Liquidation of a Company, in simple terms, is the closure of the company and the sale of its assets. On the other hand, it is the formal legal process through which a company terminates its operations, settles its debts, and distributes any remaining assets to its creditors and shareholders.
The legal framework for company liquidation in Nepal is first governed by the Companies Act, 2063 and the Insolvency Act, 2063.
In accordance with these Acts, liquidation occurs when a company is registered with the Office of the Company Registrar (OCR). While beginning a company may be exciting, liquidation often involves tough decisions and strict compliance.
Liquidation of a Company may arise in different conditions, such as when the company is unable to pay its debts, when the goals have been fulfilled, or when shareholders voluntarily decide to wind it up.
Broadly speaking, liquidation in Nepal can take two ways:
- Voluntary Liquidation – Initiated by the company’s shareholders or creditors
- Compulsory Liquidation – Initiated through a court order
Here in this article, we discuss several steps, including the appointment of a liquidator, realisation of assets, settlement of liabilities, and distribution of any surplus to shareholders.
What Are the Types of Liquidation of a Company?
The Companies Act, 2063, is the major legal framework for company liquidation in Nepal. Indirectly, this Act categorises the liquidation of a company into three types of liquidation. Here is the brief mention:
Voluntary Liquidation
In the Companies Act 2063, Section 126 has a provision relating to voluntary liquidation. It is initiated when the shareholders of a company decide to dissolve it by passing a special resolution in the general meeting.
After the resolution, the company must notify the Office of the Company Registrar (OCR) within seven days. A liquidator is appointed to manage the process of realising assets, paying off liabilities, and distributing any surplus among shareholders.
Compulsory Liquidation
Compulsory liquidation is addressed under Section 129 of the Companies Act, 2063. It usually occurs when the court orders the dissolution of a company.
This may occur if the company fails to pay its debts, violates the law, or if the court determines it is equitable to wind up the company.
In such cases, the court appoints an official liquidator to take over management, notify creditors and oversee the fair distribution of assets.
Creditors’ Voluntary Liquidation
Creditors’ voluntary liquidation is covered by Section 128 of the Companies Act, 2063. It takes place when a company is insolvent and unable to pay its debts.
In this liquidation, the creditors call a meeting and appoint a liquidator, who will manage the further process. The liquidator ensures that assets are realised and distributed in accordance with creditor claims and legal procedures, giving priority to secured creditors.
What Is the Legal Framework for Liquidation of a Company?
In Nepal, the process of liquidation is primarily governed by the following legal instruments:
- The Companies Act, 2063 – The Companies Act regulates voluntary and compulsory liquidation of a company. It sets guidelines for how companies can initiate liquidation through shareholders or creditors. This Act also guides the role of the court and the liquidator in the process.
- The Insolvency Act, 2063 – This Act provides the legal framework for companies facing insolvency. It outlines detailed procedures for insolvency proceedings, the appointment of liquidators, the protection of creditors’ rights, and the fair distribution of assets.
- The Bank and Financial Institutions Act (BAFIA), 2073 – For banks and financial institutions, liquidation procedures are dealt with separately under BAFIA. This Act ensures that liquidation in the financial sector is supervised in a way that protects depositors, maintains financial stability, and upholds regulatory compliance.
Together, these laws form the legal backbone of company liquidation in Nepal. It ensures that the process is orderly, fair, and transparent while balancing the interests of shareholders, creditors, and the broader economy.
What Are the Conditions & Procedures of Voluntary Liquidation?
Shareholders typically make decisions through a special resolution at the general meeting, and it is the process by which the company itself decides to close.
The legal basis for voluntary liquidation is provided under Chapter 10 (sections 126-128) of the Companies Act, 2063. We are now discussing the conditions and procedures for voluntary liquidation.
Conditions for Voluntary Liquidation
According to the Act, voluntary liquidation is permissible only if the following conditions are met:
- The company is under a condition to pay all its debts and liabilities
- No compulsory liquidation proceedings have been initiated, nor is there any possibility of such proceedings
- The board of directors has acknowledged in writing that the company can settle its liabilities immediately or within one year from the date of the decision to liquidate.
Process of Voluntary Liquidation of a Company
The steps for voluntary liquidation are as follows:
- The company must establish that it can pay all the debts and liabilities
- Shareholders pass a special resolution in the general meeting and submit an application for liquidation to the OCR
- Appointment of a liquidator and an auditor in the general meeting, along with fixing their remuneration and informing OCR within seven days
- The liquidator realises the company’s assets, pays off debts and liabilities, and prepares a report
- The liquidator submits the reports to the OCR within the prescribed time
- Once the OCR approves the report, the company’s name is removed from its records, and a public notice of dissolution is published in a national daily newspaper
What Are the Conditions and Procedures of Compulsory Liquidation?
Compulsory Liquidation of a company is held when a company is unable to fulfil its obligations and is ordered by the Court to undergo liquidation.
Unlike voluntary liquidation, which shareholders initiate, compulsory liquidation is a court-driven process under the Insolvency Act, 2063.
Condition for Compulsory Liquidation of a Company
As per Section 3 of the Insolvency Act, 2063, the process of compulsory liquidation can be initiated through an order of the High Court.
An application may be filed with the High Court by any of the following:
- The company itself, upon the decision of the Board of Directors and shareholders
- Creditors holding at least 10% of the company’s debt
- Shareholders holding at least 5% of the total shares
- Debenture-holders who have subscribed to at least 55% of the total debentures issued
- A relevant regulatory authority, in the case of specific industries (e.g., banks, insurance companies)
Process of Compulsory Liquidation of a Company
The general steps for compulsory liquidation are as follows:
- The company may first pass a special resolution in the general meeting to proceed with liquidation
- The court decides whether to initiate insolvency proceedings
- If admitted, the court appoints an Investigating Officer to assess the company’s financial position and the possibility of restructuring
- The Investigating Officer conducts an inquiry and prepares a report
- A creditors’ meeting is being held to discuss the financial condition of the company before submission of the final report
- The Investigating Officer submits the final report to the court within the prescribed time
- Based on the report, the court may order either:
- Liquidate the company
- Restructuring of the company, or
- Postponement for a specified period if revival seems possible
- If liquidation is ordered, the court appoints a liquidator
- Within three months, the liquidator submits a progress report to both the court and the OCR
- The liquidator calls a creditors’ meeting, inviting claims within a fixed time limit
- The liquidator realises assets, settles creditors’ claims in order of priority, and distributes any remaining assets to shareholders
- A final Liquidation Report is prepared, detailing assets realised, payments made, and distributions to shareholders, certified with an auditor’s report, and submitted to the OCR
- On approval, the OCR removes the Company’s name from the register and publishes a notice in a national daily newspaper confirming dissolution
Conclusion
The liquidation of a company in Nepal is a highly regulated legal process that ensures fairness and transparency while protecting the interests of creditors, shareholders, and other stakeholders.
However, liquidation is not the only path available. Depending on the company’s situation, restructuring can also provide an opportunity to revive and reshape the business for the future.