February 17, 2006

By Shankar Man Singh

Learning Lessons from Neighbors: A look at the Indian legal system reveals that it is based on common law of England and heavily loaded in favor of protection of unemployment of labor, which has its implications on the Insolvency law. Hence, in India , the process of winding up of companies is regulated by the Companies act and is under the supervision of the Court. Although article 19(1) (g) of the Constitution of India gives freedom to practice any profession or to carry on any occupation, trade or business to the citizens of India, there are restrictions on closure of any industrial undertaking. Such restriction is set to justify on the grounds that it is in public interest to prevent unemployment. As a result of such policy, there is a freedom to undertake any industrial activity, but there is no freedom to exit.

In the process of deregulation and liberalization that Nepal adopted since nineties, Nepal also introduced market based economy. As a consequence of this, in the context of deregulation and liberalization, a number of restrictions on undertaking industrial activity has been withdrawn and relaxed. There is a need to take the process of liberalization a step further and recognize that so long as company is acting in the interest of shareholder and otherwise observing the law of the land it should have the freedom to manage its affairs, merger, amalgamate, restructure, and reorganize or otherwise plan its affairs as it considers best in the interest of the stakeholders.

While undertaking reforms in insolvency laws there is a need to change the focus from strict regulations of the activities of companies to granting freedom to the industry in conducting its business activities and lay down norms for protection of interest of stakeholders.

Nepal ’s Insolvency Ordinance:

Experts and the businessmen have lauded the newly promulgated Insolvency Ordinance as a tool to enhance corporate governance and urged the government to work on institutional and human resources fronts for its effective implementation. Some opine that the insolvency ordinance can help amply to support investment, promote private sector growth, encourage enterprise, and generate employment. It is also crucial to manage corporate failure, promote corporate good governance, encourage sound practice and financial discipline and advance public confidence in corporate and financial sector. The Insolvency Ordinance would now allow companies to declare themselves as bankrupt in case of grave financial crisis.

In the annals of commercial law in Nepal , the promulgation of the Insolvency Ordinance can be said to be a milestone. On recapitulation, the very concept of insolvency might not be new to Nepal as in the Mulki Ain chapter there is a separate heading for the insolvency of an individual. However it is interesting to note that, as such, there is not a single case of the reporting of the insolvency case. The recent Insolvency Ordinance deals only with the corporate insolvency and personal bankruptcy is out of the domain of the recent Ordinance.

In brief, the Insolvency Ordinance 2062, effective from 23 September, 2005 includes: applicable to all limited companies; a separate administrative office to be set up to oversee the insolvency business, only licensed individuals will be allowed to carry out insolvency business i.e. become liquidators, company restructuring managers. Insolvency process can be inititated with prior approval of the court as also by owners of 5 percent or more shares in the company or by creditors who have a claim on 5 percent or more shares in the company or by creditors who have a claim on 5 percent of the total credit owned by the company. Insolvency process can be initiated if the company fails to pay the creditor the dues within 35 days of the receipt of a legal notice issued by the creditor asking for the payment.

A company is declared insolvent by the court also when it is found that the value of the liabilities of the company exceed the value of the assets. The court may order suspension of various transactions of the company as deemed necessary while the initial hearing is going on over the application for initiating insolvency process. Providers of essential services such as electricity, telephone etc. to the company cannot disrupt these services to the company after the court issues order to go ahead with the insolvency process. The court can issue order to restructure the company and appoint a restructuring manager. If a director of the company hides the fact that the company is on the verge of insolvency, he/she will be fined upto Rs. 200,000.

Insolvency ordinance provides a way out when the total liabilities of an individual or enterprise exceed the total assets so that the limits of the creditors cannot be met. It discharges the debtor from the burdensome debts and allows him to make a fresh start. It also provides for the speedy, efficient and equitable distribution of the debtor’s non-exempt property to the creditors.

The Insolvency Ordinance 2005 covers the companies with Limited Liability Company and leaves out the personal bankruptcy from its ambit. It also includes the banks and financial companies. However, in the case of banks, prior approval from the Nepal Rastra Bank is required before initiating the insolvency procedures. The insurance companies are also covered by the law, but again it requires prior approval from the Beema Samittee. The voluntary liquidation has been excluded from the domain of the new Ordinance which also remains part of the new Company Ordiance 2005.