Insolvency practitioners have expressed the need for a legal framework that facilitates rehabilitation of doomed companies instead of forcing them to go under liquidation.
“The current Insolvency Act2006 does not have the provision that encourages companies to be revived and on the other hand the long procedural hazards makes liquidation complicated and a never ending process,” pointed out chartered accountant and official liquidator of Nepal Development Bank Narayan Bajaj at an interaction program organized by Nepal Economic Forum (NEF) in association with Nepal Insolvency Practitioners’ Association (NIPA) on insolvency practices in the country.
“There should be an option along with accommodating laws that allows a takeover of the management by interested parties to revive the company that is under liquidation,” he said, adding that revival is the only possibility at present prior to the court’s verdict in favour of liquidation. Citing the example of Nepal Development Bank’s ongoing liquidation process, Bajaj pointed out the clash between the BAFIA Act that governs financial institutions and Insolvency Act that governs liquidation.
“BAFIA has provisioned that individual depositors will be the first recipients of money while Insolvency Act has listed employees and other liabilities in its priority gradually excluding the directors of the company, which created confusion regarding who should be paid first,” he said. He suggested that for financial institutions, Nepal Rastra Bank (NRB) should force the companies running in troubled waters to merge or be acquired by a stronger one instead of liquidating them.
Former president of Nepal Bankers Association Sashin Joshi also expressed that the regulators and concerned authorities should at first try to revive and restructure the companies instead of ordering them to shut shop and liquidate.
Though insolvency laws have been around for nearly half a decade, corporations –– both banking and non-banking –– rarely seek liquidation for putting an end to the problem despite facing a hard time to even manage operating costs. Nepal Development Bank is the first company to be liquidated after the Act came into existence. The bank was ordered to go into liquidation by the Patan Appellate Court in January 2010 after the development bank’s financial situation seemed to have gone beyond saving.
Likewise, in August 2011, the court ordered Samjhana Finance Company to go under liquidation for similar reasons. Law secretary Bhesh Raj Sharma also admitted that the legal provision for insolvency is not discretionary and the measure of one-size-fits-all is creating hassles in liquidation of different types of companies. “We at the Ministry of Law and Justice are open to discussions that will simplify the procedure,” he said.
Likewise, Supreme Court Judge Bharat Uprety –– who was involved in framing the Insolvency Act in 2006 –– also seconded that the Act needed to be thoroughly revised to make it more practical.