Unit 8 Winding Up of Company (6 hours)

8.1 Meaning of winding up and Liquidation

8.2 Voluntary winding up of the company and its
Procedural
8.3 Compulsory Winding up, grounds and Procedures
8.4 Appointment of Liquidator, effect of Liquidator
appointment, Their Powers, Responsibilities &
Liabilities
8.5 Liabilities of Officers during Winding Up Proceedings
8.6 Preferential Payments and closure of company
 Mode of Winding Up

Company Act, Company Act, Insolvency

Act, 2063
2063, sec.126 sec. 136

Voluntary Compulsory Court Order

Company able to pay Failure to commence the Not able to
pay debt (insolvency)
Debt (solvency) Business, default in submitting Oppression
to the shareholders
the office
Shareholders through Application made by Creditors,
Minority shareholder
AGM promoters

Decision made by Decision made by Company Decision made

by Court
Company Registrar Office

Liquidation & winding-up

 A company is a juristic person (Legal person) that comes into

existence by way of incorporation and can be dissolved by
undertaking winding-up process as per the provisions of the
 Companies Act, 2063

 Whether a company is solvent or insolvent, obligations to

customers, suppliers and employees must be brought to a close
(wound up). All the company’s affairs are put in order prior to
liquidation.

 The winding up process is the last stage in the life of a company,

wherein its existence is dissolved and all its assets are used to
satisfy the creditors and shareholders.

 Winding up means the total process to bring the company to an

end while liquidation is just a part of this complete process,
which is basically realization of assets and discharging the
liabilities.

 The process involves realization of assets and the amount that

one gets is used to pay the debts while the remaining amount is
distributed amongst the members as per their respective rights.

 When a company makes the decision to go out of business, it

generally cannot simply close its doors the instant it makes that
decision. Most businesses have long-term obligations to its
creditors, employees, suppliers and customers as well as
landlords and various other parties.

 A company will have to take time to end these relationships and

handle any obligations it has to various stakeholders before it
can close its doors.

 Winding up of a company is the process whereby its life is ended

and its property is administered for the benefit of its creditors
and members.

 The court appoints an administrator, called a ‘liquidator’, who

takes control of the company, takes possession of its assets and
finally distributes any surplus among the shareholders in
accordance with their respective rights.
  Winding Up involves ending all business affairs whilst Liquidation
involves selling off company assets.

Reasons for winding up a company

 Company has ceased business activities

 Management deadlock
 Oppression - shareholders dispute
 Corporate or financial restructuring of the group to which the
company belongs (Merger/Amalgamation)
 Minimize tax liabilities or maximize tax advantages for the group
to which the company belongs
 Breach of statutory provisions, including offences committed
 Company acting outside its scope of activities

The two main types are:

(1) Members’ Voluntary Liquidation (MVL)

 If a company is financially solvent

(2) Compulsory Liquidation

 If a company is unable to pay creditors.

 There are two tests of insolvency; the balance sheet test and the
cash flow test.
 If the company’s balance sheet shows that it owes more than it
owns. In other words, if it has a minus overall balance sheet then
it may be evidence of the insolvency of the company.
 If the company is not paying and cannot pay those it owes money
to when it is due to pay, then this can be evidence of insolvency.
Members’ Voluntary Liquidation (MVL) (Company Act, 2063
Chapter-10)

 Decision made by the members of the company whereas in

compulsory liquidation the order is given by Court
 The company should be in solvent & such solvency should be
declared by the Board whereas in compulsory liquidation the
company fall on insolvency
 Special resolution made by the general meeting of shareholders
 There is no supervision or control of Court or Company registrar
Office but in compulsory the supervision or control is made by
Court/ Company Registrar Office
 The practitioner licensed liquidator is being appointed by the
company but in compulsory liquidation the Court will appoint the
liquidator.

The process of Voluntary Liquidation under Company Act,

2063

1. General Meeting of shareholders and adopting special resolution or

subject to the provisions contained in the MOA AOA & consensus
agreement (May be mentioned conditions like, time or event for
liquidation).

