Modes of Winding – up

Winding – up

• A company comes into existence by a legal process and –when for any reason, it is desired to end its existence; it must again go through the legal process.
• Company is an artificial person which is created and ended by law. The process to end the company is related with winding up or liquidation or dissolution of company.

In the words of the professor LCB Gower,
Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. Liquidator is appointed and he takes the control of the company collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

• Incorporation is a birth winding up is process of death – both are fulfilled by due process of law and legal formalities.
• All assets and liability are brought to close and converted in to cash form for the distribution purpose.
• Winding up and dissolution of company is not same thing. A company is said to be dissolved when it ceases to exist as corporate entity. Winding up only proceeds towards the dissolution.
• Winding up is the process by which the dissolution of the company is brought about.
• At the end of the winding up, the company will have no assets or liability, and it will therefore be simply a formal step for it to be dissolved, that is for its legal personality as a corporation to be destroyed.
• The legal entity of company remains in between winding up and dissolution process.
• In winding up the company as does not cease to exist; only its administration is carried on through the medium of a liquidator. The property of company still belongs to the company.
• Winding up liquidation have been taken in same meaning but dissolution is different.

Modes of Winding up or Liquidation

• Basically there are 4 modes of winding up under Nepalese law;
• Voluntary winding up
• Compulsory winding up
• Liquidation by the order of the court.
• Cancellation of Registration or deregistration, striking off registration

Voluntary winding up

• By adopting special resolution.
• In the situation of solvency

Voluntary liquidation starts from special resolution adopted by the company in its general meetings.

As per Section 126(1) of the Companies Act of Nepal the, shareholders of the company may liquidate the company either by adopting the special resolution in general meetings or subject to the provisions contained in MoA and AOA and consensus Agreement.

As per subsection 2 of section 126, the requirements or procedures of voluntary liquidation are as follows.

• If the company is able to pay its debts or other liabilities.
• There must be solvent company.
• There must be declaration in writing of directors to pay the debts and liabilities.
• Adoption of special resolution by general meeting and submission in Authority within 7 days, section 126(3)
• Appointment of liquidator and Auditor.
• Pre-approval from central Bank in case of Banking Sec 76(1) of BaFI Act

Compulsory winding up or liquidation

• If any company is declared the insolvent at that situation, such company must be liquidated or wound-up.

• that is the situation of compulsory winding up or liquidation.

• such liquidation is executed only by the court’s order

• Though company law of Nepal recognizes and regularized the compulsory liquidation, the proceedings of compulsory liquidation have been mentioned in detail in Insolvency Act 2063. No procedure under Insolvency Act is started without the permission of court. Court means commercial bench by notification in Nepal Gazette.

• Section 4 of Insolvency Act describes the situation to apply for the proceedings of insolvency;

  • The company itself which is in insolvent condition.
  • The creditors who has invested at least 10% of total credit to the company.
  • The shareholders, who has subscribed at least 5% shares of the company.
  • The debenture holders who has subscribed at least 5% debentures of company.
  • The liquidator appointed for liquidation of company.
  • Concerned Authority or regulatory.
  • Insolvency Act, sections 4(2), 4(3), 5 etc.

Liquidation by Court’s Order
Sec 139(4) (f) of the Companies Act 2063

If company is carried on or is likely to be carried on as to be prejudicial to rights and interest of any shareholders of the company, shareholder may apply before the court for appropriate order as remedy. At this situation, If court for liquidating the company.

Dissolution by cancellation of registration or deregistration

• the company registrar office may cancel the registration of company on the following grounds. Section 136 of the companies Act 2063

  • In a situation of failure to commence the business.
  • In a situation of default in submitting the report, for three consecutive financial years
  • If he company registrar office has a reasonable grounds to believe that company is not carrying on its business or the company is not in operation.
  • Restoration of registration; section 137(a) (b) of the Company Act.

Powers functions duties and liabilities of liquidators

• Power to take into custody and control the property of company (section 130 of the Companies Act)
• The liquidator shall, mutatis mutandis exercise and perform all the powers and duties as of liquidator under the prevailing law of insolvency. Section 131(1) of Nepalese Company Act

• The duties of liquidator are as follows - as per Section 131(2) of Nepalese Company Act

  • To prepare and submit books of account to the company registrar office in every 6 months.
  • To inform the shareholders of company about progress on the liquidation proceedings in every 6 months.
  • To obtain and recover all the properties or amounts required to be obtained and recovered on the behalf of the company and repay and discharge the debts and other liabilities of all the creditors of the company.
  • After completion of above acts, to call general meeting of shareholders and present therein a proposed report and return on the distribution of the company to the shareholders.
  • To make payment of the amounts to the shareholders, if the shareholders holding at least 75% of the paid up share capital consent proposed report as referred to clause(d)
  • To appoint or retain necessary employees
  • To submit the final report after completion of liquidation proceeding
  • Announcement of cancellation