Company Liquidation Process in Nepal: Types, Laws, and Procedures Explained

Liquidation is the legal process of closing a company and distributing its assets to claimants. In Nepal, company liquidation is governed primarily by the Companies Act, 2063 (2006). Liquidation can occur voluntarily, compulsorily by order of the court, or due to insolvency. Voluntary liquidation is initiated by the shareholders through a special resolution when the company decides to cease operations. Compulsory liquidation, on the other hand, occurs when the Office of the Company Registrar or creditors file a petition in court—usually due to insolvency, legal violations, or prolonged inactivity.

Once liquidation begins, a liquidator is appointed to manage the process, which includes selling company assets, settling debts, and distributing any remaining assets to shareholders. During liquidation, the company ceases normal operations and must indicate its status in official communications. All liabilities must be cleared in the order of priority—secured creditors, employees’ wages, government dues, and finally unsecured creditors. After asset distribution, the company is struck off the register. The liquidation process ensures transparency and legal closure, protecting the rights of creditors and shareholders. It must be conducted in compliance with the Companies Act and applicable provisions of the Insolvency Act, 2063 (2006).

Legal Provisions Governing Liquidation in Nepal

The following statutes and regulatory bodies guide the liquidation process:

• Companies Act, 2063 (2006): Provides provisions for the liquidation of private, public, and foreign companies.
• Insolvency Act, 2063 (2006): Deals with liquidation based on insolvency and creditors' petitions.

Types of Liquidation in Nepal

In Nepal, the process of liquidation refers to the formal legal procedure of winding up a company’s operations, settling its debts, and distributing any remaining assets to shareholders before finally dissolving the company. Under the Companies Act, 2063 (2006), liquidation can be broadly classified into two main types: voluntary liquidation and compulsory (court-ordered) liquidation. Each type is governed by specific legal procedures and is chosen based on the company’s financial condition and the will of stakeholders.

a. Voluntary Liquidation

Voluntary liquidation is initiated by the decision of the company itself, typically through a resolution passed by its shareholders or members. This form of liquidation can occur either when the company is solvent and chooses to close down for strategic or operational reasons, or when it is insolvent and cannot pay its debts, but still opts to handle the winding-up process without immediate court involvement. Voluntary liquidation in Nepal is further categorized into two types: Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation.

i. Members’ Voluntary Liquidation

Members’ voluntary liquidation takes place when a company is financially sound and has the ability to pay off all its debts. It is a planned and peaceful winding-up process, initiated purely out of the shareholders’ desire to discontinue business operations. This could be due to the company fulfilling its purpose, owner retirement, restructuring, or changes in the business environment. To proceed with this form of liquidation, the company’s board of directors must make a declaration of solvency, confirming that the company can pay its liabilities within a specified period, usually within 12 months. After this, a special resolution is passed in the general meeting of shareholders to officially commence liquidation. A licensed liquidator is appointed to handle the process of collecting assets, settling debts, and distributing the remaining funds to shareholders. Since creditors are expected to be paid in full, their involvement in the process is minimal.

ii. Creditors’ Voluntary Liquidation

When a company is insolvent, unable to meet its financial obligations, but still wishes to avoid court proceedings and handle the liquidation internally, it may opt for creditors’ voluntary liquidation. In this case, although the shareholders initiate the liquidation process, creditors are actively involved, given their interest in the outcome. The company must hold a meeting of creditors, where they are presented with the company’s financial status, including a list of assets and liabilities. Creditors may either approve or replace the liquidator appointed by the company. The liquidator’s role is to sell the company’s assets and distribute the proceeds among the creditors according to legal priority. This method is commonly used when the company wants to act in good faith to repay its debts but lacks sufficient resources to continue operations.

b. Compulsory Liquidation (Court-Ordered Liquidation)

Compulsory liquidation, also known as court-ordered liquidation, is initiated not by the company but through a legal order issued by the court. This usually occurs when the company is deeply insolvent, involved in unlawful activities, or has failed to comply with regulatory obligations. A petition for compulsory liquidation can be filed by various stakeholders, including creditors who have not been paid, shareholders with grievances, the Office of the Company Registrar, or even the company itself under extreme financial distress.

There are several grounds under which a court may order compulsory liquidation. These include the company’s inability to pay debts, failure to commence operations within a year of incorporation, engagement in fraudulent or illegal activities, or if it is deemed just and equitable by the court to wind up the company. Once the court finds the petition valid, it issues a liquidation order and appoints a court-approved liquidator. The liquidator is responsible for taking control of the company’s assets, settling outstanding liabilities, and reporting to both the court and the Office of the Company Registrar (OCR).

This form of liquidation is tightly controlled by legal procedures to protect the rights of creditors and the general public. It ensures that companies acting against the interest of stakeholders or failing to meet legal standards are properly dissolved under judicial supervision. Once the process is completed, the company is officially dissolved, and its name is struck from the Company Register maintained by the OCR.

Conditions of Compulsory Liquidation

As per the section 3 of the Insolvency Act, insolvency process can be commenced only after the Court orders. Application has to be made to the court by any of the following person for insolvency proceedings; Applications can be made if the company is not able to make payment to creditor within 35 days from the date of notice of payment. Thereafter, Company Liquidation Imply.

• Company that has become insolvent;
• At least 10 % of the creditors of the company;
• Shareholder or the shareholders subscribing at least 5% of the total shares;
• Debenture holder or debenture holders that has subscribed at least 5% of debentures out of the total debenture holders of the company;
• Liquidator who has been appointed to liquidate the company; or
• Authorized body to administer the special kind of business like banks and financial institutions.

