Sometimes, a company must be shut down. This process is known as company liquidation or company dissolution. This means the company will no longer exist.

Company liquidation is an important process that businesses can go through for a variety of reasons. Whether due to financial struggles or the decision to close operations.

Before closing the company, it’s essential to understand the legal rules. Refer to the Nepal Company Act of 2063 (2006) and the Insolvency Act of 2063 (2007) for guidance. This step will help you avoid any potential problems that may arise during the process.

Legal Procedures for Closing a Company in Nepal

Why Close Down a Company?

Sometimes, a company needs to be shut down for various reasons. Here are some reasons why a company may need to close:

  • Financial difficulties: If a company cannot pay its bills and debts, it may have to close. That means it can’t be running because it doesn’t have enough money.
  • Shareholder disputes: If the people who own the company (shareholders) cannot agree on important matters. If the problem cannot be solved, the company may have to be closed.
  • End of the business cycle: If a company has completed the work to be done. Having achieved its goals, it no longer needs to operate. In this case, it can be closed.
  • Other reasons: Sometimes, a company has to close to comply with rules and regulations. Or, the owner may want to start a new business and decide to close the company.

What is Company Liquidation?

Company liquidation is the official process for closing down a business. It involves:

  • Selling the company’s assets.
  • Settling debts.
  • Distributing any remaining funds or assets among shareholders or creditors.

This process is usually initiated when a company is unable to pay its debts or when shareholders decide to wind up operations.

There are typically two main types of company liquidation in Nepal:

  1. Voluntary Liquidation
  2. Compulsory Liquidation

1. Voluntary Liquidation

Voluntary liquidation is an easy and official process to close down a company in Nepal. The process involves selling its assets to pay off all debts.

Approval from the liquidator, creditors, and shareholders is required for the process.

7 Simple Steps to Close a Company in Nepal

Here is a step-by-step legal process for closing a company in Nepal. Follow these seven steps:

  • Step 1: Obtain approval from the Board of Directors to close the company. Select a licensed liquidator to oversee the closing process.
  • Step 2: Inform your creditors about the closure and publish an announcement in the newspaper.
  • Step 3: Submit an application to the Company Registrar’s office to officially close the company.
  • Step 4: Obtain tax clearance from the Inland Revenue Department.
  • Step 5: Settle outstanding debts and liabilities with available funds. Distribute remaining assets among shareholders according to their entitlement.
  • Step 6: Once all tasks are completed, the liquidator will submit a final report to the Company Registrar’s office.
  • Step 7: The Company Registrar’s office will cancel the company’s registration and issue a certificate of dissolution.

2. Compulsory Liquidation

Compulsory liquidation is a legal process that occurs when a company is forced to close down and sell its assets to pay off its debts. This happens under the order of a court or a government authority.

Procedure for Compulsory Liquidation

  1. Filing of Winding-up Petition:
    When a creditor or shareholder files a winding-up petition, it begins the process of compulsory liquidation for the company. In the petition, it is clear why the company should be liquidated. Reasons include the amount of the loan and the company’s financial position.
  2. Review by Court:
    After the application is registered, the court will review it. Then, the court will send a notice to the company. Based on the evidence presented, if the company fails to pay the loan, the court will issue a closure order.
  3. Appointment of Liquidator:
    The court will select a liquidator to handle the liquidation process. The liquidator will take control of the company’s assets. They distribute money to creditors based on priority rules set out in law. This was done to pay off the company’s debt.
  4. Public Announcement:
    The liquidator will announce the winding up in the newspaper. They will also take other steps to notify creditors and other interested parties.
  5. Investigation and Realization of Assets:
    The liquidator can examine how the company’s directors and officers handled things. This may include recovering assets or seeking compensation if they have done something wrong. After that, the liquidator will sell the assets of the company. Return money to creditors based on the priority rules laid down in law.
  6. Dissolution:
    After selling all the assets of the company, the liquidator will ask the court to dissolve it. If the court agrees that everything has been done correctly, they will grant the request.

Note: Compulsory liquidation is a complex and lengthy process. It is recommended to consult with legal experts or a company registration agency when closing a company in Nepal.

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Frequently Asked Questions

Below are answers to some commonly asked questions regarding the closure of a company in Nepal:

What are the key steps involved in closing a company in Nepal?

To close a company, you need to do a few important things. First, get approval from tax authorities. Next, settling outstanding liabilities. Then, have a meeting with the board. Finally, submit the required document to the Company Registrar’s office or DOI.

Do I need to inform employees about the company closure?

Yes, it is essential to inform employees in advance and settle any outstanding dues, including salaries and benefits, as part of the company closure process. Read more about employee rights and protections during company closure.

Are there any tax implications when closing a company in Nepal?

Yes, before shutting down the company, make sure to get tax clearance from the Inland Revenue Department (IRD). This involves settling all tax liabilities.

How long does it take to close a company in Nepal?

The time it takes to close a company in Nepal can differ, usually ranging from a few weeks to a few months. This depends on things like how complicated the company’s matters are and how quickly documents are processed.

It is advisable to resolve all legal issues before starting the process of closing the company to prevent any complications.

What documents are required for closing a company in Nepal?

The required documents for closing the company in Nepal include an application for closure, a board resolution, financial statements, tax clearance certificate, and a statement of assets and liabilities.

Are there any penalties for not following the proper closure procedure?

Yes, Not following the proper closure procedure may lead to penalties. It’s important to follow the legal requirements to avoid any issues.

Can I delegate someone to complete the closure process on my behalf?

Yes, you can assign someone to manage the closing process, but it’s important to have the right paperwork and authorization.

What happens to the company’s assets during the closure process?

The company’s assets are usually used to pay off any money it owes. If there are assets left after settling debts, they are distributed among the shareholders based on their ownership.

Can a foreign-owned company be closed in the same way as a locally-owned company?

Yes, the process of closing a company is generally similar for both foreign-owned and locally-owned companies in Nepal. However, foreign-owned companies may have extra regulatory factors to consider.

What should I do if my company has multiple branches in different locations?

Every branch needs to be closed separately using the same legal steps. Also, make sure to coordinate with the Department of Industry (DOI) or the Company Registrar’s office when closing the main office.