Insolvency, liquidity and winding up
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Insolvency, liquidity and winding up

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This presentation gives an overview of the laws and regulations regarding insolvency, liquidation and winding up in Nepal

This presentation gives an overview of the laws and regulations regarding insolvency, liquidation and winding up in Nepal

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Insolvency, liquidity and winding up Insolvency, liquidity and winding up Presentation Transcript

  • Presented By: Group 3 SSS RB IM MB BS
  • • Nepalese Law • Introduction • Liquidation Process • Restructuring • Powers of Stakeholders • Few Cases • Qualification of Liquidator • Problems/Challenges of Liquidation/Winding up • World Overview Overview Table of Contents
  • • Insolvency Act 2063 (2006) • Companies Act 2063 (2006) • Insurance Act 2049 (1992) • Bank and Financial Institution Act 2063 (2006) • Nepal Rastra Bank Act 2002 Nepalese Law
  • Insolvency • Insolvency Act 2063 (2006), Chapter 1, Section 2(b) “being insolvent” means “a state of being unable, or appearing to be unable to pay any or all of the debts due and payable in the failure to creditors or a situation where the amount of liabilities of a company exceeds the value of the assets”. • Confusion of Insolvency in Nepal
  • Liquidation • Insolvency Act 2063 (2006), Chapter 1, Section 2(d) • “Liquidation of company” means a situation where the registration of a company is cancelled by fulfilling the procedures referred to in this Act”.
  • Types of Liquidation Liquidation Voluntary Company is able to fully pay its debts Company is not able to fully pay its debts i.e. Insolvency Forced/ Compulsory
  • Forced Liquidation Parties Requirement Creditors 10% of creditor or creditors of the company (Section 4(b)) Shareholders Shareholder or shareholders subscribing at least 5% of shares, out of the total shareholders. (Section 4(c)) Debenture- holders Debenture-holder or Debenture-holders subscribing at least 5% of debentures, out of the total shareholders. (Section 4(d))
  • Forced Liquidation Parties Requirement Authorized Body/ Regulator Special Business •For Banks and Financial Institutions : Nepal Rastra Bank •For Insurance Companies : Insurance Board •For a company which cannot undergo Voluntary Liquidation without the approval of the competent body or authority, such authority. (Section 4(f), 8), Insolvency Act 2063, 2006
  • Winding up • No legal definition in Nepalese law • But same meaning as “Liquidation” in Nepal • Interpretation from Company Act 1956, India • process through which the corporate existence of a company is ended and it is finally dissolved. • Section 425 of Company Act 1956 states that winding up can be made in the following two ways: – Winding up under supervision of the tribunal or compulsory winding up. – Voluntary winding up
  • (1) Application by any one of the six stakeholders • Company itself • Liquidator appointed by the company • Creditors • Shareholders • Debenture-holders • Authorized Body or Regulator • Application to be accompanied by necessary documents
  • (2) Registration of application at the court and Preliminary study of application • Court registers application • Court sets the date of hearing • Gives chance to revoke application (7 days) • Court may ask concerned body to submit statement of reasons • Court gives formal public notice in a national daily newspaper at least twice
  • (3) Hearing and Order by court (Section10, Insolvency Act 2063,2006) • Hearing takes place • Court may accept or dismiss the application • If accepted, court gives order to appoint Inquiry Officer (IO)
  • (4) Inquiry Period: Inquiry and submission of report by IO • IO makes a detail inquiry to check – Whether the company has been insolvent or not, – Whether its financial situation can be improved through restructuring or not, – Whether it’s a lost cause and the company should be liquidated • IO convenes a meeting of creditors • IO submits a report to the court
  • (5) Court gives order within 7 days of the receipt of IO Report • To liquidate • To restructure • To stay/wait for a specified time period, if the company can be improved without liquidating • To make further inquiry
  • (6) Appointment of a Liquidator • Court gives order to appoint a Liquidator • For example, Chartered Accountant Narayan Bajaj was appointed as the liquidator for the liquidation of Nepal Development Bank. • Court also sets the time limit for completing the liquidation proceeding • Usually 5 years in Nepal • But in practice, this time is extended to more than 10 years, especially in case of liquidation of Public Enterprises in Nepal.
