Liquidation of Companies in Nepal

1. Background

This article covers the process of liquidation of companies in Nepal. Liquidation is the process of bringing a business to an end and distributing its assets to claimants. The insolvency proceedings of companies which are insolvent or going to be insolvent commence because such companies are unable to pay debts to creditors or are facing financial difficulties. Such proceedings also apply in relation to the restructuring of such companies.

2. Governing laws

The major laws that govern liquidation of companies in Nepal are:

a) Insolvency Act, 2063 (2006) (“Insolvency Act”); and

b) Companies Act, 2063 (2006) (“Companies Act”).

In addition to the above, the Bank and Financial Institutions Act, 2073 (2017) specifically deals with the liquidation of the banks and financial institutions in Nepal.

3. Methods of liquidation

As defined by the Insolvency Act, being “insolvent” means a state of being unable, or appearing to be unable, to pay any or all of the debts due and payable to or payable in the future to creditors or a situation where the amount of liabilities of a company exceeds the value of the assets and “liquidation of company” means a situation where the registration of company is cancelled by fulfilling the procedures as provided by the Insolvency Act.

There are mainly two ways of liquidation of a company:

a) Voluntary Liquidation; and

b) Compulsory or forced Liquidation.

4. Voluntary liquidation

A voluntary liquidation is a self-imposed wind-up and dissolution of a company that has been approved by its shareholders. Voluntary liquidation is done when company is able to pay its debts fully and a situation where a company can satisfy the claims of all its creditors. The decision to voluntarily liquidate will begin once a company’s leadership (the court may or may not be involved) decides that the company has no reason to continue operating. Chapter 10 of the Companies Act deals with the provisions applicable for voluntary liquidation; when the company is in a state to clear all of its credit, tax, fees and fine if applicable and do not bear any liabilities to any of the parties.

4.1. Conditions of voluntary liquidation

The company can be liquidated voluntarily on the following conditions: –

a) If the company is able to pay its debts or other liabilities fully;

b) If application for the review of insolvency of the company is reviewed and the company is not a subject to an insolvency proceeding;

c) The directors of the company, have, after due inquiry, made a declaration in writing that the company is able to pay its debts and other liabilities in full and that the debts and liabilities to be paid on behalf of such company can be paid up or can be fully settled in any other process within one year from the date of the adoption of the resolution to liquidate the company; or

d) If the written declaration made by the directors pursuant to Clause (c) was presented in the general meeting called to discuss the matter of liquidation of the company or such declaration was made at the time of discussions on that matter in the general meeting.

  4.2. Timeline for liquidation of company

The Companies Act does not prescribe any statutory time period for completion of the liquidation process. It may depend upon number of creditors and settlement with creditors, time taken to sell the assets and tax clearance obtained from tax authorities.

Section 127(6) of the Companies Act provides that the liquidator appointed pursuant to this section shall complete the liquidation proceedings of the company within the period of time specified at the time of his/her appointment.

However, in case where the liquidation proceedings cannot be completed for any reason within the specified period of time, a reasonable time limit may be extended by following the same procedure as followed in his/her appointment.

4.3. Procedure of voluntary liquidation

The procedure for such voluntary liquidation entails the following:

a) Company should internally verify its financial statements and determine its financial status to clear all of the debts and liabilities.

b) The representative of the shareholder of the Company should adopt a written declaration confirming that the company can satisfy debts and other liabilities within one year from the date passing of resolution for liquidation or can be fully satisfied through any other arrangement.

c) Representative of the shareholder of the Company should pass a written resolution resolving to dissolve the company and submit the same to the Office of Company Registrar (“OCR”).

d) The representative of the shareholder should also provide for appointment of the liquidator and auditor and fix the time to complete the liquidation process with the remuneration.

e) The company shall give the information of appointment of a liquidator no later than seven days of appointment to the concerned government authorities like the OCR, and Inland Revenue Department (“IRD”).

f) Section 130 of the Companies Act provides that the liquidator shall take control over all the assets, accounts and records of the Company. Section 131 specifies the general duties, power and responsibilities of the Liquidator. The general duties include communicating with the shareholders, sale of assets and cancellation of agreements.

g) Liquidator appointed pursuant to section 131 will:

• file information to the OCR regarding income and expenses, accounts of the companies at the interval of every six months,
• notify shareholder of the company every six months regarding progress of the liquidation process,
• discharge all the debts and liabilities of the company from the assets and receivables of the company,
• after discharge all of the debts and liabilities, submit the proposal for distribution of residual assets before the shareholder meeting,
• make payment to the shareholder out of the residual assets  if the same is approved by shareholder representing 75% of shares,
• submit a report to the OCR detailing money realized from sale of assets, payments made to the creditors and distribution made to the shareholder including auditor’s report with certification that the company has been liquidated.

h) Cancellation of registration of company upon receiving the report on liquidation.

5. Compulsory or forced liquidation

Compulsory liquidation is a situation in which a company must stop operating and sell all its assets in order to pay its debts. Compulsory or forced liquidation is done if any company is not able to satisfy claims of all the creditors. The difference between a voluntary and a compulsory liquidation is that the latter is usually forced upon the company, rather than the directors complying with their statutory duty to wind up the insolvent company in an orderly manner. Under both processes however, the liquidator is required to sell the company assets, with their objective to recoup as much as possible for creditors. While the former is often much more flexible and with a skilled insolvency practitioner can be used as a rescue process and to achieve better results for the creditors.

Generally, such liquidation starts with the order of the court and such companies are subject to the provisions of the Insolvency Act.

