What is Insolvency?

Insolvency refers to a situation of financial distress where a company is not able to meet its obligation pertaining to the debts owed and other liabilities. Section 2 (b) of Insolvency Act, 2063 of Nepal, the governing legislation on the matter, defines ‘insolvent’ as a state of being or appearing unable to pay any or all of the debts due or payable in the future to the creditors or a situation where the amount of liabilities of a company exceeds that of assets. It is an act of involuntary liquidation done against the will of a company for clear reasons only.

Conditions for initiating insolvency proceedings:

No insolvency proceedings shall be commenced without court order. Provisioned in section 7 of the bare Act, any of the following person/entity can file an application, along with stipulated documents, at the court for the institution of insolvency proceedings:

  1. Insolvent company itself,
  2. Out of the total creditors of a company which has become insolvent, creditor(s) subjecting to at least 10% of total credit,
  3. Shareholder(s) subscribing to least 5% of the total shares,
  4. Debenture holder(s) subscribing to at least 5% of the total debentures,
  5. Liquidator appointed to liquidate a company,
  6. In the case of a company that undertakes a specific type of business as specified in the Act, a body authorized to administer and regulate such company.

However, as provided by section 8 of the Act, no application for carrying out liquidation proceedings can be made against the following company without obtaining prior approval of the following authority:

Type of Business Approval granting authority
Banks or financial institution carrying out banking and financial business, Nepal Rastra Bank
Insurance company carrying out insurance business, Insurance Board formed pursuant to Insurance Act, 2049
Any other business that cannot undergo voluntary liquidation without prior approval of the competent body or authority, Such authority as prescribed.

Other than when it has been established that a company’s liability exceeds the value of its assets or when the company itself admits that it has become insolvent, a company shall be deemed to have become insolvent in following instances:

  1. Shareholders’ GM adopts a resolution that the company has become insolvent or a meeting of the Board of Directors (BoD) of the company makes such decision,
  2. The court issues an order requiring the company to pay the debts payable and the debt is not paid within 35 days from such order,
  3. If the company fails to pay the debt within 35 days of notice served by the creditor to the company for the payment of debt or fails to make an application to the court within the said period to void such notice.

Company may file an application only if the given notice is found to be unreasonable or where there is any other reason for not repaying the debt immediately. Court shall issue a notice summoning the creditor giving notice of payment of debt, to appear before the court within seven days along with the copies of application made to void that notice issued by creditor. Court may make a decision to nullify or not to nullify the notice issued by the creditor no later than seven days.

Note: No one shall issue notice of payment of debt again or submit an application to proceed for liquidation against the company, till the decision of the court ceases to exist. If the court does not make a decision against the notice issued by the creditor then, the company has to clear all the debts within 35 days.

Required Documents:

Every application to be made shall be backed by the reasons for making such application, short description of company’s financial condition and the evidence to support the fact that the company has become insolvent along with the following documents:

    1. If an application is submitted by the Insolvent company itself

a. Document certified by the board of directors of the company stating that the company has become insolvent.
b. Special resolution passed by the board of directors to carry out the insolvency proceedings.
c. Certified copies of balance sheet and audit report of company available at the time of making an application to carry out the liquidation proceedings.

2. If an application is made by the creditors of the company who has become insolvent
a. Statement of the principal and interest of the debt which the creditor claims to be due and payable by the company.
b. Particulars of the date on which the company borrowed the debt claimed by the creditor and the reasons for borrowing the dept.
c. Statement that the principal and interest amount is due and need to be paid immediately.
d. The creditor believes that the company against whom the insolvency proceedings has been carried out, is insolvent, accompanied by the reasons/basis for such belief.

3. If an application is made by the liquidator
a. Evidence that the liquidator is appointed by the company to carry out the insolvency proceedings.
b. Opinion and basis presented by the liquidator confirming that the company against whom the application for carrying out liquidation proceedings has been made, is insolvent.

Note: Court shall not give approval to commence liquidation proceedings against any company in the absence of enough evidence.

Procedure

Insolvency proceedings start when an application is registered at court. After that the court follows given procedure to take action on application so filed:

  1. The court shall register the application that has been filed duly and shall set a date for hearing the same.
  2. Where an application is made by the party other than the company itself for insolvency proceedings, the court shall give seven days’ notice to the concerned party requiring the party to present statements in writing, if any, for not instituting such proceedings.
  3. If the court considers reasonable, it may, prior to hearing of an application, order concerned companies to present a statement, if any, for not carrying out any proceedings as requested by applicant and publish the same to company’s shareholders, creditors and others as stated in national daily newspapers twice.
  4. The court issues orders to appoint an insolvency professional as inquiry official or restructuring manager to investigate the financial or management situation of a company.
  5. Inquiry official so appointed shall make a detailed inquiry to check whether the company has been insolvent or not, whether financial situation can be improved through restructuring or not.
  6. The inquiry official then convenes a meeting of creditors and takes their suggestions. The report is submitted to the court.
  7. The court after receiving the inquiry report, and the proposal passed by the meeting of creditors or any other restructuring programs of the company (if any), will decide whether to order to liquidate a company, restructure, wait for a period of time or to make additional inquiries.

If court orders for restructuring of the company:

After receiving orders for restructuring the company, the restructuring management has to prepare written restructuring programs. Restructuring may be terminated if the restructuring officer makes an application that the company has already implemented the program or the company fails to implement the restructuring program, in such case the court will issue an order to liquidate the company.

If Court orders to liquidate the company:

After receiving an order to liquidate a company, the court issues an order to appoint a liquidator. The liquidator so appointed has:

  1. Right to take control of all the properties, accounts, records, and documents of the company once the liquidator commences the liquidation proceedings.
  2. Liquidator has the right to exercise all the rights and duties as exercised by the directors and officials of the company.
  3. Employment of all the employees of the company will come to an end after the liquidator takes on the charge of the company. However, liquidators may decide to retain or appoint necessary employees for his/her support and assistance.

The liquidator shall submit a progress report on liquidation of a company to court or OCR within 3 months from the date of appointment. Then, the court will make a decision as required.

Offences

Offences Punishment
If a Director does not submit the report on financial status and transaction of the company to the court, Fine not exceeding Rs 50,000.
If a person acts as an insolvency practitioner without a license, Fine ranging from Rs 10,000 to 50,000.
If a director deliberately conceals the fact that the company has become insolvent or is going to become insolvent, Personal liability of up to Rs 200,000.
If the insolvency practitioner fails to discharge her/his responsibility in good faith, Fine of Rs 500,000 along with compensation for the loss caused.
Where any director or employee or shareholder or anyone from the company commits any act of fraud, forgery or cheats or misleads the company or its’ creditors. Fine ranging from Rs 100,000 to 500,000 and imprisonment for 1 to 2 years.

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