2. The company is able to pay its debts or other liabilities in full.

3. There should not be any application for review of insolvency of

company or pending case under the prevailing law of Insolvency.

4. If the directors of the company, have, after due inquiry, made a

declaration in writing that the company is able to pay its debts and
other liabilities in full and that the debts and liabilities to be paid half
of such company can be paid up or can be fully settled in any other
process within one year from the date of the adaptation of the
resolution to liquidate the company.

5. Written Declaration of directors and presented to the general

meeting for discussion.
6. A declaration made by the directors & special resolution shall be
submitted to the Company Registrar within 7 days from the date of
adaptation.

7. Practitioner licensed Liquidator under Insolvency Act, is appointed

for conducting the liquidation proceedings and fixed remuneration
receivable by such liquidator.

8. Company shall give information of appointment of liquidator within 7

days of such appointment.

9. After the appointment of liquidator he/she shall control the

company and its management and its directors & officers shall
relieve from their office and employees also terminated.

10. The liquidator shall complete the liquidation proceeding of the

company within the period of time specified at the time of
appointment.

11. While the liquidator commences proceeding of liquidation and

found that the company is insolvent and unable to discharge its full
liabilities shall make an application to have review of insolvency of
the company under the Insolvency Act.

12. Power of liquidator to take into his custody and under his control
property of company.

13. The liquidator shall exercise all powers and duties during the
liquidating proceeding.

14. At the completion of liquidation proceedings, to prepare a report on

the properties recovered, payments made to the creditors and
distribution made to the shareholders on behalf of company, and
submit such report certifying that the company has been liquated,
accompanied by the auditor's report, to the Company Registrar.

15. Upon received by the Company registrar Office of a report on the

liquidation of company, Office shall strike the name of the company
from its register and publish in a national daily newspaper a notice
that such company has been dissolved.
16. Any creditors/shareholders shall make complaint against the
liquidator in the Court if any irregular or wrongful action has been
done by such liquidator.

17. If a liquidator found that any director, officer, shareholder or

employee of a company has committed a fraud or deception against
the company, the liquidator may take necessary legal action
against such person.

Functions, duties and powers of liquidator

(1) The functions, duties and powers of the liquidator in addition to the
other provisions set forth in this Act shall be as follows,

(a) To institute or defend any case or legal action on behalf of the

company;

(b) To appoint employees to assist in the discharge of his or her

functions;

(c) Where any installment on any share of the company is due, to

make a call on the shareholder for payment of such installment;

(d) To do and execute, or cause to be done and executed, all such

acts and deeds or documents as required to be done and
executed on behalf of the company and in the name of the
company and use the seal of the company for that purpose;

(e) To borrow loans against security of the assets of the company;

(f) Where the liquidator considers that the sale and disposal of any
property or termination of any contract or liability will render
benefits to the company, to sell and dispose of such property or
terminate such contract or liability;

(g) To enter into compromise with any creditor of the company or

any person who claims to be a creditor of the company in
relation to the claim made by such creditor or person;
(h) To enter into compromise with any person against whom the
company may make a claim in relation to any loan, liability or
any other claim;

(i) To sell the assets of the company and distribute the proceeds of
such sale, and

(j) To perform, or cause to be performed, all such other acts as

may be necessary to liquidate the company.