5.1. Conditions of Compulsory Liquidation

As per the section 3 of the Insolvency Act, insolvency process can be commenced only after the Court orders. Application has to be made to the court by any of the following person for insolvency proceedings;

• Company that has become insolvent;
• At least 10 % of the creditors of the company;
• Shareholder or the shareholders subscribing at least 5% of the total shares;
• Debenture holder or debenture holders that has subscribed at least 5% of debentures out of the total debenture holders of the company;
• Liquidator who has been appointed to liquidate the company; or
• Authorized body to administer the special kind of business like banks and financial institutions.

Applications can be made if the company is not able to make payment to creditor within 35 days from the date of notice of payment.

5.2.  Procedure of compulsory liquidation

The procedure for compulsory liquidation entails the following:

a) Registration of an application to the concerned court. Once registered, application cannot be withdrawn expect as permitted by the court. Court will set the date of hearing after registration.

b) Hearing and order by court to institute or not to institute insolvency proceeding. If accepted, court gives order to appoint an inquiry officer.

c) Inquiry officer is appointed to inquire into insolvency proceedings and determine;

• Whether its financial situation can be improved or not to issue an order for immediate liquidation;
• Whether an order should be issued for restructuring of the company through restructuring program or not; or
• Whether the company is insolvent or not.

d) Report to be made by director on financial situation and transactions of the company to the court.

e) The inquiry officer shall submit an inquiry report to the court within the period specified by court.

f) Court shall make any of the following orders within seven days of the receipt of the report submitted by inquiry officer.

• Immediately liquidate the company;
• Implement the restructuring program;
• To stay until the period specified by the court in the event of possibility without liquidating; or
• Extend the period of insolvency proceedings.

g) Court shall make an order to appoint liquidator if the court makes decision to liquidate the company.

h) Liquidator will be the primary decision making authority. The directors, officers and all the other employees are relived from their position and liquidator exercises all their power. Liquidator takes into custody all the assets, properties and books of account except the properties in possession of secured creditors.

i) In addition to above following, duties need to be carried out by the liquidator:

• To institute or defend any case or legal action on behalf of the company;
• To appoint employees to assist in the discharge of his/her functions;
• To borrow loans against security of the assets of the company;
• Examine whether if any kind of fraud, cheating or deception has been done by directors, shareholders or employees;
• To sell the assets and distribute the proceeds of such sale; and
• To perform or cause to perform all activities as be necessary to liquidate the company.

j) The liquidator shall prepare a progress report in relation to the company and submit it to OCR and court no later than three months of his/her appointment.

k) Liquidator can call meeting for creditors, form committee of creditors and give time limit for submissions of debt claims.

l) Settlement of liabilities is done following the order as prescribed in section 57 of Insolvency Act and for bank and financial institutions according to the Banks and Financial Institutions Act.

m) Liquidator shall submit the report at the completion of liquidation proceedings, to prepare a report on the properties recovered, payments made to the creditors and distributions made to the shareholders, on behalf of the company, and submit such report, certifying that the company has been liquated, accompanied by the auditor’s report, to the OCR.

n) Upon of a report on the liquidation of a company OCR shall strike the name of the company off the company register and issue an order that the registration of the company has been canceled. Notice must be published in a national daily newspaper that such company has been dissolved.

5.3. Restructuring

“Restructuring” is a process to be adopted under Insolvency Act in order to a company which may become insolvent because of financial difficulty. “Financial Difficulty” under the Act means a situation where company becomes or may become insolvent immediately or in the near future if the company is not restructured.

Restructuring is when a company makes significant changes to its financial or operational structure, typically while under financial duress. This helps a company cope with the dynamic and volatile business conditions.

5.3.1. Procedure of restructuring

The restructuring of a company is undertaken in the following manner:

a) Restructuring program is prepared by restructuring manager when the court orders to restructure the company. The restructuring scheme should include the following programs under section 23(2) of Insolvency Act:

• To capitalize the debt of the company and alter the capital structure;
• To pay the claims of creditors by selling any portion of the asset of company;
• To change the nature or claims of creditors of the company and issue securities for the same;
• To get the creditors of the company to participate in capital investment by issuing shares in consideration for their claims;
• To amalgamate the company with any other company;
• To change the management of the company or any other appropriate acts.

b) Meeting of creditors is called to discuss the Restructuring Program Proposal and submit their respective claims no later than fifteen days after the restructuring manager has commenced the business. Such notices are published at least for two times in national daily newspaper.

c) The restructuring manager prepares and submits report to the court accompanied by the transaction, assets and financial situation of the company and its restructuring program if any.

d) Claim and objection to approved restructuring program can be made within seven days by the creditors who are not agreeable setting out the grounds and reasons.

e) If the court approves the restructuring program adopted by the meeting of creditors the program shall be binding on all the creditors, directors and shareholders of the company.

f) Restructuring manager will operate the company during the restructuring period. Restructuring manger shall have power to inspect all books of accounts, ledgers, records accounts and documents of the company, manage and control transactions and properties of the company.

g) If restructuring manager in accordance with the program considers any amount to be necessary to keep running the company may borrow a loan with or without using the company’s property as security.

h) Implementation of restructuring program.

i) If the program cannot be wholly or partially implemented, it can be altered or amended through meeting of creditors if approved by court.

j) Termination of restructuring program is issued where the company fails to implement the program. Court also issues an order to liquidate such company.

Liquidation of a company may simply be understood as the selling of poor performing goods of the company at a price lower than the cost to the business, or at a price lower than the business desires. This way a business or a company which is already at a loss can pay off its stakeholders and can close itself down so that it does not have to incur any more costs in the future. Such bankrupt business or company will no longer be in existence once the liquidation process is complete.

Disclaimer: This article is for informational purposes only and shall not be construed as legal advice, advertisement, personal communication, solicitation or inducement of any sort from the firm or its members. The firm shall not be liable for consequences arising out of actions undertaken by any person relying on the information provided herein.