Insolvency

It is governed by Insolvency Act, 2063, which needs to be followed while making an attempt to dissolve the company. It is done against the will of a company for clear reasons only. 

Any of the following person/entity can file an application 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, at least ten percent creditor or creditors who has or have lent money
3. Shareholder or Shareholders  that has or have subscribed at least 5% of the total shares of shares, out of the total shareholders of a company
4. Debenture holder or debenture holders that has or have subscribed at least 5% of debentures, out of the total debenture holders of a company.
5. Liquidator appointed to liquidate a company
6. A body authorized to administer and regulate the company that carries any specific type of business as per the Act. 

However, no application for carrying out liquidation proceedings can be made against the following company without obtaining prior approval of the following authority:

1. In the case of a bank or financial institution carrying on banking and financial business, approval of the Nepal Rastra Bank, or
2. In the case of an insurance company carrying on insurance business, the Insurance Board formed pursuant to the Insurance Act, 2049, or
3. In the case of a company which cannot undergo voluntary liquidation without prior approval of the competent body or authority, then the approval of such authority.

Copy of the approval given by the authority mentioned above shall be submitted along with the application before the court for commencing liquidation proceeding.

In order to make an application, a period of 35 days’ notice served by the creditor to the company for the payment of the company’s debt has to expire. After the expiry date, one can file an application for commencing liquidation proceedings. 

The company against whom the notice has been issued holds the right to file an application before the court against such notice within 35 days from the date of receipt of 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.

The court may order to nullify the notice issued by the creditor under the given circumstances:

1. If there is a clear dispute as to whether the creditor has paid back debt to the company or not,
2. The debt due to be paid by the company to the creditor does not seem to be payable immediately. 

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.

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:

Required Documents :

If an application is submitted by the Insolvent company itself:

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

If an application is made by the creditors of the company who has become insolvent:

1. Statement of the principal and interest of the debt which the creditor claims to be due and payable by the company.
2. Particulars of the date on which the company borrowed the debt claimed by the creditor and the reasons for borrowing the dept.
3. Statement that the principal and interest amount is due and need to be paid immediately.
4. 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.

If an application is made by the liquidator:

1. Evidence that the liquidator is appointed by the company to carry out the insolvency proceedings.
2. 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 to present statements in writing, if any, for not instituting such proceedings.
3. If court considers reasonable, it may, prior to hearing of an application, order concerned company to present 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 newspaper twice.
4. The court issues order to appoint investigator or restructuring manager to investigate on financial or management situation of a company.
5. Investigator appointed shall make a detail inquiry to check whether the company has been insolvent or no, whether financial situation can be improved through restructuring or not.
6. The investigating officer then convenes a meeting of creditors and takes their suggestions. The report is submitted to the court. 
7. The court after receiving the investigation 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 investigations. 

If court orders for restructuring of the company:

After receiving order for restructuring the company, the restructuring management has to prepare written restructuring programs. Restructuring may be terminated if 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 order to liquidate the company.

If Court orders to liquidate the company:

After receiving order to liquidate a company, the court issues 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 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, liquidator 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.

Interim Order:

If it appears during the hearing process, that there exist in the company any of the following situations which may affect the interest of the creditors or any other person related to the company then, the court may issue interim order.

1. The assets of the company have been sold or disposed wrongfully or there is a possibility of such act.
2. If management of the company has not been carried out properly.
3. If any illegal action is carried out or such action is being enforced or there exist possibility of such enforcement which prejudice the assets of the company.