The Business of Going Out of Business in Nepal

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)