  • (7) Consequences of the commencement of Liquidation proceedings • Liquidator: the supreme authority • The directors and officers of the company are relieved of their position/office and the liquidator exercises all powers of directors/officers. • All employees are also terminated, except the few retained by the liquidator to help him manage the company. • The liquidator takes into custody all assets, properties and books of accounts except the properties in possession of secured creditors.
  • (8) Activities performed by liquidator • examines the business and financial situation • calls the meeting of creditors within 15 days of his appointment • asks creditors to submit their debt claims along with evidences and calculates the total debt of the company • obtains and recovers all properties or amounts required to be obtained and recovered • valuates the total assets/properties of the company
  • (8) Activities performed by liquidator • examines whether any director, shareholder, or employees has committed fraud, cheating or deception and takes legal action against them • settles any legal matters or claims against parties • prepares and submits the statements of accounts of incomes and expenditures in the course of liquidation in every 6 months (Section 132. 2(a),Companies Act, 2063) • submits progress report to the court and the Office of the registrar (after 3 months of appointment)
  • (9) Sale of assets and distribution of proceeds • The Liquidator – sells the assets of the company – distributes the sale proceeds to all the concerned parties in the order of settlement of claims/order of priority of payment of liability.
  • Order of settlement of claims or liability of a company (Insolvency Act 2063) 1 • All expenses incurred by Interim Administrator, liquidator, Restructuring Manager, Inquiry Officer. 2 • All remuneration due to Interim Administrator, liquidator, Restructuring Manager, Inquiry Officer 3 • All debts borrowed by Inquiry Officer and Liquidator 4 • Wage, remuneration payable to the workers/employees at the time of the issue of the order to liquidate or restructure the company. NO DIRECTORS 5 • Gratuity, and Employee Provident fund, NO DIRECTORS 6 • Distribution to Creditors 7 • Distribution to Preference Shareholders 8 • Distribution to Common Shareholders
  • Order of settlement of claims of BFIs according to Section 77(c) BAFIA 2063 (2006) 1 • All expenses incurred in liquidation 2 • Payments outstanding to depositors on savings accounts 3 • Payments outstanding to depositors on fixed accounts 4 • Payments outstanding to other depositors 5 • Taxes, fees and other charges payable 6 • Credit obtained from NRB 7 • Salary, allowances, provident fund, gratuity, and other amounts outstanding to employees 8 • Other credits obtained by the licensed institution 9 • Shareholders
  • (10) Report Submission by the Liquidator (Section 131, 2(d), (e), (f), Companies Act, 2063 (2006)) (11)Cancellation of registration of the company (Section 132, (1), (2), Companies Act, 2063 (2006)) • Office of the Registrar – strikes the name of the company off the company register – issues an order that the registration of the company has been cancelled – publishes in a national daily newspaper a notice that such company has been dissolved.
  • Restructuring • According to Section 2 (e) of Insolvency Act: “Restructuring” means a process to be adopted under this Act in order to a company which may become insolvent because of financial difficulty
  • Procedure 1. Court order to the appointment of restructuring manager 2. Preparation of restructuring program – To capitalize the debt of the company and alter the capital structure or management structure ; – To pay the claims of creditors by selling any portion of the assets of the company; – To amalgamate the company with any other company; – To do any such other act which the Court considers appropriate to restructure the company
  • Procedure 3. Call meeting of creditors – Discuss the “Restructuring Program Proposal” 4. Prepare report – The restructuring manager submit to the Court a report, accompanied by the transactions, assets and financial situation of the company and its restructuring program, if any proposed.
  • 5. Claim and objection to approved restructuring program: – A creditor who does not agree may make an application of claim and objection within seven days 6. Consequences of approval by court – If the Court approves the restructuring program adopted by the meeting of creditors the program shall be binding on all creditors of the company, directors and shareholders of the company
  • 7. Restructuring manager is to operate company – Management and control of the business, properties and transactions of the company; – Termination, sale and disposal of any business or property of the company; – Doing or exercising any such act or power that the company or its officer may do or exercise.
