Liquidation of Company in Nepal : Closure of Company

Liquidation is the process of closure of a company by selling the assets of the company where the company is in the situation to be insolvent and no longer meets its financial obligations.

 

In Nepal, there are following two types of Liquidation:

 

i. Compulsory Liquidation

ii. Voluntary Liquidation

 

i. Compulsory liquidation: Compulsory liquidation takes place when a company is in the condition of non-fulfillment of its liabilities. This usually happens when the company is forced to liquidate by the order of the Court. An application is filed before the Court to initiate the liquidation proceeding. The procedure for Compulsory liquidation is governed by the Insolvency Act, 2063 (2006).

 

ii. Voluntary Liquidation: Voluntary Liquidation is the process where a company chooses to close down and sell its assets and is in the condition to fulfill the liabilities. It is the decision made by the company's shareholders or directors to close the company. An application should be given before the Office of Company Register ("OCR") for liquidating a company voluntarily. The procedure for Voluntary Liquidation is governed by the Companies Act, 2063 (2006).

 

Below mentioned are laws that govern the liquidation process in Nepal:

 

a. Companies Act, 2063 (2006)

b. Insolvency Act, 2063 (2006)

 

Note: The process of liquidation of Nepal's banks and financial institutions is governed by the Bank and Financial Institution Act, 2073 (2017) ("BAFIA"). The article does not cover the liquidation of Banks and Financial Institutions as they are separately governed.

 

 

Voluntary Liquidation is the process where a company chooses to close down and sell its assets and is in the condition to fulfill the liabilities. It is the decision made by the company's shareholders or directors. In voluntary liquidation, the shareholders/directors decide that the company can't continue operating and it is better to sell company assets and use the money to pay the debts.

 

The provision for voluntary liquidation is incorporated under Chapter 10 of the Companies Act, 2063(2006).

 

Conditions for voluntary liquidation are as mentioned:

S.N.	Condition
1.	If the company can pay all of its Debts and liabilities.
2.	If the company has not initiated the compulsory liquidation proceeding or there is no possibility of the same.
3.	If the board of directors has acknowledged in writing that the company is in the financial position to pay its debts and liabilities or declare such liabilities can be settled within a year from the date of the decision to liquidate the Company.

 

The process of voluntary liquidation is as mentioned:

Steps	Details
Step 1	A company must be able to establish the position to pay all its debts and liabilities.
Step 2	The shareholder of the company should pass a written resolution from the General Meeting and submit an application to OCR to wind up the company.
Step 3	Appointment of the liquidator and auditor from the General Meeting with their remuneration and inform OCR regarding the appointment within 7 days of the appointment.
Step 4	Liquidator shall recover and discharge the debts and other liabilities.
Step 4	Submit the report to OCR within the given time frame.
Step 5	Once the report is submitted to OCR, the name of the Company is removed from the record book of OCR and the same notice should be published in the national daily newspaper.

 

Note:

1. Once the OCR appoints the liquidator, all rights of BOD shall be transferred to the liquidator.

2. Further employees of a company shall be ispo facto terminated.

3. An auditor shall be appointed while appointing a liquidator and the liquidator shall retain or appoint necessary employees for his/her support in the liquidation process.

 

The process of cancellation of registration of a Company is called Deregistration of a Company. Unlike in the Voluntary Liquidation of a Company, the company can be deregistered if it has not been operated at all even after its establishment.

 

Major differences between the Voluntary liquidation and deregistration of the Company are as mentioned:

S.N.	Voluntary Liquidation	Deregistration of Company
1.	The process of a company where it chooses to close down and sell its assets and is in the condition to fulfill the liabilities is called Voluntary Liquidation.	It is the process of cancellation of registration of a Company if it has not been operated even after the establishment.
2.	In the process of Voluntary liquidation, shareholder or director of the Company close down and sell its assets and is in the condition to fulfill the liabilities.	The promoter of the Company makes an application showing a reason for the failure to Commence the business of the Company.
3.	Voluntary liquidation is initiated by the Shareholder or director of the Company.	Deregistration of the Company can also be initiated by the OCR itself.

 

Compulsory liquidation takes place when a company is in the condition of non-fulfillment of its liabilities. This usually happens when the company is forced to liquidate by the order of the Court.

