Definition of Liquidation

Liquidation is the formal process of winding down all the affairs of a company, where all assets are sold to settle debts, ultimately leading to the company’s dissolution and discontinuation of its existence. The main reason for this decision is usually that the company can’t pay its debts or can’t keep running profitably.

Why a Company Might Undergo Liquidation

• Insolvency: The primary reason for liquidation is insolvency, where the company cannot meet its financial obligations or pay its debts as they come due.
• Unprofitable Operations: If a company is consistently unprofitable and there is no feasible path to turn it around, liquidation may be chosen to prevent further financial losses.
• Completion of Business Purpose: Sometimes, a company is established for a specific project or purpose, and once that is completed, the company is liquidated.
• Disputes Among Stakeholders: Irreconcilable disputes among shareholders or directors can lead to the decision to liquidate the company.
• Regulatory or Legal Issues: Violations of laws or regulations that severely impact the company’s ability to operate can necessitate liquidation.

Types of Liquidation

There are basically two types of liquidation available in Nepal. They are:

• Voluntary Liquidation
• Involuntary/ Compulsory Liquidation

1. Voluntary Liquidation

Voluntary liquidation is initiated by the company’s shareholders. It involves passing a resolution for liquidation, appointing a liquidator, and notifying creditors.

2. Compulsory Liquidation

Involuntary liquidation occurs when a company is unable to pay its debts and a court order is issued for its liquidation. This process involves filing a petition in court, court proceedings, and the appointment of an official receiver.

Governing Laws in Nepal

The major law that governs liquidation of the companies are:

• Insolvency Act, 2063 (2006)
• Companies Act, 2063 (2006)
• Bank and Financial Institutions Act, 2073 (2017)

Alongside the Office of the Company Registrar and judiciary also plays a pivotal role in overseeing the liquidation process.

Condition for Voluntary Liquidation

Decision by Shareholders

The decision to liquidate must be made by the company’s shareholders. A special resolution must be passed at a general meeting with at least a 75% majority of shareholders’ votes.

Solvency Declaration (for Members’ Voluntary Liquidation)

Directors must declare that the company can pay its debts in full within a specified period, usually 12 months. This declaration must be made in a board meeting and supported by a solvency statement.

Insolvency Condition (for Creditors’ Voluntary Liquidation)

If the company is insolvent and cannot pay its debts, a creditors’ voluntary liquidation can be initiated. Shareholders must acknowledge the company’s inability to continue business due to financial difficulties.

Fig: processes Goes In a clockwise Direction

Conditions of Involuntary/Compulsory Liquidation of a Company

Involuntary or compulsory liquidation in Nepal is typically initiated through a court order due to insolvency or other legal grounds. This process is governed by the Companies Act, 2006, and the Insolvency Act, 2006.

Insolvency

Insolvency is a financial condition where a company is unable to meet its debt obligations as they come due. The most common ground for compulsory liquidation is the company’s inability to pay its debts. A creditor can present evidence that the company owes a significant amount and has failed to pay or secure this debt within 21 days of a formal demand.

Special Resolution

Shareholders may pass a special resolution (with at least a 75% majority) requesting the court to liquidate the company, usually when the company is unable to continue its business due to financial difficulties.

Failure to Comply with Legal Requirements

If the company repeatedly fails to file statutory reports, hold annual general meetings, or comply with other regulatory requirements, it can be grounds for compulsory liquidation.

Fraudulent or Illegal Activities

Evidence of serious misconduct, fraud, or illegal activities by the company’s directors or officers can lead to a court-ordered liquidation.

Court’s Discretion

The court may decide that it is just and equitable to wind up the company. This might occur in situations where there is a deadlock in management, loss of company’s main purpose, or severe internal disputes among shareholders.

Duties and Power of Liquidator

A liquidator is appointed to manage the process of winding up a company’s affairs, whether in voluntary or compulsory liquidation. The duties and powers of a liquidator are typically outlined in a country’s legal framework. In Nepal, these duties and powers are governed by the Companies Act, 2006, and the Insolvency Act, 2006. Here is an overview of the duties and powers of a liquidator.

Asset Management

• Prepare a detailed inventory of all the company’s assets.
• Take custody and control of the company’s assets to safeguard them.
• Sell the company’s assets in an orderly manner to maximize returns. This might involve auctioning, tendering, or private sales.

Debt Settlement

• Settle the company’s debts by paying creditors in the order of their legal priority. Secured creditors are paid first, followed by unsecured creditors.

Dispute Resolution

• Resolve any disputes regarding claims made by creditors.

Financial Reporting

• Prepare and maintain detailed accounts of the liquidation process.

Reporting to Stakeholders

• Regularly report to creditors, shareholders, and the court (if applicable) on the progress of the liquidation.

Investigation

• Investigate the company’s financial affairs and transactions leading up to the liquidation.

Director Conduct

• Examine the conduct of the company’s directors and officers to identify any fraudulent or wrongful trading.

Distribution

• Distribute any remaining funds to shareholders after all debts and liquidation expenses have been settled.

Preparation of Final Accounts

• Prepare a final account of the liquidation process for review by the court and stakeholders.

Dissolution

• Apply to the court or relevant authority for the company’s dissolution once the liquidation process is complete.

Removal from Register

• Ensure the company is removed from the register of companies, marking its official dissolution.

Powers of a Liquidator

• Asset Management: Take control of the company’s assets, including the power to sell or dispose of them.
• Management of Business: Continue to operate the company’s business if it benefits the liquidation process, such as to sell as a going concern.
• Legal Actions: Initiate or defend legal proceedings on behalf of the company to recover assets or settle claims.
• Settlement of Claims: Compromise or settle claims made by or against the company.
• Contracts: Terminate contracts that are not beneficial to the liquidation process.
• Entering into Contracts: Enter into new contracts if necessary to facilitate the winding-up process.
• Employee Management: Dismiss employees if their services are no longer required during the liquidation.
• Settlement of Employee Claims: Settle claims by employees for wages, salaries, and other entitlements.
• Investigation: Examine the company’s books, records, and documents to uncover any misconduct or fraudulent activities.
• Summon Persons: Summon and question the company’s directors, officers, and other persons involved in the company’s affairs.
• Creditors and Shareholders Meetings: Call meetings of creditors and shareholders to discuss the liquidation process and obtain necessary approvals.
• Report Progress: Report on the progress of the liquidation and present accounts for approval.
• Borrowing and Financing: Borrow money on the security of the company’s assets if required to meet the costs of liquidation.
• Securing Loans: Secure loans and finance the liquidation process, ensuring the best possible outcomes for creditors.

Disclaimer

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