  • 8. Raise loan, if necessary – Power to raise loan if amount to be necessary to keep on running the company or operate the business and transaction of the company 9. Implementation of restructuring program – the restructuring manager responsible for the supervision and management of the implementation of the restructuring program
  • 10. Ceiling of remittance of loan of company: – Where as per the agreement of creditors, the restructuring program provides for the remission or alteration in the terms of any loan or any portion of the loan not secured, such remission or alteration may be made in accordance with that program.
  • 11. Alteration in and amendment to restructuring program – If the program cannot be wholly or partly implemented, it can be altered or amended through meeting of creditors. Alterations have to approved by Court
  • 12. Termination of program – The program may be terminated under two circumstances: 1. The manager makes application that the company has already implemented the program 2. The company fails to implement the restructuring program, in such case the court shall issue order to liquidate the company
  • Creditors • According to Section 2(I) “Creditor” means a person who is entitled to receive payment from a company which has become insolvent or may become insolvent;
  • Rights of Creditors 1. Right to claim – Right to claim for the loan due or payable to him/her – Provide proof and evidence if necessary – Restructuring manager or liquidator will examine the claim and accept or reject within 7 days – If creditor is not satisfied, he/she can make application to Appellate Court within 15 days – Foreign creditors also have right to claim
  • Rights 2. Right to claim for interest – Creditor has the right to claim the agreed upon interest from the insolvent company – No interest may be claimed for the period after the date of issue by the Court of an order to liquidate the company or implement the restructuring program of the company.
  • 3. Right to complain – If any creditor of a company thinks that there is any irregularity in respect of any act or action of the liquidator – At least 10% of total creditors; and debenture- holders that has or have subscribed at least 5% of total debentures of a company have the right to file an application.
  • 4. Right to claim amount paid in consideration of preferential transaction – Any creditor who pays any amount to the liquidator in relation to any preferential transaction made with the company, according to the order of the Court or for any other reason, may make a claim for that amount as a debt claim against the company in liquidation
  • Secured Creditor • A secured creditor means a creditor that lends money to a company against a security. • Rights to debt claim • The amount to be claimed difference between the amount received from the market value of property and amount payable
  • Shareholder According to Section 2(r) of Companies Act, 2063: “Shareholder” means a person having ownership in the share of a company
  • Shareholder • Right to complain • Right to residual claim
  • SOG Vs Margaretic • Sons of Gwalia :Australian Gold Mining company, listed on the ASX • Luka Margaretic: Shareholder bought shares of the company which went into liquidation 11 days later • Margaretic claimed damages based on misleading or deceptive conduct and a failure to comply with continuous disclosure obligations • Compensation claim to recover the cost of his shares plus brokerage
  • • Ruling: Ruled in favour of Margaretic • Person who buys shares in a company relying on deceptive information from that company, or was misled as to the company's worth by its failure to make disclosures, may have a claim for damages against the company that ranks on a par with other creditors.
  • Nepal Development Bank (NDB) • NDB is the first company to be liquidated after the Insolvency Act came into existence. • Bad management, bad policy and bad luck as well were main reasons – Narayan Bajaj. • As per clause 74 of the BAFIA, case was filed in Patan Appellate Court for liquidation. • In January 2010, Court ordered to liquidate NDB.
  • Some numerical data • In first quarter of 2064 B.S., reserve deficit was Rs.580 million. • Furthermore, in first eight month period of 2065 B.S. NDB suffered Rs.680 million. • Net worth turned negative by 25.02% which further worsened to 30.43%by Chaitra. • Non-performing loans were 50% with negative Capital Adequacy Ratio of 48.31% (NRB allowing up to 11% only).
  • How it started • It started from January 19, 2010 with audit of assets and liabilities. • In first process of recovering loans, Rs.200 million was recovered within 15 days of publication of notice. • As per the Insolvency Act, “the liquidator will have to submit report about assets and liabilities of the bank to the court before reaching any conclusion on sharing of the money to stakeholders.”
