Examining insolvency in policy and practice

-This article was originally published by Labisha Uprety in The Himalyan Times on September 25, 2016.

Insolvency is a relatively little used term in Nepal – discussions on it are fairly limited to niche circles of business and/or law. However, insolvency is one of three company exit procedures as allowed by the Nepalese legal system – the first two being cancellation of registration and voluntary liquidation of company. Being insolvent simply means that a company is unable to clear its debts and has been running under alarm-triggering losses for a substantial period of time. The Insolvency Act 2006 governs insolvency dealings in the country and allows for a number of parties to file for insolvency at the Appellate Court: the company itself, or creditors/shareholders/debenture-holders of the company. The regulatory body under which the company is registered (such as the Insurance Board for all insurance companies or the Nepal Rastra Bank for all banks and financial institutions in the country) can also file for insolvency if it has amassed substantial evidence that the company in question is unable to pay its debts. There are two options that a company can undergo once the Appellate Court accepts the case – either liquidation (which would imply selling off all assets to settle debts, and closing the company) or restructuration (modifying operations in order to rescue the business by cutting costs and selling assets or even changing ownership if needed).

The initial process

After a case is filed under insolvency, the court will review the evidences and host a hearing in 15 days’ time. During this time period, the company in question is allowed to offer evidence-based counter arguments as to why it should not be declared insolvent and forced to liquidate its assets. When the court decides it has found no reason to stall the insolvency procedure, it will appoint an inquiry officer to re-evaluate the company’s financial state of affairs. This investigation often lasts for a period of 90 days after which the inquiry officer will generate a report explaining whether the company could be restructured or needs to be liquidated. The Appellate Court then, based on the inquiry officer’s report, holds a meeting with the applicant on finalizing the best course of action.

Increased length of proceedings

Liquidation under insolvency is the last resort for any company. Naturally then, regulatory bodies or creditors of the company will not have filed for application without substantial homework. In particular, when the insolvency filer is a regulatory body – well aware of government proceedings and following due process – the inquiry official appointment, whose work can again be reviewed by the liquidator makes for redundancy. While appointment for an inquiry official is warranted in cases of body/bodies not too familiar with the due process, the decision to twice review a regulatory body’s decision (first by the inquiry official and second by the appointed manager/liquidator) could be relaxed – for it may only work to lengthen the procedure.

A separate administration office

Though the law states that there will be a separate provision for an Insolvency Administration Office, no such office exists even after 8 years of the Act having been passed. Currently a number of functions that the law envisages the new office to take over is being handled by the Office of the Company Registrar. This includes registering insolvency practitioners, and issuing and renewing their licenses. It also includes maintaining insolvent companies records – but the OCR is currently burdened with documentation of over 100,000 shell companies alone. These shell companies’ records are ones that OCR should be looking into in order to cancel their registration but has not been doing so for many years. If the law provisions for a separate administration for insolvency, then this would reduce one set of burden fror the OCR – allowing them perhaps to engage more resources in dealing with shell companies.

Lack of cross-border insolvency policies

A remarkable absence in the reigning Insolvency Act is the lack of policies for cross-border insolvency. If a parent company based on borders outside of Nepal closes, what does this mean for its branches here? There is a lack of clear policy options for this particular case, and with Nepal housing a large number of international companies’ branches – options to ease this probable concern is a necessity.

Insolvency may be thought of as fairly uninteresting – but when a company is insolvent, it means it is sitting on resources that could be freed for other uses. Having a smoother facilitative process would allow for companies and people to use these resources better and create newer ventures and better innovation.