Insolvency law in Nepal is governed by the Insolvency Act, 2063 B.S. (2006 A.D.). Although the law was enacted in 2006, the adjudication forum under this Act was established only in 2074 B.S. (2018 A.D.). Despite more than six years since its establishment, the application of insolvency proceedings remains infrequent.
You're more likely to encounter a tiger on your first visit to Chitwan National Park than to come across an insolvency proceeding in Nepal. In this article, we will delve into the various reasons behind this. First, let's understand the basics of insolvency law in Nepal. In simple terms, when a company faces financial difficulties and is unable to repay its loans, either insolvency proceedings or debt recovery may be initiated. These are distinct legal mechanisms, and the key differences between them are outlined below.
Insolvency – The Taboo
There are several reasons why insolvency is not the preferred method for loan settlement in Nepal. Some of these include:
• Insolvency in Nepal is largely perceived as a failure rather than an opportunity for the business to recover or restart.
• The debt recovery process has been in place for over two decades, and its practical enforceability has been well established in the market.
• Stakeholders and practitioners remain detached from the concept of insolvency due to the lack of practical application and successful resolutions.
• Debt recovery forums have developed specialized knowledge of Nepal's debt markets, making them the preferred choice for banks and financial institutions.
Benefits of Insolvency
Having briefly examined the reasons for the rarity of insolvency proceedings in Nepal, let’s now explore their advantages. Insolvency proceedings offer several benefits compared to the debt recovery process. Some of these advantages include:
• All company assets, not just pledges, mortgages, and other securities, can be used to repay the loan amount, providing banks and financial institutions with a greater degree of risk mitigation against bad debts.
• This gives the company's directors an opportunity to avoid blacklisting and provides the company with greater flexibility in repaying its loans.
• Unlike debt recovery proceedings, insolvency proceedings allow for the restructuring of the company. This restructuring can take various forms, such as converting debt into equity, merging with another company, changing management, or altering the capital structure. In many cases, this approach results in better risk allocation for all stakeholders.
• The company can initiate this process itself, thereby avoiding an adversarial situation with its banks and financial institutions.
• The insolvency mechanism is monitored by the Commercial Bench of the relevant Hon’ble High Court, as outlined in Chapter 5, Part 67, Serial Number 49 of the Nepal Gazette Notification dated 2074.09.24 B.S. (January 8, 2018 A.D.), and is carried out by qualified and licensed professionals. Writs in these cases, if applicable, against the decisions of the Hon’ble High Court can only be filed before the Hon’ble Supreme Court. In contrast, a debt recovery claim, along with any appeals and writs arising from it, must pass through three forums: the Hon’ble Debt Recovery Tribunal, the Hon’ble Appellate Tribunal, and finally the Hon’ble Supreme Court before the claim is resolved.
• The relevant bank and financial institution can file collective petitions alongside other banks and financial institutions to which the company owes money.
• Insolvency is a viable option when personal or bank guarantees for loan repayment have not been provided or when enforcing such guarantees may be practically impossible.
Process of Insolvency
As discussed above, an insolvency petition must be filed before the Commercial Bench of the relevant Hon’ble High Court. When the company itself submits such a petition, it is required to include a document from the Board of Directors stating that the company has become insolvent, along with a special resolution adopted by the Board resolving to initiate insolvency proceedings under the Insolvency Act 2063 B.S. (2006 A.D.). Certified copies of the company's balance sheet and audit report will also be required, ensuring transparency in the process.
When creditors apply for insolvency, they must first send a notice to the company in the prescribed format requesting payment of the debt.
Proceedings can be instituted before the Commercial Bench of the relevant High Court only after the expiry of 35 days. This allows the company sufficient time to repay its debt before insolvency proceedings are initiated against it.
The process to be followed by other eligible petitioners may differ, but the law as a whole upholds principles of natural justice—ensuring that no one is condemned without being heard and that adequate notice is served to the concerned company. It emphasizes the need for transparency regarding the company's financial health while also providing protections against misuse.
Conclusion
As discussed above, the process and reasons for declaring or initiating insolvency are quite straightforward. Experience from mature markets shows that these proceedings can revitalize the concerned company while facilitating debt settlement, with liquidation being a last resort. In many cases, insolvency proceedings serve as effective risk mitigators against bad debts.
These proceedings also offer all stakeholders an opportunity to engage in a non-adversarial settlement of dues, maximizing effective risk allocation for everyone by ensuring transparency regarding the financial health of the concerned company. In Nepal, the effectiveness of this mechanism has yet to be fully explored, and policy reform will remain a key agenda concerning insolvency laws. This is especially important given the lack of adequate classification and identification of the various types of creditors. However, before we dismiss the tiger, we must first let it roar.
(Malla is Consultant at NDM Corporate Solutions.)
(The opinion article was originally publihsed in the October, 2024 issue of the New Business Age Magazine.)
