Winding Up of a Company in Nepal

Meaning of Winding up and Liquidation

Winding up of a company is the process by which the life of a 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 a company is terminated, and liquidation is another term used for it. The process of liquidation of a 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 a company, also called the winding up of a company or exit process of companies, can be done by three methods in Nepal:

• Voluntary Liquidation
• Compulsory Liquidation
• Deregistration / Striking off

Voluntary Liquidation

Voluntary liquidation of a company can be done only for a solvent company. The appointment of the liquidator by the general meeting is mandatory for voluntary liquidation. The members of the company must 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

Section 126 of the Companies Act has provisions regarding the voluntary liquidation of a company. Except in cases where a company has become insolvent under the prevailing law on insolvency, shareholders of the company may liquidate the company either by adopting a special resolution in the general meeting or by memorandum of association, articles of association, or consensus agreement. (Section 126(1))

Conditions for Voluntary Liquidation

• The company is able to pay its debts or other liabilities in full.
• No situation exists where an application for the review of insolvency of the company is pending or where the company would be in any manner subject to insolvency proceedings.
• Directors, after due inquiry, declare in writing that the company can pay its debts and other liabilities in full within one year from the adoption of the liquidation resolution.
• The written declaration made by the directors is presented in the general meeting called to discuss the liquidation or made at the time of discussions on the matter in the general meeting.

Step-by-Step Procedure for Voluntary Liquidation

1. Special resolution to liquidate the company is adopted in the general meeting.
2. Copy of such resolution and written declaration made by directors is submitted to the OCR within 7 days.
3. Appointment of liquidator and notification to OCR within 7 days.
4. Approval from regulatory bodies, if needed (e.g., NRB for banking and financial companies, Department of Education for schools).
5. Liquidator initiates the liquidation process as per Section 131.
6. Obtain tax clearance letter from the tax office.
7. Publish notice in a national newspaper twice, inviting claims against the company within 35 days.
8. Submit the liquidation and audit reports to the OCR.
9. Pay any fines.
10. OCR removes the company name and publishes a notice of closure.
11. Remove tax name and PAN number from the tax office.

Compulsory Liquidation

Provisions related to compulsory liquidation are in the Insolvency Act 2063. Liquidation under this Act is considered compulsory liquidation, initiated through a petition in the Commercial Bench of the High Court. This is also referred to as winding up by the court's decision.

Conditions for Insolvency

• A special resolution is adopted in the general meeting declaring insolvency, or the Board of Directors makes such a decision.
• The court issues an order requiring the company to pay the debt, and the debt is not paid within 35 days.
• The company fails to pay the debt or file an application to void the creditor’s notice within 35 days.
• Liabilities exceed the value of the company’s assets, or the company admits insolvency.

Who Can File for Insolvency Proceedings?

• The insolvent company itself.
• At least 10% of creditors.
• At least 5% of shareholders or debenture holders.
• An appointed liquidator.
• Authorized bodies such as NRB (for banks) or the Insurance Board (for insurance companies).

Insolvency Proceedings

1. Case filed at the Commercial Bench of the High Court.
2. Hearing scheduled within 7 days.
3. The company may offer counterarguments unless it is the applicant itself.
4. An inquiry officer evaluates the company’s financial state and submits a report.
5. The court appoints a liquidator or restructuring manager based on the report.

Deregistration / Striking Off

The Companies Act provides for deregistration/striking off in Nepal. Companies registered with the OCR but failing to commence business or remain inactive can be deregistered under the following grounds:

• Failure to commence business.
• Failure to submit annual reports and documents for 3 consecutive fiscal years.
• Reasonable belief that the company is not operating any business.

Disclaimer: This information is provided for educational purposes only and should not be construed as legal advice. FinLex Associates retains exclusive rights to the content.

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FAQ

1. What is winding up of a company?

   Winding up is the process of ending a company’s existence, during which its assets are managed for the benefit of creditors and members. A liquidator is appointed to oversee this process.

2. What is liquidation?

   Liquidation refers to the process of converting a company’s assets into cash and distributing them to creditors and shareholders. It is often used interchangeably with winding up.

3. What are the methods of terminating a company in Nepal?

   Companies in Nepal can be terminated through:

   • Voluntary Liquidation
   • Compulsory Liquidation
   • Deregistration / Striking off
4. What is voluntary liquidation?

   Voluntary liquidation occurs when a solvent company decides to wind up its operations. A special resolution must be adopted by the members to initiate this process.

5. What is the procedure for voluntary liquidation?

   The steps include:

   • Adopting a special resolution in a general meeting
   • Submitting the resolution and a declaration by the directors to the Office of the Company Registrar (OCR) within 7 days
   • Appointing a liquidator and notifying the OCR
   • Liquidator publishing notices for claims against the company
   • Submitting liquidation and audit reports to the OCR
6. What is compulsory liquidation?

   Compulsory liquidation is initiated by a court order, often when a company is unable to pay its debts. It can be applied to both solvent and insolvent companies.

7. What conditions deem a company insolvent?

   A company is considered insolvent if:

   • A special resolution declares insolvency
   • A court orders payment of a debt that is not paid within 35 days
   • It fails to pay a debt after a creditor's notice
   • Its liabilities exceed its assets
8. Who can initiate insolvency proceedings?

   The following can file for insolvency:

   • The company itself
   • At least 10% of creditors
   • At least 5% of shareholders or debenture-holders
   • Regulatory bodies like the NRB for banks
9. What is deregistration or striking off?

   Deregistration is the process of removing a company’s legal status if it has failed to commence business, has been inactive, or has not submitted annual reports for three consecutive years.

10. What happens to a company’s assets during liquidation?

    During liquidation, the liquidator collects the company’s assets, pays off debts, and distributes any remaining funds to members according to their rights.