TyroCity: Company Law Notes

Allotment of Share

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Section 28 of Nepalese Company Act.
Allotment is the process of distributing and selling of shares by company for the persons who are going to be future shareholders of the company.
Prospectus issued by the company is the invitation to the public to apply for the shares of the company.
On the basis of invitation the persons apply to the company for its shares.
An application for shares is an offer from the applicant to purchase the shares.
When such application is accepted by company that is called an allotment.
Allotment is the appropriation of shares to a particular person, out of the previously inappropriate capital of the company.
So, allotment is the fresh issue of shares by company.
It is a binding contract between the company and shareholders.
The rules of offer and acceptance of contract law are applied in allotment process.
The company must make a decision of allotment to go in public. The board fixes certain reasonable time frame to pay the share amount.
General rules of allotment; – 1) the allotment must be made by proper authority e.g. board of directors, or delegated authority.2) the allotment must be communicated. – to the applicant e.g. postal communication, public notice.3) there should be a reasonable time for application.4) the allotment must be unbiased and absolute.4) There must be clear terms and conditions in application itself.
The allotment process must be mentioned in MoA and AoA as per the legal provisions of the companies Act 2006.
The allotment is done privately in case of private company, not publicly, private company cannot make public offer for allotment, if made that is punishable by section 160(q).
Respective legal provision of allotment is sections 28 of the Companies Act 2006 of Nepal

Lifting (or Piercing) the Corporate Veil

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Lifting the veil of incorporation or better still; “Piercing the corporate veil”:

means that a court disregards the existence of the corporation because the owners fail to keep one or more corporate requirements and formalities. The lifting or piercing of the corporate veil is more or less a judicial act. Judge Stoughton LJ defined the term as “to pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, therefore should mean to have regard to the shareholding in a company for some legal purpose” whereas, Young Jon his part defined the expression “lifting the corporate veil” as “that although whenever each individual company is formed a separate legal personality is created, courts will on occasions, look behind the legal personality to the real controllers.”

Thus, it can be said that the Lifting of the Corporate Veil is the exception of Limited Liability. The courts will lift the corporate veil where it is necessary to secure justice, where it is the public interest to do so or where it is for the benefit of revenues. The concept of lifting the corporate veil describes a legal decision where a person of a company is held personally liable for the liabilities of the company despite the general principle that those persons are immune from suits in or that otherwise would hold only the company liable. The doctrine is also known as “disregarding the corporate entity”.

It is difficult to identify a consistent thread running through the decided cases indicating when the veil will be lifted. Certain themes can be identified. These are:

Fraud: Fraud is a crime of deceiving somebody in order to get money or goods illegally. The courts have been more prepared to lift the corporate veil when it feels that is or could be perpetrated behind the veil. The courts will not allow the Solomon principal to be used as an engine of fraud. In Gilford Motor Company Ltd. v. Horne, 1933. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this he incorporated a limited company in his wife’s name and solicited the customers of the company. The company brought an action against him. The Court of appeal was of the view that “the company was formed as a device, a stratagem, in order to mask the effective carrying on of business of Mr. Horne” in this case it was clear that the main purpose of incorporating the new company was to perpetrate fraud. Thus the court of appeal regarded it as a mere sham to cloak his wrongdoings.

Group enterprises: The argument of group enterprises is to the effect that in certain cases, some companies that act as a corporate group may operate to hide behind the advantages of limited liability to the disadvantage of their creditors. They may operate in a way that the parent entity is not clearly distinguishable from the subsidiaries. The argument in favor of piercing the corporate veil in these circumstances is to ensure that a corporate group which seeks the advantages of limited liability must also be ready to accept the corresponding responsibilities. This was the opinion of Doyle CJ in the 1998 case of Taylor v Santos Ltd.

Agency: The doctrine of separate legal entity that the company is a legal entity with a different identity from that of its members means that a company does not exist to become an agent for its shareholders. A company having power to act as an agent may do so as an agent for its parent company or indeed for all or any of the individual members if it is or they authorize it to do so. If so, the parent company or the members will be bound by the acts of its agent so long as those acts are within actual or apparent scope of the authority. But there is no presumption of any such relationship in the absence of an express agreement between the parties it will be difficult to establish one. In cases where the agency agreement holds good and the parties concerned have expressly agreed to such a agreement them the corporate veil shall be lifted and the principal shall be liable for the a acts of the agent. The court in The Electric Light and Power Supply Corporation Limited v Cormack, 1911. refused to pierce the veil. A one-man company had contracted with the plaintiffs to use their power supply for his work during two years, and not to install any other alternative source of energy power during that period of time. But within that period, the defendant sold his company to another company of which he was both the manager and the main shareholder. The new company thereupon installed energy power other than he one contracted with the plaintiffs. The court refused to pierce the veil, considering the act as a personal undertaking. As such Lord Rich AJ found no evidence that the sale of the business by the defendant was done with the object of evading his personal obligations.

Unfairness: One other serious ground under which courts would be so ready to pierce the corporate veil is in cases where it is deduced that there was unfairness on the part of the company in question. The plaintiff may pray to the court to pierce the corporate veil on the grounds that doing so would help bring a fair and just result.

Sham or Façade: An argument that the company under scrutiny is a sham or a façade is one of the strongest points that would prompt a court to lift the veil of incorporation. The argument is quite close to the argument of fraud, but usually stands on its own. In short, to say a company was merely a façade or a sham means the corporate form was incorporated or merely used as a mask to hide the real purpose of the corporate controller. In the case of Sharrment Pty Ltd v Official Trustee in Bankruptcy 1988, Lockhart J, stated that: “A ‘sham’ is…something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.“

Trust: The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the case of Abbey and Planning the court lifted the corporate veil. In this case a school was run by a company but the shares were held by the trustees on educational charitable trusts. The court pierced the veil in order to look into the terms on which the trustee held the shares.

