Closing an
enterprise is tougher than opening a business in Nepal, despite the government
devising legal provisions necessary for an exit.
Nepal has
improved the opening process by going online last year, but deregistration and
liquidation of businesses is still the same tedious task it always has been.
Stakeholders blame a lack of awareness among entrepreneurs, the consolidated
Act for bankruptcy and the lengthy nature of the ordeal investors are compelled
to go through.
“The Company
Act has provisions for a company to deregister and liquidate,” says deputy
registrar of the Office of Company Registrar, Toya Nath Adhikary. Records from
the Office of the Company Registrar (OCR) revealed that in recent years, the
number of company deregistrations has increased.
Some 42
industries have already been deregistered or liquidated in the first four
months of the current fiscal year, according to data provided by the OCR. In
the last fiscal year, the number stood at 139, from 114.
Once a
company is registered with the OCR, the company must submit its annual reports
every year. Otherwise it will have to pay a fine, according to the legal
provision. “Low compliance of law due to lack of corporate culture has also
made it difficult for both the OCR and enterprises,” adds Adhikary.
The company
creates unlimited liability to the state, various institutions and
shareholders, and while closing the company; the government must be proactive
in protecting the rights of the state, institutions or individuals, if the company
has any liability. Legal experts say that a company has to go through court
procedures for insolvency, and also to identify the liability-asset status of
the company.
If a company
has more loans than liabilities, it will be sent for liquidation, whereas if a
company has more liabilities than loans, it is declared insolvent and sent to
court, says corporate advocate Gandhi Pandit, who is also one of the architects
of the Insolvency Act.
“The concept
of deregistration, liquidation and insolvency has not been clear. Rather, it
has sent the wrong message to enterprises that it’s difficult to close the
business,” he says.
The
government has established a commercial bench – at the Appellate Courts across
the country – that looks into insolvency cases. When the Nepal Development Bank
went bankrupt due to lack of good governance, the central bank moved to the
Patan Appellate Court on July 9, 2009 asking permission for its liquidation.
However, the bank’s lawyers, including Pandit, asked the court to send it for
insolvency.
But the
Patan Appellate court sent Nepal Development Bank to liquidation – the first
such case in the banking history of Nepal – on December 18, 2009 as its
liabilities were valued higher than its assets.
Likewise,
the Nepal Rastra Bank sought the permission of the court to send United and
Samjhana Development Banks for liquidation. The court concurred with the
central bank and also appointed liquidators for these institutions.
However, the
Doing Business Report 2014 of the International Finance Corporation (IFC), an
arm of the World Bank Group, has reported that it takes five years to resolve
insolvency in Nepal compared to the South Asian average of three years and the
OECD average of 1.7 years.
The time and costs required to resolve bankruptcies show
weaknesses in existing bankruptcy law and the main procedural and
administrative bottlenecks in the bankruptcy process. The recovery rate,
expressed in terms of how many cents on the US dollar claimants –
creditors, tax authorities, and employees – recover from the insolvent firm,
the time taken for insolvency is more in Nepal compared to the South Asian
average.
But for the last couple of years, there have been no changes in
the resolving insolvency indicator score that has been continuously at 25.95 –
including time taken, cost and recovery rate – except the ranking of the
indicator that varies compared to other economies. It also means that despite
the act, domestic and foreign investors do not feel comfortable with the
insolvency act and are seeking an easier exit policy, according to Pandit.
The
Insolvency Act directs a company to settle the issue only through court, which
takes some time. “As a business has to go through court, it might take some
time but not much,” Adhikary agrees. The business fraternity, however, says
that it’s a tedious process to deregister a company due to labours issue and
tax administration.
Though there
is a provision to deregister VAT and PAN, it’s a very tedious process, says
Federation of Nepalese Chambers of Commerce and Industry vice president
Pashupati Muraraka. “Likewise, compensation packages for labour is another
hurdle for closing the business,” he adds. Adhikary also accepts that a
consolidated Act could shorten the time frame for insolvency, despite the current
provisions.
“A
comprehensive dialogue among the private sector, legal experts and business
people is a must for a consolidated act that is applicable to the domestic
context,” he adds. Nepal improved in the Doing Business report due to reduced
paperwork and time frames to register a business, but there is a stark need to
look again at the closing business environment, to instill confidence in
investors.
(Published
in Business 360 magazine December 2013 issue)
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