, dissolution allows for all members to be notified, assets realised and distributed accordingly. It meets the obligations set out in the Companies Act 2006 and therefore ensures that the director is meeting their obligations.”

“I suppose it seems strange to discuss the benefits of any type of closure, but certainly, those directors who are faced with closure can reap comfort from knowing that there is an alternative when finances do not exist for a liquidation.”

Significantly cheaper

“Prices are significantly lower [than liquidation]. Average dissolution costs are around 75% less than liquidation”

“In addition to this, directors do not have to attend a formal creditors meeting, and above all, they are ensuring that their duties as a director are being lawfully met and that their integrity is maintained.”

On this common misunderstanding, Rick stresses “so long as the director has not committed any wrongful trading historically, the correct closure of any company, in particular using the dissolution route, does not leave any form of bad mark against the director, nor does it prevent their ability to be a director moving forwards.”

Is dissolution right for me?

So you have a failing small company, and you want to dissolve you company. Sounds pretty straight forward. Well it’s not that simple. Rick states “It’s not really a choice for directors [to dissolve or liquidate] more a matter of fact.”

“If the company is insolvent, the choice to close is pretty well defined.  The company must then be assessed to know which route comes next, but generally speaking, if it cannot afford liquidation, then it has few other options.”

“Once it has been established that dissolution is a route that can be utilised, the company must still adhere to the same complex insolvency laws that liquidations must follow.”

Get it wrong and you could pay the price

“Failure to adhere to the relevant legislation could lead to a number of problems.” Rick continues “Firstly, if the closure is not handled correctly, and where creditors exist, closure would not necessarily even occur due to longstanding objections.”

“You also have to bear in mind that failure to comply with the insolvency laws can carry severe penalties for directors including fines, disqualification, and in certain circumstances, personal liability for company debt.”

Like most things, typing insolvency into your internet search engine will give you bedtime reading for the next few months. Rick states quite clearly “Always seek the advice of an insolvency expert if you are thinking about closing your company through dissolution.”

“Firstly, the professional will offer peace of mind that the closure is done in the correctly. A good insolvency firm will handle things for you. Secondly, they will save you 3 months of bedtime reading and stress!”

Need some help with closing a company?

Need some advice on whether to dissolve or liquidate your company? Call us on 0800 975 0380 or email [email protected]

Want to see if your company qualifies for dissolution? Take the dissolution test