Liquidation of a Company in Nepal: A Complete Guide

What is Company Liquidation?

Liquidation of a Company in Nepal refers to the formal process by which a company ceases its operations, and its assets are distributed among creditors and shareholders. The legal framework for company liquidation in Nepal is primarily governed by the Companies Act, 2006 and Insolvency Act 2063.

According to the Act, Liquidation of Company is the circumstance where a company registered by the Office of Company Registrar is cancelled by fulfilling a specific procedure.

What are the Laws Governing Liquidation of a Company in Nepal?

In the context of the Companies Act, 2063 (2006) in Nepal, liquidation refers to the process of winding up a company’s affairs, selling its assets, and distributing the proceeds to creditors and shareholders. Liquidation can occur voluntarily, initiated by the company’s shareholders, or involuntarily through a tribunal order in cases of insolvency.

According to the Insolvency Act, 2063 (2006) Liquidation is a condition wherein an entity is incapable or seemingly incapable of satisfying any or all of its outstanding debts, whether presently due and payable or anticipated to be payable in the future to creditors.

What are the three types of Liquidation?

Voluntary Liquidation, Compulsory Liquidation, and Creditor’s Voluntary Liquidation are the three primary forms of company liquidation in Nepal.

Voluntary Liquidation

Voluntary liquidation is initiated at the discretion of the company’s shareholders, necessitating the passage of a special resolution. A liquidator is appointed by the shareholders to oversee the realization of assets and the subsequent distribution among creditors and shareholders.

Compulsory Liquidation

A court order typically initiates compulsory liquidation when a company fails to fulfill its financial obligations or when the court determines that the process of winding up is fair and impartial. To oversee the liquidation process, including the notification of creditors and the appropriate distribution of assets, a court-appointed official liquidator is appointed.

Creditor’s Voluntary Liquidation

Similar to voluntary liquidation, creditors’ voluntary liquidation is initiated by the company’s creditors, usually in the event that insolvency is suspected. The creditors call a meeting, name a liquidator, and proceed with asset distribution based on creditor claims in accordance with the established legal procedures.

What is the main Purpose of Liquidation?

The primary objective of liquidation is to facilitate the methodical and orderly winding down of a company’s operations. Additionally, this results in the allocation of the company’s assets among its shareholders and creditors.

The company’s outstanding debts may be settled in a fair and equitable manner through liquidation. Creditors have the right to receive payment in full. Organizations confronted with financial challenges or insolvency may elect to pursue liquidation as a means to adhere to legal obligations.

The main objective is to turn the assets of the company into cash and distribute the proceeds to the shareholders and creditors in accordance with their individual rights and priorities.

Following the conclusion of the liquidation procedure, the company’s officers and directors are typically discharged from their responsibilities and legal obligations.

What is the Liquidation Process of a Company?

The liquidation process of a company in Nepal involves several steps and is governed by the Companies Act, 2063 (2006) and the Insolvency Act, 2073 (2016). The process is initiated when a company becomes insolvent or is unable to meet its financial obligations.

A number of stages comprise the Nepalese company liquidation procedure, which is regulated by the Companies Act, 2063 (2006) and the Insolvency Act, 2073 (2016). When a company becomes insolvent or is unable to fulfil its financial obligations, the procedure is initiated.

Shareholder Determination or Board Resolution

In most cases, the decision to liquidate a company is made by the shareholders via a special resolution passed by the board. In order to proceed, the decision must receive the necessary majority vote.

Designation of a Liquidator

The liquidator appointed by the company may be a corporation or an individual. It is mandatory for the liquidator to possess a valid license as an insolvency practitioner. In the Office of the Company Registrar, the appointment is then filed.

Notice of Insolvency or Solvency Declaration

If the company is solvent, a declaration of solvency is filed with the Company Registrar stating that the company is able to fully pay its debts within a designated timeframe, not exceeding one year. This stage is omitted when the company is insolvent.

General Public Notification

Publishing a public notice of the company’s intention to liquidate in a minimum of two daily newspapers of national scope is required. Creditors should be encouraged to submit their claims within a designated timeframe via this notice.

Convocation of Creditors

At a convened meeting of creditors, the liquidator provides an account of the financial status of the company. The opportunity exists for creditors to submit claims and object to any assertions made.

Conversion of Assets

The liquidator proceeds to sell or otherwise dispose of the company’s assets upon assuming control of them. In a predetermined order of priority, the funds generated from the asset realization are applied to the settlement of the company’s debts.

Allocation of Assets

The remaining funds are distributed among unsecured creditors and shareholders in accordance with their respective priorities and entitlements after the secured debts have been paid off.

Conclusion of Meeting

The liquidator convenes a final meeting of shareholders and creditors to present the final accounts and request approval for the dissolution of the company, once all assets have been utilized, debts have been settled, and any remaining surplus has been distributed.

Dissolution

After receiving consent from the relevant authorities and stakeholders, the liquidator submits an application to the Company Registrar for the dissolution of the company. After receiving sanction, the company is dissolved officially.

What is the Procedure of Restructuring in Nepal?

A company’s financial and operational structure can be changed through restructuring to increase its sustainability. The following is a synopsis of the Nepalese restructuring process:

1. It is necessary for the board of directors to approve a resolution that specifies the specific details and objectives of the proposed reorganization and proposes the restructuring of the company.
2. Acquiring and soliciting consent for the restructuring plan, a meeting of creditors is convened.
3. In accordance with the articles of association of the company, shareholders might be obligated to pass a special resolution endorsing the restructuring plan.
4. In addition to pertinent resolutions and approvals, the regulatory authorities, including the Office of the Company Registrar, are presented with the restructuring plan.
5. The restructuring plan is subject to assessment by regulatory authorities in order to verify its adherence to legal and regulatory obligations. The restructuring is authorized by the authorities if it is considered satisfactory.
6. The company proceeds to carry out the restructuring plan after receiving regulatory approval. Official notification is extended to creditors, shareholders, and other stakeholders regarding the approved restructuring plan and any modifications that might impact their interests.
7. The company files the required documents with regulatory authorities, including the revised Memorandum of Association and Articles of Association, once the restructuring has been effectively implemented.

Conclusion

In this context, liquidation may be initiated voluntarily by shareholders or involuntarily by a tribunal order in instances of insolvency, as enumerated in the Insolvency Act of 2063. Voluntary, compulsory, and creditor’s voluntary liquidation are the three principal categories of liquidation, each characterized by unique initiation procedures and processes. In order to ensure a smooth winding-up of the company’s affairs, the principal aim of liquidation is to impartially distribute assets among stakeholders while resolving any outstanding debts.