What does a company liquidation imply?
When a company goes into liquidation, its assets, such as assets and securities, are “liquidated,” or turned into cash for reimbursement to the company’s creditors in order of priority. As a result of the liquidation, your company is removed from the register at the Office of the Company Registrar because it no longer exists. These proceedings are also applicable in the case of a reorganization of such companies.
What are the laws in Nepal that regulate the liquidation of a company?
- The Insolvency Act, 2063 (2006)
- The Companies Act, 2063 (2006)
Aside from that, Nepal’s banks and financial institutions are governed by the Bank and Financial Institutions Act, 2073 (2017).
What are the liquidation procedures in Nepal?
According to the Insolvency Act, to be “insolvent” implies being unable to, or appearing to be unable to, pay any or all of the debt obligations due and owing to or payable in the long term to creditors, or a condition in which the sum of the company’s liabilities exceeds the value of its assets. Company liquidation” refers to a condition in which the company’s registration is canceled after the procedure is completed.
A company can be liquidated in two ways:
- a) Compulsory or coerced liquidation; and
- b) Voluntary Liquidation
What is voluntary liquidation?
When the promoters of a company decide that the company has no reason to continue operating, the decision to voluntarily liquidate begins. The involvement of the court may or may not be required.
The provisions of Chapter 10 of the Companies Act apply to voluntary liquidation, which occurs when a company is able to clear all of its credit, tax, fees, and fines and owes no liabilities to any of the parties.
What are the requirements for a voluntary liquidation?
- Following a thorough investigation, the company’s directors issued a written declaration stating that the company is able to pay its debts and other liabilities in full, and that the liabilities and debt obligations to be paid on its behalf can be paid in full or completely settled in any other procedure within one year of the adoption of the resolution to liquidate the company.
- If the company is able to fully pay off its debts or other liabilities;
- If the company’s application for insolvency review is approved and the company is not the subject of an insolvency proceeding;
- If the written declaration made by the directors in compliance with Section (c) is presented at the regular meeting called to discuss the company’s liquidation, or if such pronouncement is made during the general meeting’s discussion on that subject.
How long does it take for a company to be liquidated?
- There is no mention of a statutory time limit for completing the liquidation process in the Companies Act. It could be determined by the number of shareholders and their settlements, the time it takes to sell the assets, and the tax clearing obtained from the tax office.
- According to Section 127(6) of the Companies Act, the liquidator appointed under this section is required to complete the company’s liquidation proceedings within the time window specified at the time of his/her appointment.
- If, for any reason, the liquidation proceedings cannot be concluded within the given time frame, a set time threshold may be extended by following the same process as in his/her appointment.
What are the steps involved in voluntary liquidation?
- To clear all debts and liabilities, the company should conduct an internal audit of its accounting records and examine its financial position.
- The Company’s members should adopt a signed statement acknowledging that the organization can fulfill debt obligations as well as other debts within one year of the resolution for liquidation being passed, or that they can be fully satisfied through any other agreement.
- A representative of the Company’s shareholders must pass a written resolution dissolving the company and submit it to the Office of the Company Registrar (“OCR”).
- The shareholder’s representative should provide for the referral of the liquidator and auditor, as well as the timeline for completing the liquidation process and receiving wages.
- The company must notify the concerned authorities, such as the OCR and the Inland Revenue Department (“IRD”), of the appointment of a liquidator no later than seven days after the appointment.
- According to Section 130 of the Companies Act, the liquidator has control over all of the Company’s assets, transactions, and documents. Section 131 describes the Liquidator’s obligations, capabilities, and roles. Major duties include communicating with shareholders, selling assets, and discontinuing agreements.
- A liquidator appointed in compliance with Section 131 will:
- Submit income and expense information, as well as company accounts, to the Office of Company Registrar (OCR) at least about every six months.
- The shareholders of the company are alerted of the development of the liquidation process each six months.
- Pay off all of the company’s debts and liabilities with its assets and receivables.
- Submit a proposal for the distribution of residual assets to the shareholder meeting after paying off all debts and liabilities.
- If 75% of the shares are approved, make a payment to the shareholder from residual assets.
- Submit to the OCR a report detailing the earnings from asset sales, payouts, and shareholder allocations, as well as an audit report confirming that the company has been liquidated.
- The registration of the company is terminated upon receipt of the liquidation report.
What are the mandatory liquidation procedures in Nepal?
- An insolvency officer is appointed to investigate and assess the status of liquidation.
- If its financial problem can be mitigated or if an order for immediate liquidation should be issued;
- Whether or not an order should be issued for the reorganization of the company through such a reform program; or
- Whether or not the company is bankrupt.
- The director must report to the court on the company’s financial situation and transactions.
- The inquiry officer is required to submit an investigation report to the court within the time frame stipulated by the court.
- Within seven days of receiving the report submitted by the inquiry officer, the court may issue any of the following orders.
- Liquidate the company immediately;
- Enforce the reform plan;
- Remain till the time prescribed by the court in the event of probability without liquidating;
- Extend the deadline of the insolvency resolution process.
- If the court decides to liquidate the company, it must issue an order appointing a liquidator.
- The liquidator will be the primary decision-maker. The directors, officers, and all other employees are relieved of their duties, and the liquidator assumes complete control. Except for the properties in possession, the liquidator seizes all investments, assets, and publications of account.