(2) It shall be the duty of the liquidator to perform the following

functions,

(a) To collect, protect and sell the assets of the company;

(b) To examine the business and financial situation of the

company;

(c) To accept debt claim of any creditor

(d) To distribute the proceeds of sale of the assets of the company

subject to the order of priority determined for the payment of
liability

(e) To call and conduct the meeting of creditors;

(f) To prepare a report on his or her acts and actions and present it
to the Office;

(g) To facilitate the cancellation of registration of the company;

and

(h) To examine or inquire into whether any director or employee or

shareholder of the company or any person has committed any
fraud, cheating or deception against the company or its
creditors and institute necessary legal action against such
person.
Winding-up (Cancellation of Registration) by decision
of Company Registrar

The Company Registrar Office may cancel the registration of a

company in the following circumstance

(a) If the promoter of the company makes an application showing a

reason for the failure to commence the business of the company,

(b) If the company is in default in submitting to the Company Registrar

Office the returns as referred to in Section 80 or fails pay the fine as
referred to in Section 81 for three consecutive financial years; or

(c) If based on the proofs received in the course of administration of

the company, the Office has a reasonable ground to believe that the
company is not carrying on its business or the company is not in
operation.

(2) The Office shall, prior to the cancellation of registration, give a

notice, accompanied by the reason for such registration, to the
concerned company.

(3) A notice given to the company shall also be published in a national

daily newspaper, as per necessity.

(4) If the company fails to make an application, specifying the reasons

that the registration of the company should not be canceled, within
two months from the date of receipt by the company of a notice or,
despite the making of such application, the reasons specified are not
found reasonable, the registration of such company may be canceled.

(5) If the registration of a company is canceled such information

thereof shall be given to the concerned directors and shall also be
published in a national daily newspaper.

(6) If the registration of a company is canceled, and if there exists

any kind of liability of the company, the liability of the officer or
shareholder of the company shall continue to exist; and nothing
contained in this Section shall be deemed to bar the instituting of
necessary legal action against them to have such liability fulfilled.

(7) The assets, rights, benefits or liabilities held in the name of the
company at the time of cancellation of its registration shall devolve on
its shareholders in the proportion of their shareholding.

(8) If any debt to be repaid by or any liability to be

performed/discharged by the company of which registration has been
canceled and cannot be settled from the assets, rights, or benefits
devolved on the shareholders, the shareholders, directors or officers
who were involved in the management of such company and
responsible for giving rise to the situation as referred to in Sub-section
(1) shall personally bear such remaining loan or liability.

(9) A company of which registration is canceled shall not be allowed

to carry on any business by the name of the same company.

(10) Following the cancellation of registration of any company the

Company Registrar Office shall return to the shareholders only such
property, if any, remaining after deducting therefrom the expenses
incurred in the cancellation of the registration of that company.

Restoration of registration of company of which registration

was cancelled

(1) In the case of cancellation of the registration of a company, where

the company or its shareholder or creditor makes a petition, setting
out the reasons, to the Court to have the company restored, no later
than five years after the date of publication of the notice of
cancellation of registration of the company, the Court may, if the
following circumstance, order to restore the company and restore its
name in the company register:

(a) If it appears that the registration of the company was canceled

while such company was carrying on its business;

(b) If the Court considers it to be just to restore the name of the

company for the proper management of the assets and liabilities of
such company.
(2) In the event of restoration of a company by virtue of an order of
the Court, the company shall be considered to have been in existence
from the date of its registration.

(3) In issuing an order, the court may issue such orders and make an
order to make such arrangements as it may consider appropriate and
necessary for restoring the company and all other persons into the
status quo ante as if the registration of the company were not
canceled.

(4) Where a company is restored and any fine is to be paid, the

company shall be restored and its name reentered in the company
register only after such fine is paid to the Office.

(5) Where a company of which registration has been canceled and is

restored, such company shall have the following property reverted to
it:

(a) Any property received by its shareholders in such capacity virtue

of the cancellation of registration of the company;

(b) Where the property has already been sold and disposed of, the
proceeds of such sale and disposal. But no property or amount
already employed in the payment of debt or liability of a creditor
shall be returned.