 

The conditions required for the compulsory liquidation is as mentioned:

 

As per section 3 of the Insolvency Act, the liquidation process can be commenced after the order of the court only. Application has to be filed to the High Court by any of the person mentioned below:

SN	Condition
1.	Company itself through decision of BOD and Shareholder
2.	Creditors carrying 10% of credit in the company.
3.	Shareholders subscribing to at least 5% of the total shares of the company
4.	Debenture holders who have subscribed at least 55% of debenture out of the total Debenture.
5.	Regulating government authority for any specific type of business

 

The process of compulsory liquidation in Nepal is as mentioned:

Steps	Detail Process
Step 1	Company should pass a special resolution through the general meeting for taking Company to liquidation.
Step 2	Submission of the Application of liquidation to the concerned High Court.
Step 3	Order of the court either to initiate the insolvency process or not.
Step 4	Appointment of an investigating officer by Court to inquire about the financial status of the Company or the possibility of restructuring.
Step 5	The investigating officer shall prepare a report after investigation.
Step 6	The investigating officer shall call for the Creditor's meeting to discuss regarding the financial position of the company before submission of the final report before the court.
Step 7	Submission of report by the investigating officer to the court within the time provided by the Court.
Step 8	After the submission of the report, the court shall give order either to; Liquidate the company, Restructure the company, Wait for a specified period if there is the possibility that the company can be reformed without liquidating it immediately.
Step 9	If the court decides to liquidate the company, an order to appoint a liquidator shall be made by the Court.
Step 10	The liquidator shall submit a progress report regarding the liquidation of the company before the Court and OCR within three months of his/her appointment.
Step 11	The liquidator before submission of the progress report shall call a meeting for creditors where he/she will give a time limit to submit debt claims.
Step 12	The liquidator shall make a settlement to all creditors as per their priority and if any asset is remaining such shall be distributed to the shareholders in proportion to their ownership in the company.
Step 13	The liquidator shall prepare a report including the details of properties, payments made to creditors and distributions made to the shareholders, and submit such report certifying that the company has been liquated, accompanied by the auditor's report, to OCR.
Step 14	After receiving a report regarding the liquidation of a company, the OCR (Office of the Company Registrar) will proceed to remove the company's name from the OCR register book. A formal order will be issued to confirm the cancellation of the Company registration. Additionally, a notification will be published in a national daily newspaper to announce the dissolution of the company.

 

Note:

i. In case the creditor or debtor is applying for the liquidation, prior notice of 35 days should be provided

ii. The investigation officer shall inquire about the following;

a) Whether the immediate cancellation order should be issued showing the reason that the financial position of the company cannot be improved,

b) Whether the order of the court should issue a restructuring program,

c) Whether the company is in a position to be insolvent.

iii. The Court shall give the order to publish a notice to inform the stakeholders regarding the initiation of the liquidation proceeding.

iv. Before the initiation of the liquidation proceeding, the court may take an opinion from the concerned government authority related to the Company if they have an objection to the initiation of the liquidation proceeding.

v. After the appointment of Liquidator BOD shall be dissolved and the employee will not hold any position in the company.

 

Once the liquidator is appointed, he/she shall have the power to take control over all the assets of the company with the following other duties:

a. To proceed or defend any case on behalf of the company;

b. Make appointments with employees to support them during work;

c. Instruct shareholders of the company to make payment of installments in respect of shares of the Company;

d. To use the seal of the company and perform all other documentary works on behalf of the company;

e. To sell the assets and distribute the proceeds of such sale; and

f. Perform all activities that are required to liquidate the company.

 

 

It is the process under the insolvency act where a company overcomes its financial difficulties and continues its operations rather than immediately liquidating its assets and shutting down. During the insolvency proceeding, the Court may decide to initiate the restructuring of the Company if the Court finds the following conditions:

(i) If the investigating officer gives an opinion to restructure the Company,

(ii) If the investigating officer or the Court thinks the creditors can be paid by selling any parts of assets of the Company,

(iii) If the Company's situation seems to be improved after the amalgamation with any other Company.

(iv) If the Court finds that there exists a situation where the company can change its management.

 

 

Date of Publication: 20 Janurary 2024

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