Chris Bristow

Company liquidation and strike-off are both processes that close a company but they differ in many respects. From the official nature of company liquidation to the speed and autonomy of strike-off, directors need to understand their closure options so they take the correct route.

Failing to do so can lead to serious repercussions for themselves and their businesses, including legal issues such as investigation by the insolvency service and the unfortunate loss of available tax savings.

What is liquidation?

Liquidation involves closing a business following the sale of assets and distribution of funds to either creditors or company shareholders. When the business that’s to be liquidated can pay all its bills as they fall due, it’s known as solvent liquidation. Insolvent liquidation is carried out when the business cannot pay its liabilities.

Solvent liquidation

Members’ Voluntary Liquidation (MVL) enables a company to close down tax-efficiently and is typically suitable for businesses with £25,000 or more in profits to distribute to shareholders.

It’s a formal procedure carried out by a licensed insolvency practitioner (IP) and offers significant tax savings because distributions are subject to Capital Gains Tax (CGT) instead of income tax.

Insolvent liquidation

Creditors’ Voluntary Liquidation (CVL) is the best way to close down an insolvent company that cannot be rescued. Again, it’s administered by a licensed IP and monies generated from the sale of assets are used to repay creditors.

Creditor interests are the focus of attention for the IP, who must work to provide as high a return as possible. Directors can take some control over the process by choosing their own insolvency practitioner to conduct the CVL and deciding when to enter the procedure.

What is strike-off?

Strike-off is an unofficial way to close a business and is appropriate for solvent companies. Also known as company dissolution, directors taking this route must be certain that their business can pay all of its liabilities within 12 months. Strike-off is an inexpensive way to close a solvent company that has straightforward business affairs and relatively low levels of profit to distribute.

Differences between liquidation and strike-off

Cost is one of the main differences between company liquidation and strike-off – liquidation is a formal procedure and attracts professional fees. Strike-off can be carried out inexpensively and costs only £10, but it’s important to be aware of the risks of making a mistake with this option.

Another major difference is eligibility, given that strike-off is solely for solvent companies but liquidation is appropriate for solvent and insolvent businesses, albeit they are different liquidation processes.

The statutory nature of liquidation, and the fact that it must be administered by a licensed professional, offers reassurance to directors. In contrast, the success of a company strike-off relies on directors taking the right steps and avoiding mistakes.

Which is better – liquidation or strike-off?

The first consideration when deciding whether liquidation or strike-off is better is the company’s financial state. If there’s any doubt about its ability to repay all creditors within 12 months of closure, directors need to seek professional guidance on the best way forward.

Once solvency has been established, they then need to look at the amount of retained profits available for distribution so they can identify available tax savings. If profit levels are high, MVL is likely to offer tax efficiencies that make a considerable difference to the final distributions.

Company strike-off, on the other hand, is more appropriate for solvent companies with straightforward affairs, and that are looking for a route to closure without the professional fees attached.

Chris Bristow is a senior insolvency expert at Scotland Liquidators