Winding-up by the Order of the Court

(Compulsory) Insolvency Act, 2063

Key points; -

 Compulsory winding up occurs when a company is forced, by law

and usually by a court order, to appoint a liquidator, sell off its
assets and distribute the proceeds to its creditors.
  The company should be in insolvent & such insolvency should be
declared by the Board or in the transaction of the company the
company fall on insolvency.
 Before liquidating a company, the Court see the possibility of
arrangement of reconstruction of company, for that the Court
appoint the Inquiry Officer and the Reconstruction manager.
 The practitioner licensed liquidator is being appointed by the
Court.
 The liquidation process is under supervision and control by Court.

Procedural or steps; -

(a) Application to be made by only the following parties to the Court

 A company itself
 At least 10% creditors of total creditors of the company
 At least 5% shareholders, out of total paid up shareholders
 At least 5% debenture-holders out of total debenture-holders of
company
 A liquidator who has been appointed to liquidate a company
 In the case of a company that carries on any specific type of
business, a body authorized to administer and regulate such
business (for instance insurance or banking business)
(b) Application has to be accompanied by the reason for making the
application, short description of the financial condition of the
company and evidence supporting the fact that the company has
become insolvent.

(c) Company deemed to have become insolvent if-

 The general meeting of shareholders adopts a resolution that the

company has become insolvent or a meeting of the board of
directors of the company makes such decision,
 The Court issue an order requiring the company to pay the debt
and the debt is not paid up within 35 days from the date of
receipt by the company of such order,
(d) Inquire by the Court to find out whether company is falling in
insolvency or not.
If the report is summited that the company is in insolvency, then the
court give order the company to pay its debt or other financial
obligation.

if the company is unable to pay its debt to its creditors/ debenture-

holders or other financial obligation as per the order made by Court,
then after the liquidation process of company is proceed.

(e) The Court order to appoint the inquiry officer to finding out the
actual assets & liabilities & financial position of the company &
determine the following issues-

 Whether or not there should be issued an order for immediate

liquidation of the company by the reason that its financial
situation cannot be improved
 Whether or not the period of inquiry should be extended
 Whether or not there should be issued an order for the
restructuring of the company through the restructuring program
 Whether or not the company has become or is likely to
become insolvent

(f) The Inquiry Officer works as a bridge among shareholders,

directors, creditors and Court

(g) it is the duty of shareholders, directors & creditors to assist

the Inquiry Officer and provide the required information asked by the
Officer

(h) Normal course of business shall not be affected during the

investigation of the Inquiry officer

(I) The Inquiry Officer shall call the meeting of creditors to find
out their debt to the company and their opinion about the company

(j) After completion of investigation/inquiry, the Officer shall

submit the report to the court

(k) Based on the report received by the Inquiry officer, the court
shall have following order;

 To immediately liquidate the company

 To implement the restructuring program of the company
 In the event of possibility of improvement without liquidating the
company immediately, to stay until the period specified by the
court

 To extent the period of insolvency proceeding as specified by the

Court for the situation

(l) If the Court deem that the company can be sustained and run its
business before going to liquidation then the Court may appoint the
restructuring manager for preparing a restructuring scheme of the
company containing the following scheme-

 To capitalize the debt of the company and alter the capital

structure
 To pay the claim of creditors by selling any portion of the assets
of the company
 To change the nature of claims of creditors of the company and
issue securities for the same
 To get the creditors of the company to participate in capital
investment by issuing shares in consideration for their claims
 To amalgamate / merger the company with any other company
 To change the management of the company, or
 To do any such other act which the Court considers appropriate to
restructure the company

(j) Meeting of the creditors to be called by the restructuring

manager

(k) Report to be submitted by restructuring manager to the Court

(L) Creditor who is not agreed with the proposal of restructuring

program prepared by Restructuring Manger shall put their objection
and claim

(m) Having made approval of restructuring program by the Court,

such program shall be binding on all creditors of the company,
directors and shareholder of the company, other than secured
creditors of the company and the restructuring period shall end on
that date.

(n) The Restructuring Manager shall operate the company during

the currency of the restructuring period.

(O) The company shall be responsible for implementing the

restructuring program adopted by the meeting of creditors and
approved by the Court.

