Liquidation of a company means the legal way of ending the company in which assets are discharged and sold out to repay the creditors whereby the business is closed and its name is removed from the record of the Company Registrar’s Office (OCR).
In Nepal, the major law governing the liquidation process of a company are:
Meanwhile, for liquidating a bank and financial institution, there is a specific act, Bank and Financial Institution Act, 2017 to govern liquidation.
Method of liquidation
There are mainly two exit options available for the companies that want to shut down their businesses which are mentioned below:
- Voluntary liquidation
- Compulsory liquidation
Voluntary liquidation is done when a company is able to pay its debts fully and in a situation when it can satisfy the claims of all its creditors. The decision to voluntarily liquidate the company begins once its leadership decides that the company has no reason to continue operating. Chapter 10 of the Company Act deals with the issue of voluntary liquidation.
Circumstances for voluntary liquidation
Section 126 of the Company Act has listed the circumstances which should be fulfilled to initiate the process of voluntary liquidation. The circumstances are mentioned below:
- If the company is able to pay its debts or other liabilities fully
- If an application for the review of insolvency of the company is reviewed and the company is not subject to an insolvency proceeding
- If 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
- 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
Procedure for voluntary liquidation
Step 1: The general meeting shall pass a resolution of liquidating the company. It shall be followed by the declaration from the board of directors regarding the company’s capacity to pay all the creditors. The boards of directors shall notify the Office of Company Registrar regarding the appointment of the liquidator and auditor to initiate the process of liquidation.
Step 2: Publishing of advertisement in any national daily with all the information for liquidation: After the maturity of the time, the general meeting shall pass a resolution as per the audit report prepared by the auditor and shall file it to the OCR along will all other documents of the company.
Step 3: After the OCR examines the report, it issues a letter to the regulatory body for in-principle approval.
Step 4: After receiving all the approval from the regulatory body, the OCR liquidates the company and remove the name from its record.
Step 5: After receiving a letter from the OCR regarding the liquidation of the company, the OCR issues a letter for removal of records at the tax office and the local body.
Compulsory liquidation is a circumstance in which a company must stop operating and sell all its assets in order to pay its debts. Compulsory liquidation is initiated if any company is not being able to pay claims of all the creditors. The difference between a voluntary and a compulsory liquidation is that the latter is usually forced upon the company. Generally, such liquidation starts with the order of the court and such companies are subject to the provisions of the Insolvency Act.
Circumstances for compulsory liquidation
Section 4 of the Insolvency Act mentions conditions for compulsory liquidation in which it is necessary to initiate the proceedings of insolvency against any person. In such conditions, an application can be filled to the court by any of the following person for insolvency proceedings:
- The company that has become insolvent
- At least 10% of the creditors of the company
- A shareholder or shareholders subscribing at least 5% of the total shares
- A debenture holder or debenture holders that have subscribed at least 5% of debentures out of the total debenture holders of the company
- The liquidator who has been appointed to liquidate the company, or
- An authorised body to administer the special kind of business like banks and financial institutions.
Procedure for compulsory liquidation
Step 1: Registration of an application to the concerned court
Step 2: Hearing and order by the court to institute or not to institute insolvency proceeding. If accepted, the court will order appointing an inquiry officer.
Step 3: The 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 programmes or not
- Whether the company is insolvent or not
Step 4: A report to be made by the director on the financial situation and transactions of the company to the court
Step 5: The court shall make an order to appoint the liquidator if the court makes a decision to liquidate the company.
Step 6: The liquidator shall prepare a progress report in relation to the company and submit it to the OCR and the court no later than three months of his/her appointment.
Step 7: The 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.
Step 8: Upon submission of a report on the liquidation of the company, the OCR shall strike the name of the company off the company register and issue an order that the registration of the company has been cancelled. A notice must be published in a national daily newspaper that the company has been dissolved.