-This article was originally published in The Himalayan Times on May 8, 2016 by Labisha Uprety.
Company exit in Nepal is a perplexing topic to say the least. It rarely finds its way into our conversations over tea or in classrooms. Company exit also does not come up in news channels — its process or complications — nothing is discussed. The very use of the words (company exit) may confuse the general audience. Why write about something that seems so unappealing to begin with then? For precisely the reasons as listed above — company exit may not be one of the most lustrous ideas to deliberate over but it is a crucial indicator of economic freedom.
What does company exit mean?
At first glance, it simply means the ability of a company (or a body registered as one) to leave a market. This usually extends to formally shutting down operations and laying off workers. A company might close for reasons unlimited — they want to look at a new venture, perhaps the company made irrecoverable losses or simply, the proprietor now has had a change of heart about owning a company. When we think of companies, we usually think of faceless buildings and people we have no connections to in real life. Their stories don’t touch us. But the terminology ‘company’ is all-encompassing. The small shop that you frequent to get tea and cigarettes is registered as a private company. That tiny barbershop that gives the best head massages? Private company. That local bakery that bakes the best bread in town? Private company. You may think company exit still doesn’t touch you unless you are an entrepreneur — which could cover anything and everything from owning an industry to innovating paid driver pick-ups when the client is a little too inebriated. You are affected directly by options and ease provided for company exit, even if you have no plans for inventing the next big social media, because they affect the choices you have as a consumer. Fluidity in company exit means that more people can enter newer businesses as they close old ventures. It means there is a flow of ease in and out of a market when company entry and exit laws are flexible.
What are the options that Nepal provides for company exit?
There are three main types of exit that a company could undergo based on their situation : cancellation of registration, voluntary liquidation or forced liquidation (or insolvency). The first two are governed by the Companies Act (2006). Cancellation of the registration of a company The cancellation of registration of a company applies to those companies who were unable to commence business once they got registered — say person A registered papers for opening a travels and tours company but his business never took off because he could not find people to work for him. Or, he found that he could not sustain his interest in tourism because the market had already been well-saturated. In this case, person A goes to the Office of the Company Registrar (OCR) and applies to simply cancel his registration papers. Cancellation of registration can also apply when the companies have failed to show audit records/pay fines for more than three consecutive years to the OCR or the OCR has enough grounds to believe that the company is not functioning. Currently, there are thousands of records of businesses that haven’t sent in their audit records for years, whose registration the OCR has the power to cancel but hasn’t done so yet in fear of not being able to understand these companies’ individual financial situations.
Voluntary liquidation of a company
The second option is voluntary liquidation. This applies to businesses that did engage in business transactions post-registration completion. This means a grocery shop did procure goods to sell or that a shoe store hired salespersons. If there has been any form of transaction post-registration that aided company existence, the person now has to file for voluntary liquidation to dissolve their business. The company in question does not necessarily have to be in loss to undergo this process, at least according to our laws. A liquidator has to be hired regardless of the size of the company. This means that whether you own an industry or a one-person mom and-pop store which you have registered as a company, you will have to find a liquidator to set your final audit records straight and cancel the registration of your company. Not all people can hire liquidators though. This becomes troublesome for the business owner when he could simply use an auditor’s service for a few days and engage in a process similar to cancellation of registration of company to liquidate his/her business.
The third option, as dictated by the Insolvency Act (2006), is forced liquidation where regulatory bodies or creditor bodies (who have at least a 10% stake or 10 per cent of total creditors) have the power to file for insolvency of the company in question when they have enough proof to believe that the company will be unable to pay its dues. The court is involved in this procedure and asks for a recheck on the financial situation of the company by appointing an inquiry official. This official then studies the company’s records and proposes either forced liquidation or restructuring of the company. There has been only one successful insolvency case in Nepal so far that of Nepal Development Bank — that too in the past years. But our Act is fairly young and it is not necessary that companies had to have been restructured. However, the Act does ask for an Insolvency Administration Office which is non-existent till date. Company exit laws affect all of us because they dictate the facileness of mobility in and out of markets — any markets and encourage innovation when there are fewer hassles to moving from one venture to the next. When an entrepreneur cannot wipe his slate clean and start a new business when s/ he finds fit, it stifles growth as her/ his capital gets stuck in a not-so profitable business and s/he is rendered unable to create new goods and services, and more importantly, new jobs in the market.