Meaning of Winding up and Liquidation

Winding up of a company is the process by which the life of company is ended and its property is administered for the benefit of its creditors and members. An administrator called a ‘liquidator’, is appointed who takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members by their respective rights. Winding up is the process through which the legal status of company is terminated and liquidation is another term used for it. The process of liquidation of company takes the management and control of the company’s affairs from the hands of the directors to the liquidator.

Exit process of Companies in Nepal

The termination of the company also called as winding up of company or exit process of companies can be done by three methods in Nepal : 

  1. Voluntary Liquidation
  2. Compulsory Liquidation
  3. Deregistration / Striking off

  1. Voluntary Liquidation

Voluntary liquidation of the company can be done only of the solvent company. The appointment of the liquidator by the general meeting is mandatory for voluntary liquidation. The members of the company has to adopt a special resolution to liquidate a company in its general meeting. A copy of the decision to liquidate the company along with the application form and application fee as determined by its paid-up capital shall be submitted within 7 days to the OCR. (Application fee is Rs 1,000 for companies having paid up capital of less than 10,00,000 and Rs 5,000 for companies exceeding it).

  • Section 126 of the Companies Act has provision regarding voluntary liquidation of company.
  • Expect in case where a company has become insolvent in accordance with the prevailing law on insolvency, the shareholders of the company may liquidate the company either by adopting a special resolution in the general meeting or memorandum of association, articles of association or consensus agreement. (Section 126(1))
  • A company may be liquidated under this Act in the following circumstance:
    • If the company is able to pay its debts or other liabilities in full;
    • If there exists no situation where an application for the review of insolvency of company is pending or where the company would be in any manner subject to 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 can be paid up or fully settled within one year from the date of the adoption of the resolution to liquidate the company; 
    • If the written declaration made by the directors 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.
  • A copy of the special resolution adopted with respect to the liquidation of a company and a written declaration of directors shall be submitted to the Office within seven days of adoption of the resolution.

Step-by-Step Procedure for Voluntary Liquidation

  • Special resolution to liquidate the company is adopted in the general meeting
  • Copy of such resolution and written declaration made by directors shall be submitted to the OCR within 7 days
  • Appointment of liquidator and notification to OCR within 7 days
  • Taking approval from the regulatory bodies, if needed. (NRB in case of banking and financial companies, Department of Education incase of schools)
  • Liquidator starts the liquidation process by exercising the powers and duties as mentioned under Section 131
  • Liquidator gets letter from OCR for obtaining tax clearance letter from the tax office for cancelation of company
  • Tax clearance certificate is issued by tax office which shows that all taxes till date have been paid up
  • Publish notice in national newspaper for at least twice which invites for claim against the company within 35 days, if there are any
  • Submission of the liquidation report and audit report to the OCR
  • Pay fines; if any
  • OCR removes off the name of company and publishes notice of the closing of company
  • Receive letter from OCR to remove tax name and PAN number from tax office

2. Compulsory Liquidation

  • The provisions related to compulsory liquidation is present in the Insolvency Act 2063.
  • Thus the liquidation of company as per the Insolvency Act is considered as the compulsory liquidation.
  • Compulsory winding up / liquidation is initiated through the petition in the commercial bench of the high court. Thus, this type of liquidation is also called as winding up by the decision of the court.
  • Compulsory winding up may be applied to a solvent or insolvent company. However, most of the times the liquidation process is initiated when the company is unable to pay its debts (becomes insolvent).

When is company deemed to be insolvent?

A company shall be deemed to have become insolvent on the following condition:

  • Special resolution is adopted in the general meeting that the company has become insolvent or a meeting of BoD makes such decision; or
  • The Court issues an order requiring the company to pay the debt and the debt is not paid up within thirty-five days from the date of receipt by the company of such order; or
  • The company fails to pay the debt within thirty-five days after the notice by the creditor for the payment of the debt or fails to make an application to the Court within the said period to void such notice.
  • If it is proved from any other matter that the liability of the company exceeds the value of the assets or the company itself admits that it has become insolvent.

Who can file for insolvency proceedings?

Any of the following persons may make an application to the Court in the prescribed form for initiating the insolvency proceedings against the company:

  • Company itself which has become insolvent
  • At least 10 % creditor or creditors
  • At least 5 % shareholder or shareholders
  • At least 5% debenture-holder or debenture-holders
  • Liquidator who has been appointed to liquidate a company
  • In the case of a company that carries on any specific type of business, a body authorized to administer and regulate such business.
    • NRB in case of bank and financial institutions
    • Insurance Board in case of insurance companies

Insolvency Proceedings

  • The insolvency process begins when case is filed at the Commercial bench of the High Court by any of the qualified person.
  • The court generally calls for a hearing within 7 days.
  • The company is allowed to offer counter arguments as to why it should not be declared insolvent and forced to liquidate its assets, except when the applicant is the company itself.
  • When the court decides it has found no reason to cancel the liquidation procedure, it will appoint an inquiry officer to evaluate the company’s financial state of affairs.
  • The inquiry officer shall make a report explaining whether the company could be restructured or needs to be liquidated.
  • After making the report, the inquiry official shall have a meeting with creditors in order to understand their view on the future of the company. However, the High Court may based on the report may ask with applicants on finalizing the best course of action.
  • The court then appoints either a liquidator or a restructuring manager based on the review and discussion.
  • The liquidator or the restructuring manager will scrutinize previous reviews and reports and either liquidate or restructure the company as per the order of the court.

3. Deregistration / Striking off

Companies Act has provision for deregistration / striking off of the companies in Nepal. The legal status of any company which is registered in the OCR but fails to commence the business or is inactive can be ended through the medium of deregistration. The deregistration / striking off of the company can be done on thse grounds : 

  • Failure to commence the business
  • Failure to submit the annual reports and documents for consecutive 3 fiscal year
  • Reasonable ground to believe that company is not operating any business

Disclaimer: This information is presented solely for educational purposes and should not be considered legal advice.

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