  • Cont. • Small depositors had Rs.210 million. • Employees Provident Fund (EPF) and Nepal Army had Rs.330 million & Rs.180 million. • Expenses of the liquidator, employees and other liabilities were listed in its priority gradually excluding directors of the company • Ministry of Finance sent a list of 40 former NDB officials to police for further investigation.
  • Cont. • Initially, 75% of deposits were expected to be returned back. • Notice was issued to pay back up to Rs.800,000 up to small institutional depositors. • NA purchased land in Chitwan in auction of NDB; from which Mr Bajaj decided to pay to depositors.
  • Ranger PLC (Rangers) • Rangers entered into financial crisis during late 2000s. • It owed substantial amounts to Her Majesty’s Revenue and Customs, who subsequently refused to allow Rangers to exit administration via a Company Voluntary Arrangement (CVA) • A bill potentially of around £49 million was assessed in 2010.
  • Liquidation • RFC entered into the process of liquidation on 31st October 2012. • On 6 May 2011, it was confirmed that David Murray had sold his controlling interest in the club (85.3 percent) to Wavetower Limited, ultimately owned by Craig Whyte, for £1. • They refused to remit the pay-as-you-earn tax deducted from his employees to HMRC.
  • Cont. • 13 Feb 2012 – Rangers filed legal papers with intention to enter into administration. • 14 Feb 2012 – HMRC made unsuccessful attempt for petition of authority to appoint their choice of administrator. • Duff & Phelps were selected as administrators. • April- Revealed debt could top £134M. • HMRC rejected owner’s bid to exit administration via CVA giving creditors 9 pence a pound.
  • Cont. • Business & assets were sold to Sevco Scotland Ltd, with BDO appointed as liquidator. • Reason behind liquidation was overspending due to mismanagement. • “For every £5 Celtic spends, we will spend £10.” – Former owner of Rangers
  • Formation of New Company • Club’s assets were sold to Sevco Scotland ltd. owned by Mr Charles Green’s consortium. • At present, a new company has been formed legally with under new name. • Any attempt to adopt the name “The Rangers Football Club” would require the approval of the liquidators.
  • Requirement to be a liquidator • Section 63, Insolvency Act 2063, 2006 (a) Have completed the age of thirty five years; (b) Being a member of the prescribed professional association; (c) Having acquired at least bachelor's degree in commercial law, commerce, management, accounts or any other prescribed subject from a recognized university; (d) Having abode in the State of Nepal; (e) Being competent to carry on insolvency practice under this Act.
  • Nepalese Scenario According to data from companies that have gone into liquidation • 26% - due to poor supervision and lack of a regulatory body • 20% due to deficient bank management • 11% due to political influence • 15% due to connected lending and fraud.
  • ISSUES REGARDING LIQUIDATION IN NEPAL
  • Issue 1 The Insolvency Act of Nepal doesn’t discuss about the dissolution of the Board of Directors. Which governing body has the privilege to take the action?
  • On liquidation of a company the board of directors does not automatically dissolve. Nepal Rastra Bank (NRB) has the right to liquidate the board under the NRB Act(In case of BFI’s); however NRB is yet to do this. (Ambiguities are there in case of other companies)
  • Issue What is the role of the court except the appointment of liquidator? Essential in determining payment priorities and distribution of surplus funds, as the Insolvency Act does not differentiate between creditors.
  • ISSUE CONTRADICTIONS BAFIA states that individual depositors will be the first recipients of money while the Insolvency Act states that employees and other liabilities will have to be prioritized
  • How is the priority assigned among creditors during liquidation? This issue needs to be responded in the respective act so that there lies no further confusions regarding the topic. For, right now court is responsible for the decision.
  • Is Insolvency the last resort? What about the other options such as rehabilitating? • Differentiate insolvency and liquidation • There should be rehabilitation of the doomed companies. • Provisions to change of management for restructuring
  • Recommendations • The local elements need to be infused in our strategies and vision. • The priority list of creditors needs to be prepared • Insolvency and liquidation need to be • It is time to make the acts in English so that nothing is lost in translation • The contradictions in the laws need to be explained and amended
  • Thank You! And Any Questions?