The liquidator must carry out the following responsibilities:
- To initiate or defend any legal action or case on behalf of the company;
- To designate employees to assist him/her in carrying out his/her duties;
- Borrowing loans against the company’s assets as collateral;
- Determine whether any offence, deception, or manipulation was committed by directors, shareholders, or employees;
- To sell the holdings and distribute the proceeds; and
- To carry out or cause to be carried out all tasks necessary for the company’s liquidation.
- The liquidator must start planning a progress update on the company and report it to OCR and the court no later than three months after being appointed.
- The liquidator has the authority to call a creditors’ meeting, form a creditors’ committee, and set a deadline for the submission of debt allegations.
- Liabilities are resolved in the order referred to in section 57 of the Insolvency Act, and for banks and financial institutions in accordance with the Banks and Financial Institutions Act.
- At the end of the liquidation proceedings, the liquidator must prepare a report on the assets retrieved, money paid to creditors, and allocations made to shareholders on behalf of the company and submit it to the OCR, confirming that the company has been liquidated and supplemented by the audit reports.
- After receiving a report on a company’s liquidation, OCR shall strike the company’s name from the company register and issue orders terminating the company’s registration. A notice of the dissolution of such a company must be published in a national daily newspaper.
What exactly is coerced liquidation or forced liquidation?
Obligatory or coerced liquidation
Compulsory liquidation occurs when a company is forced to cease operations and sell all of its assets in order to pay its debts. If a company is unable to satisfy all of its creditors’ claims, it is forced to liquidate. The distinction between voluntary and compulsory liquidation is that the latter is usually imposed on the company rather than the directors fulfilling their legal obligation to wind up the insolvent company in an organized manner. However, in both procedures, the liquidator is supposed to sell the company’s assets in order to recover as much as reasonably practicable for lenders.
Whereas the latter is often much more stable and can be used as a rescue process and to produce better results for creditors with the assistance of a competent insolvency practitioner. In several cases, such liquidations begin with a court order, and such businesses are in accordance with the provisions of the Insolvency Act.
- What are the prerequisites for mandatory liquidation?
According to Section 3 of the Insolvency Act, the insolvency process can only begin after the Court issues an order. Any of the following individuals must apply to the court for insolvency resolution process;
- Company that has gone bankrupt;
- At least ten percent of the company’s creditors;
- Shareholders owning at least 5% of the total number of shares;
- Debenture holder or holders who have signed up for at least 5% of the total debentures issued by the company;
- A liquidator is appointed to liquidate the company; or an authorized body is appointed to manage a specific type of business, such as banks and financial institutions.
- If the company is unable to pay the creditor within 35 days of receiving payment notice, an application can be made.
2. What does restructuring mean?
The term “restructuring” refers to a process used by the Insolvency Act to assist a company that has become insolvent because of a lack of funds. According to the Act, “financial distress” refers to a situation in which a company becomes or may become insolvent immediately or soon if it is not reorganized. When a company goes through restructuring, it makes significant changes to its operating and financial framework, which is most common when the company is facing financial difficulties. It enables a company to deal with a competitive and unpredictable business environment.
3. What are the restructuring procedures?
When a court orders the company to be restructured, the restructuring manager creates a restructuring plan.
- Section 23(2) of the Insolvency Act requires that the restructuring plan include the following programs:
- To change the nature of the company’s creditors’ claims and issue securities in exchange;
- In order to persuade the company’s creditors to participate in capital investment, shares will be issued in exchange for their claims.
- To leverage the debt of the company and alter its capital structure.
- To satisfy creditors’ claims by selling all or a portion of the company’s assets;
- To merge the company with another company; to change the management of the company; or to perform any other appropriate acts.
- A creditors’ meeting is called to discuss the Restructuring Program Proposal and report their claims no later than fifteen days after the restructuring manager starts operations. A national daily newspaper publishes such notices at least twice a week.
- The restructuring manager prepares and submits to the court a report containing information about the company’s transaction, assets, and financial situation, as well as any restructuring program.
- Dissatisfied creditors have seven days to file a claim and object to the approved restructuring plan, outlining the grounds and reasons for their dissatisfaction.
- If the court approves the creditors’ meeting’s restructuring plan, it will be valid and enforceable on all of the company’s creditors, directors, and shareholders.
- The restructuring manager will run the company during the restructuring period. The restructuring manager is authorized to monitor all of the company’s accounting records, invoices, documents, transactions, and paperwork, as well as handle the company’s transactions and assets.
- If the restructuring applies accordingly that any amount is required to maintain the company operating in conformity with the program, the company may take loans with or without using the project’s financial resources.
- If the company fails to implement the restructuring program, it is terminated. The court also orders that such a company be liquidated.
- If the program cannot be implemented in its entirety or in part, it can be altered or amended through a creditors’ meeting if the court authorizes.
- Execution of restructuring program.
A company’s liquidation is merely the sale of underperforming products by the company at a lower price than the cost to the company, or at a sharp decline than the business desires. A company or business that is already losing money can pay off its creditors and close down so that it does not have to incur any extra costs in the long run. Once the liquidation process is completed, the bankrupt business or company will no longer be relevant.
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Alpana Bhandari is a founding partner and CEO of Prime Legal Consultants and Research Center. She graduated from American University Washington College of Law. She specializes in corporate/arbitration and family law.