CLOSING YOUR BUSINESS: LEGAL ASPECTS OF VOLUNTARY LIQUIDATION OF COMPANIES IN NEPAL
In the plainest sense, liquidation refers to liquidating all the assets of the company, thus bringing the business to an end. Voluntary liquidation is when a company decides to end its existence deliberately as opposed to when the company has become insolvent.
Companies’ Act, 2063 and Company Directives 2072 lays down the required legislation to be abided by in carrying out voluntary liquidation of a company. The shareholders of the company may liquidate the company either by adopting a special resolution in the general meeting of the company. However, if the Memorandum of Association (MoA), Articles of Association (AoA) or the Consensus Agreement between the shareholders provisions on the voluntary liquidation of the company, the company shall be liquidated voluntarily as per such document.
As laid down by section 126 of the Companies’ Act and section 64 of the Directives, any company may undergo voluntary liquidation under following circumstances:
- If a company is able to fully pay off its debts or other liabilities,
- If there exists no situation where an application for review of insolvency is pending, or where the company would be subject to insolvency proceedings,
- If the directors of the company have after due inquiry, made a declaration stating that the company is able to pay off all of its debts and other liabilities or that the debts and liabilities to be paid on behalf of such company can be paid up or fully settled in any other process 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 Special General Meeting (SGM), called to discuss on the liquidation matter or it was made at the time of GM called to discuss matters on liquidating the company.
Appointment of liquidator and auditor
Upon adopting the resolution to liquidate the company, the company shall appoint one or more liquidators, licensed under the prevailing law on insolvency to carry out the liquidation of the company in accordance to the prevailing insolvency law of the company. Company shall notify about the appointment of liquidator to OCR, no later than seven days from the date of such appointment. Directors, officers and the employees of the company shall be relieved from their office meanwhile transferring all the rights and power in relation to the company’s operation to the liquidator.
An auditor also shall be appointed to audit all the financial records of the company prepared by the management committee, depicting the current economic and financial status of the company.
Liquidator shall complete the liquidation proceedings within the period of time as mentioned at the time of appointment. If the proceedings could not be completed within the predetermined period of time, a reasonable time limit may be extended for its completion.
Liquidation of the company
The liquidator has the right to take control of all the properties, accounts, records, and documents of the company once the liquidator commences the liquidation proceedings. After commencing the liquidation proceedings of a company, if liquidator is satisfied that the company is unable to pay debts required to be paid or discharge liabilities required to be discharged in full then, the liquidator shall make an application for review of insolvency of the company in accordance to the prevailing law on insolvency.
Liquidator shall be required to submit the statements and accounts of income and expenditure in the course of liquidation every six months at OCR. Similarly, liquidators are vested with the responsibility to pay the debts and other liabilities of all the creditors of the company from among its assets and by recovering all properties and amounts that need to be recovered on behalf of the company. Liquidator will also publish notices in national dailies regarding liquidation of the company and calling creditors to settle any outstandings with the company within the prescribed time. Once the creditors are paid, the liquidator shall present a proposed report related to the distribution of the remaining properties of the company before the shareholders by calling a general meeting. Upon receiving the consent of shareholders holding at least 75% of paid up share capital on the proposed report, the payment shall be made to the shareholders accordingly.
If found that there is any irregularity in respect of liquidation proceedings carried out by the liquidator then, the shareholders or any creditor of a company may file a complaint in the court against such matter within 15 days of the receipt of such information.
After the successful completion of liquidation proceedings, the liquidator shall prepare a report on the properties recovered, payments made to the creditors, and distribution made to the shareholders on behalf of the company and submit the same to the OCR certifying that the company has been liquidated.
Cancellation of registration of company
Upon the receipt of a report on the liquidation of the company, OCR shall strike the name of the company off the company register and issue an order that the registration of the company has been cancelled. A notice stating that such a company has been dissolved shall be published in a national level newspaper by OCR.
Note: Commencement of voluntary liquidation proceedings of the company shall not prevent the creditors who have lent loans against the security of any company’s property from exercising their rights to use and manage such secured property, in any manner, under prevailing law.