(P) Where the company has already implemented the restructuring

program or the Court, on application by the restructuring
manager, make an order to terminate the program because of the
company' failure to implement it, such program shall terminate.

(q) When the Court issues an order to terminate the restructuring

program, it shall also issue an order to liquidate such company.

The purposes of a liquidation are:

 to ensure a just distribution of the company's assets among

creditors and contributories

 to terminate the company's existence by its eventual dissolution.

Appointment of liquidator and his functions

a) Realization of assets

Company’s assets that may be realized by a liquidator include:

 Cash in hand and in the banks and all other financial institutions
 Book debts disclosed in the Statement of Affairs
 Sale of office fittings and properties owned by the company
 Call of unpaid capital
 Recovery of assets from dispositions made by the company. This
includes things in action and transfers of shares after the
commencement of the winding up not sanctioned by the Court as
 well as undue preferences given to certain creditors and
transactions made to creditors at below valuation prior to
winding up.

 It must be noted that the liquidator shall not be liable to incur any
expenses in relation to a winding up unless there are sufficient
available assets.

 A creditors' meeting may be convened for the purpose of obtaining

the creditors' consent to pursue a claim that is worth pursuing
and to meet the expenses of pursuing such a claim. Such claims
would include undertaking legal proceedings for recovery of
moneys.

c) Adjudication and admission of claims of the creditors

 Creditors may file their Proofs of Debt with the liquidator once the
company is in liquidation.

 The claims are then adjudicated and admitted or rejected

accordingly. If any claim is rejected either in part or in whole, the
liquidator will send a notice of rejection to the creditor, stating
his reasons for the rejection. Any creditor who is dissatisfied
with the liquidator’s decision may appeal to the Court within 21
days to set aside the liquidator’s decision.

b) Prosecution of company officers

 Apart from the prosecution of directors or officers who fail to file

the Statement of Affairs, delinquent directors and officers of the
company in winding up can also be held liable for a range of
offences including falsification of books, failure to keep proper
accounts and fraudulent trading.

 In addition, delinquent officers can also be made personally liable

in damages for misfeasance or breach of trust against the
company on the application of the liquidator to the Court for
assessment of damages against guilty officers, and the Court
may also direct that prosecution be instituted for any criminal
 liability on the part of the officers found liable.

 In general, directors are not liable for company's debt. but If they
have made a personal guarantee to a company creditor/s then
they may be called to pay this under their guarantee.

 If the director has acted in breach of the insolvency legislation,

then they could potentially face fines or orders to repay monies
to the company.

d) Distribution of assets

While settling the liabilities of a company which is being liquidated

under Insolvency Act, the liquidator shall make payment of liabilities
from the available funds according to the following order of priority:

 All the expenses associated with the functions discharged by the

inquiry officer
 All expenses associated with the functions discharged by the
restructuring manager and his/her remuneration
 All expenses associated with the functions discharged by the
liquidator and his/her remuneration
 Wages and remuneration due and payable to the workers or
employees of the company at the time of the issue of the
order
to liquidate or restructure the company;
Provided that no director of the company shall be entitled to
such amount.
 Amounts payable to the workers or employees of the company
in consideration of home leave, sick leave, gratuity and
employee provident fund, if any, at the time of the issue of the
order under this Act to liquidate or restructure the company;
Provided that no director of the company shall be entitled to
such amount.
 All other amounts in consideration of debt claims accepted by
the liquidator.
 Where any liability of the company is insured, the amount
receivable under such insurance contract shall be paid to that
 person who is entitled to it.
Where the liabilities mentioned in above (1), (2) are settled fully,
the surplus shall be used by the liquidator to pay interest payable on
debts from the date of the order issued to liquidate or restructure
the company to the date of acceptance of the debt claim. The amount
remaining after such payment shall be distributed among the
preference shareholders, and the remaining amount shall be
distributed among the other shareholders proportionately.

e) Release and dissolution

 Upon the completion of the liquidation, the liquidator applies to

the Court for the company to be dissolved and to be released as
liquidator where it discharges the liquidator from all liability in
respect of his conduct in the course of winding up.
 The company’s operations are brought to an end, and its assets
are divided up among creditors and shareholders, according to
the priority of their claims.

