A. Introduction
Liquidation refers to the formal process of dissolving a company by selling its assets, paying off creditors, and distributing any remaining proceeds to shareholders, effectively bringing a company’s existence to an end. In Nepal, there are two types of liquidation, which includes:
- Voluntary Liquidation as per Companies Act; and
- Compulsory Liquidation as per Insolvency Act.
This article provides a general overview of the liquidation processes in Nepal.
B. Governing Laws
- Companies Act, 2006 (“Companies Act”) deals with voluntary liquidation process;
- Insolvency Act, 2006 (“Insolvency Act”) deals with compulsory liquidation/insolvency process.
Note: The liquidation process for banks and financial institutions is governed by Bank and Financial Institutions Act, 2017; and for insurance companies is governed by Insurance Act, 2022. This article does not cover the liquidation process of such specific sectors.
C. Voluntary Liquidation
A voluntary liquidation is the process where a company’s shareholders willingly decide to dissolve the company by passing a special resolution, and appointing a liquidator to settle debts and distribute remaining assets. Chapter 10 of the Companies Act deals with the provisions relating to voluntary liquidation.
1. Conditions of Voluntary Liquidation
A company can undergo voluntary liquidation process in the conditions as follows:
| S.N. | Conditions |
|---|---|
| 1. | If the company is able to pay its debts or other liabilities fully; |
| 2. | If the company has not initiated insolvency proceeding or there is no possibility of the same; |
| 3. | If the board of directors has acknowledged in writing that the company is in financial position to pay its debts and liabilities or declared that such liabilities can be settled within a year from the date of the decision to liquidate the company. |
| 4. | If such written declaration 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. |
2. Procedure of voluntary liquidation
A step-by-step procedure for voluntary liquidation of a company is provided in the table below:
| Steps | Procedure |
|---|---|
| Step 1 | Company must internally verify its financial statements to establish the position to pay all its debts and liabilities; |
| Step 2 | The shareholder of the company must pass a written resolution from the General Meeting and submit an application to Office of the Company Registrar (“OCR”); |
| Step 3 | The company must appoint the liquidator and auditor from the General Meeting and inform the concerned government authorities such as, OCR, and Inland Revenue Department (“IRD”) within seven (7) days of the appointment; |
| Step 4 | If such written declaration 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; |
| Step 5 | Liquidator recovers and discharges the debts and other liabilities pursuant to the power and duties provided under the Companies Act; |
| Step 6 | Submission of report prepared by the liquidator at the OCR; |
| Step 7 | Upon review of the report and application, the OCR approves the company liquidation process, and removes the company’s name from its record book. |
D. Compulsory Liquidation/Insolvency
Compulsory liquidation/Insolvency in Nepal is a court-ordered process that forces a company to close when it cannot pay its debts, initiated through a petition by creditors or regulatory authorities and overseen by a court-appointed liquidator who takes control of all company affairs.
Compulsory liquidation/Insolvency proceeding is subject to the provisions of the Insolvency Act.
a. Application for insolvency proceeding
Pursuant to the Insolvency Act, the insolvency proceeding against a company commences once an application is filed at the High Court by any concerned parties, details of which are follows:
| S. N. | Procedure |
|---|---|
| A | A company itself which has become insolvent; |
| B | Creditors with at least 10% of credit in the company; |
| C | Shareholders who have subscribed to at least 5% of the total shares of the company; |
| D | Debenture holders who have subscribed to at least 55% of debenture out of the total debenture; |
| E | A liquidator who has been appointed to liquidate a company; |
| F | Regulating government authority for any specific type of business. |
b. Process of Compulsory Liquidation in Nepal
A step-by-step procedure for compulsory liquidation of a company is provided in the table below:
| Steps | Procedure |
|---|---|
| Step 1 | Submission of liquidation application to the concerned High Court; |
| Step 2 | Order of the court whether or not to initiate the insolvency process; |
| Step 3 | Appointment of an investigating officer by the court to inquire about the financial status or the possibility of restructuring; |
| Step 4 | The investigating officer shall prepare a report after investigation, and 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 5 | After the submission of the report, the court gives order either to liquidate the company, or undergo restructuring procedure; |
| Step 6 | If the court decides to liquidate the company, the court orders to appoint a liquidator; |
| Step 7 | The liquidator must call a meeting for creditors where they give a time limit to submit debt claims. Thereafter, the liquidator submits a progress report regarding the liquidation of the company before the court and the OCR; |
| Step 8 | The liquidator must make a settlement to all creditors as per their priority and, if any asset remains, such shall be distributed to the shareholders in proportion to their ownership in the company; |
| Step 9 | The liquidator prepares a report including the details of properties, payments made to creditors, and distributions made to the shareholders, and submits such report certifying that the company has been liquidated, along with the auditor’s report to the OCR; |
| Step 10 | The OCR will proceed to remove the company’s name from the OCR register book. |
c. Restructuring of Company
Pursuant to the Insolvency Act, restructuring is a formal rehabilitation process that allows financially distressed companies to continue operations while reorganizing their debts, ownership, and business operations rather than proceeding to liquidation. This mechanism enables viable businesses facing financial difficulties to negotiate with creditors, implement operational changes, and develop a court-supervised recovery plan.
During the insolvency proceeding, the court can decide to initiate the restructuring of the company in the following conditions:
| S.N. | Conditions |
|---|---|
| a) | If the investigating officer gives an opinion to restructure the company; |
| b) | If the investigating officer or the court deems that creditors can be paid by selling any parts of assets of the company; |
| c) | If the company’s situation seems to be improved after the amalgamation with any other company; and |
| d) | If the court deems that there exists a situation where the company can change its management. |
Disclaimer: This article is for general informational purposes only and does not constitute legal advice, advertisement, personal communication, solicitation or inducement. No attorney-client relationship is created through this content. Gandhi & Associates assumes no liability for any consequences resulting from actions taken based on information contained herein.
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