Towards a Stronger Insolvency Framework

– This article was originally published by Ankshita Chaudhary in the Himalayan Times on the September 30, 2018

Market entries for businesses form an equally critical piece of the puzzle as market exits for the same. Policy-makers focus heavily on reforming entry laws but neglect nuances in the exit law, underestimating the role that a sound insolvency framework plays in winning the investors’ confidence.

The Government of Nepal passed the Insolvency Act, 2006, finally paving way for the introduction of a much-needed framework to deal with the insolvency proceedings in the country. The Act aims to balance several objectives such as saving viable businesses to go into liquidation, providing a safety net for financially distressed debtors by maximizing their recovery and protecting the rights of the creditors. However, there still exist shortcomings in the insolvency regime that need to be analyzed to see if the inefficiency is the product of laws that are deficient or that are not implemented in the intended approach.

Provision of Blacklisting

The philosophy underpinning the Insolvency law is ‘clean exit and fresh start’. However, the Unified Directive issued by the Nepal Rastra Bank states that a financially distressed or an insolvent company is automatically blacklisted if it applies to the court to initiate the insolvency proceedings either through reorganization or through liquidation. Once a company is blacklisted, its directors are blacklisted too. In such a case, the parties are ineligible to take further loans and other facilities from the banks and financial institutions thereby denying them an option of a ‘clean slate’.

Lack of a Specialized Court

The initial idea of the Government was to form a commercial court but due to lack of resources- human and financial- a commercial bench was established instead. The commercial benches fill in the vacuum created by lack of commercial courts. These benches consist of temporary judges, which means that they are subject to frequent transfers and hence, cannot build sectoral expertise. Both the judges and the lawyers lack training in part to successfully settle the commercial disputes. Even though the bench has been established, its effectiveness cannot be guaranteed. Moreover, the commercial cases are scattered in various tribunals and are not redirected to the commercial benches due to lack of proper segregation of the concerned jurisdictions. This has weakened the essence of making the commercial bench a hub for settlement of commercial disputes.

Inefficiency in the absence of time ceilings

In Nepal, there is no set time ceiling within which the liquidation process needs to be completed. Likewise, the cost associated with the liquidation process including procedural costs, fees for attorneys, assessors, and auctioneers is not fixed. These fees are determined by the liquidator, whose fee in turn is determined by the court. The creditors, who have a direct interest in the level of costs and who hope to recover some of their debts out of the assets, have no say.

 Proposed Reforms:

Reviewing the Blacklisting Directive

The whole idea of an insolvency law is to encourage risk-taking among businesses and entrepreneurs provision only discourages the entrepreneurs, brings down their morale and deters ownership. Thus, the Unified Directive that governs the blacklisting policy must be revised in order to encourage businesses to take risks. Certain criterions need to be established so that the parties who have been blacklisted can de-list themselves from the same.

Strengthening the Commercial bench

Efforts can be made to review and strengthen the existing commercial bench. The scope as well as the jurisdiction of the commercial bench should be outlined in the Insolvency Act, 2006, so that all the concerned cases are redirected to the commercial bench and are not disseminated to different tribunals. Moreover, not just the lawyers, but also the judges need to be competent in the commercial law practices. The judges hearing the commercial matters should have a sound understanding of the markets and businesses in practice. Thus, the National Judicial Academy could introduce ongoing trainings in commercial law to conduct efficacious trials from part of both lawyers and judges. Likewise, the commercial curriculum could bereviewed periodically. The rapid changes in the market can be incorporated in the curriculum and there can be continuous consultation with the business community concerning topical issues that may give rise to legal disputes.

Ensuring that proceedings are time-bound

There needs to be a defined time ceiling based on when the insolvency proceeding must be carried out. Since, the court does not state any time limit for companies who have begun insolvency, the only real beneficiaries are the liquidators as they do not have to strictly adhere to a ceiling and can, meanwhile, seek the fixed remuneration. The court should thus, come up with a fee setting where the liquidators as well as other assessors’ fee is either commission based or a standard fee.

For astronger insolvency system to be guaranteed in Nepal, the following areas of reform needs to be looked into by the lawmakers. And in all likelihood, exit strategies will finally gain momentum in the corporate ecosystem and create a conducive environment for doing business in Nepal.