Insolvency Act, 2063, Section 57. Order of settlement of

liabilities:
 The expenditure for liquidation
 The Remuneration for liquidator
 The government due on taxes, fees etc.
 Salaries/remuneration of employees
 Repayment to creditors
 Payment to preferential shareholders
 Eventually to shareholders
(1) While settling the liabilities of a company which is being liquidated under this
Act, the liquidator shall make payment of liabilities from the available funds
according to the following order of priority:
 (a) All expenses associated with the functions discharged by the interim
administrator appointed pursuant to Sub-section (4) of Section 11 and
remuneration;
(b) Other amounts to be settled pursuant to Chapter-2;
(c) All expenses associated with the functions discharged by the inquiry officer
appointed pursuant to sub-sections (3) and (4) of Section 10 and remuneration;
(d) All expenses associated with the functions discharged by the restructuring
manager appointed pursuant to Sub-section (2) of Section 22 and remuneration;
(e) All debts of the company borrowed during the period of investigation of the
insolvency proceedings; (f) All debts of the company borrowed during the period
of the restructuring program of the company; (g) All expenses associated with the
functions discharged by the liquidator appointed pursuant to Sub-section (1) of
Section 37 and remuneration;
(h) Wages and remuneration due and payable to the workers or employees of
the company at the time of the issue of the order under this Act to liquidate or
restructure the company; Provided that no director of the company shall be
entitled to such amount. 39
(i) Amounts payable to the workers or employees of the company in
consideration of home leave, sick leave, gratuity and employee provident fund, if
any, at the time of the issue of the order under this Act to liquidate or restructure
the company; Provided that no director of the company shall be entitled to such
amount.
(j) All other amounts in consideration of debt claims accepted by the liquidator.
(2) Every liability falling in the order of priority referred to in Subsection (1) shall
be treated equally; and all liabilities falling in such order shall be settled fully.
Provided that if such liabilities cannot be settled fully, they shall be settled
proportionately.
(3) Where any liability of the company is insured, the amount receivable under
such insurance contract shall be paid to that person who is entitled to it.
(4) Where the liabilities mentioned in Sub-section (1), (2) or (3) are settled fully,
 the surplus shall be used by the liquidator to pay interest payable on debts from
the date of the order issued to liquidate or restructure the company to the date
of acceptance of the debt claim. The amount remaining after such payment shall
be distributed among the preference shareholders, and the remaining

Relevant court cases

1. Arun Chandra vs. Nepal Rastra Bank, Nepal Kanoon Patrika (NKP) 2063
No.11, p. 1434
2. Nepal Airlines Corporation vs. Harati Travels, NKP (2067), No. 12, p. 2086.
3. Piyus Raj Pandey vs. Tax Office kathmandu, NKP (2040), No. 12, p. 901.
4. Pursusottam Acharya vs. Boris and Restaurant Pvt.ltd, NKP (2044), No.9,
P.934.
5. Shankar Law Agrawal vs. Nepal lever Limited, NKP (2057), No. 5., p. 427
6. Sushila Rani Rana vs. Hotel Jaya international, NKP (2040), no. 3, p. 259.
7. Jyoti Spinning Mills Ltd vs. Department of industry, NKP (2057), No.5, p. 453.

8. Connors Bros vs. Connors (1940) 4 All ER 179 U.K.

9. Jones v. Lipman (1962) 1. W.L.R. 832.
10. Lee vs. Lee’s Air Farming Ltd. 1961 A.C. 12 UK.
11. Re R.G Films Ltd. (1953) 1 All E.R 615 UK
12. Salomon vs. Salomon & Co.Ltd. 1897 A.C. 22 UK.