Procedure of liquidation

A. Procedure for Voluntary Liquidation in Nepal

• Financial Assessment: The company must internally review its financial records to confirm that it is capable of settling all debts and liabilities.
• Solvency Declaration: A representative of the shareholders must submit a written declaration affirming that the company can clear all its debts within one year from the date of the liquidation resolution, or that liabilities can be settled through other means.
• Resolution for Liquidation: The shareholder representative must pass a formal written resolution to dissolve the company and submit it to the Office of the Company Registrar (OCR).
• Appointment of Liquidator and Auditor: The same resolution must also appoint a liquidator and an auditor, specify their remuneration, and set a timeline for completing the liquidation.
• Notification to Authorities: Within seven days of appointing the liquidator, the company must inform relevant government bodies such as the OCR and the Inland Revenue Department (IRD).
• Role of the Liquidator (Section 130 and 131):
  • The liquidator will assume control over the company’s assets, financial records, and documents.
  • Responsibilities include communicating with shareholders, selling assets, terminating agreements, and preparing reports on recovered assets and creditor payments.
  • Ultimately, the liquidator is responsible for submitting a closure report to the OCR for final deregistration.
• Ongoing Duties of the Liquidator (Section 131):
  • Submit reports to the OCR every six months detailing income, expenditures, and accounts.
  • Update shareholders semi-annually on the liquidation progress.
  • Use the company’s assets to settle all liabilities and debts.
  • After settling liabilities, propose a plan to distribute any remaining assets to shareholders.
  • If shareholders representing at least 75% of the total shares approve, distribute the residual assets accordingly.
  • Submit a final report to the OCR detailing asset sales, creditor payments, and shareholder distributions. This report must be audited and certified.
• Company Deregistration: After reviewing the liquidator’s final report, the Office of the Company Registrar cancels the company’s registration, marking the completion of the voluntary liquidation process.

B. Procedure of Compulsory Liquidation in Nepal:

• Filing Application to Court: The liquidation process begins when an application is filed with the appropriate court. Once submitted, the application can only be withdrawn with court permission. After registration, the court schedules a hearing date.
• Court Hearing and Preliminary Order: During the hearing, the court decides whether to proceed with insolvency proceedings. If accepted, the court issues an order to appoint an inquiry officer.
• Appointment of Inquiry Officer: The inquiry officer investigates the company’s financial status and advises the court on one of the following:
  • If the company should be liquidated immediately.
  • If it is viable to restructure the company through a formal program.
  • Whether the company is indeed insolvent.
• Director’s Report Submission: The company's directors must provide the court with a detailed report outlining the company's financial health and recent business transactions.
• Submission of Inquiry Report: The inquiry officer submits the investigation report to the court within a timeframe specified by the court.
• Court Decision Based on Report: Within seven days of receiving the inquiry officer’s report, the court may issue one of the following orders:
  • Proceed with immediate liquidation.
  • Initiate a company restructuring plan.
  • Temporarily halt liquidation for a specified period.
  • Extend the insolvency proceeding period.
• Appointment of Liquidator: If liquidation is ordered, the court appoints a liquidator to oversee the entire dissolution process.
• Powers and Role of the Liquidator: Once appointed, the liquidator becomes the key authority over company matters. All directors, officers, and employees are relieved of their duties, and the liquidator assumes control over the company’s assets, records, and liabilities (except those held by secured creditors).
• Additional Responsibilities of Liquidator:

  The liquidator’s functions include:

  • Filing or defending legal claims on behalf of the company.
  • Hiring support staff as necessary.
  • Securing loans using company assets as collateral.
  • Investigating potential fraud, deception, or misconduct by the company’s directors, employees, or shareholders.
  • Selling company assets and allocating the proceeds accordingly.
  • Executing all required steps to complete the liquidation process.
• Progress Reporting: Within three months of appointment, the liquidator must submit a progress report to the Office of the Company Registrar (OCR) and the court.
• Engagement with Creditors: The liquidator can organize creditor meetings, form a creditors’ committee, and establish a deadline for debt claim submissions.
• Debt Settlement: Debts are settled in accordance with the priority list in Section 57 of the Insolvency Act. For banks and financial institutions, settlement follows provisions outlined in the Banks and Financial Institutions Act (BAFIA).
• Final Report and Auditor Certification: After completing the liquidation, the liquidator prepares and submits a final report to the OCR detailing:
  • Recovered assets.
  • Payments made to creditors.
  • Distributions to shareholders. This report must also include the auditor’s certification that the company has been properly liquidated.
• Company Deregistration: Upon receiving the final report, the OCR removes the company’s name from the company register and issues an official cancellation order. A public notice is also published in a national daily newspaper, confirming the company's dissolution.

Company liquidation in Nepal is a regulated legal process aimed at dissolving a business by settling liabilities and distributing remaining assets. Governed primarily by the Companies Act, 2063, and the Insolvency Act, 2063, liquidation can be voluntary, initiated by shareholders, or compulsory, ordered by the court due to insolvency or misconduct. The appointment of a liquidator ensures transparency, asset management, debt repayment, and compliance with statutory duties. Upon completion, the company is officially deregistered. Whether voluntary or court-mandated, liquidation protects stakeholders’ rights and promotes accountability, ensuring orderly closure of business entities under legal supervision and maintaining trust in the corporate system.