Tax: At times tax legislations warrant the lifting of the corporate veil. The courts are prepared to disregard the separate legal personality of companies in case of tax evasions or liberal schemes of tax avoidance without any necessary legislative authority.

Legal provisions:
In case, any member is found guilty after the veil has been lifted, then he or she as per section 89 of the Companies Act 2063 (2006) will be disqualified from being appointed and from continuing to hold office. The following sections provide circumstances for disqualification:

Section 89 (1) (e): who is convicted of an offense of theft, fraud, forgery or embezzlement or misuse of goods or funds entrust to him/her, in an authorized manner, and sentenced in respect thereof, a period of three year has not elapsed from the expiry of the sentence.
Section 89 (1) (f): who has personal interest of any kind in the business or any contract or transaction of the concerned company.
Section 89 (2) (a): Any person referred in Sub-section (1) shall not be eligible to be appointed to the office of an independent director.
Section 89 (3) (f): If one is blacklisted by a competent body pursuant to the prevailing law for his/her default in repaying a loan of any bank or financial institution, and the period of such black listing has not expired.

[1] Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769

[2] Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 (SCNSW, Young J).

[3] Gilford Motor Company Ltd. v. Horne, 1933 (Ch. 935)

[4] Taylor V. Santos. Corporate Law Electronic, 1998 (Bulletin no. 13, September)

[5] The Electric Light and Power Supply Corporation Limited v Cormack (1911) 11 NSWSR 350

Points:

An exception of distinct personality.
Concept of ‘piercing the corporate veil’ describes legal decisions where a shareholder, member or director of a corporation is held liable for its debts or other liabilities.
Generally, corporation is liable, but exceptionally, in the course of delivering justice the members or shareholders are liable.
This doctrine is known as disregarding corporate entities.
The phrase ‘disregarding of corporate entity’ relies on the metaphor of a ‘veil’ or ‘legal fiction’.
The doctrine is generally used in cases where liability is found but the corporation is insolvent.

Lifting the corporate veil - (Exception to corporate personality)

Disregarding of corporate entity.
The principle of separate personality was established in a famous case of Salomon v. Salomon & Company.
It is a fundamental principle of company law that company has distinct personality.
There is a veil drawn between the company and its members.
as per this principle typically, courts in most cases refuse the separate personality, go behind the curtain and see who are the real persons composing the company, but sometimes necessity of situation come to the courts or authorities to disregard the corporate legal entity and look to individual members who are in fact the real beneficial owner of all corporate property, and this is fact known as lifting or piercing the corporate veil.
If the veil is lifted, individual members are held liable for acts or entitled to its property.

Grounds for Lifting the Corporate Veil

For securing justice.
For the benefit of revenue
Separate legal entity is general rule and lifting the veil is an exception.
Statutory provisions for application lifting the corporate veil; Section 24,120(3),121,122,123,124,163,160(a),160(b),160(m),160(e),160(f),1609(g),160(h),160(i)160(l),161(a),!61(b),95(4),161(w),80,81,160(n),114,161(c),47,160(x),160(z),141,175,160(j), 160(A),160(P),160(Q),160(r),160(t),138-139 etc. of the Companies Act 2063 BS.

Use of Lifting the Corporate Veil on the basis of the Principles Developed by Courts;

To determine the enemy character or residency relation .( See; Company Kanoon, Bharat Raj Uprety)

Daimler v. Continental Tire & Rubber Co.

To determine group of companies (Agency Relation) ( See; Company Kanoon, Bharat Raj Uprety)
In case of Fraud or Misconduct ( See; Company Kanoon, Bharat Raj Uprety)

Gilford Motor Co. V Horne

For revenue purpose. ( See; Company Kanoon, Bharat Raj Uprety)

Income tax Commissioner V. Sri Meenaxshi Mills

A legal decision where a Shareholder or director of company is held liable for debts or other liabilities of company.
General principle is that shareholders are immune from suits. Only the company is liable but piercing the corporate veil is an exception.

Factors to consider the doctrine of disregarding corporate entity

Inaccuracy of corporate records.
Concealment or misrepresentation.
Failure to maintain arm’s length relationships with related entities.
Failure to observe the corporate formalities in terms of behavior and documentation.
Failure to pay dividends.
Intermingling of assets of corporation and of the shareholders.
Manipulation of assets or liabilities
Non- Functioning corporate officers and directors.
Other factors the court find relevant. Siphoning of corporate fund by the dominant shareholder(s).
Treatment for individual in terms of assets of corporation as his/ her own;
Alter ego.

Stages of Incorporation of Company

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Incorporation is the first process of giving existence or birth of company.
Registration or establishment of company is incorporation.
Incorporation is creation of a legal person by registration of a company with existing law.
A legal person is created artificially by law and contributed as a legal personality from the process of Incorporation.
A company is an artificial entity created by law for the purpose of carrying on any objects such as business, sports research, education charity etc. But commonly companies are formed for the purpose of conducting business.

Basically, there are 4 stages of forming of a company;

Promotion
Incorporation or registration
Capital subscription
Commencement of Business

In case of private company it needs to go through the 1st two stages only, as soon as it receives the certificate of incorporation and it can commence the business.

Private company cannot invite public to subscribe the shares.

Private company must arrange the capital privately, not publicly.

But a public company having a share capital has to go through all 4 stages. Only then it is formed and commences its business.

Promotion

Promotion is the 1st stage of formation of a company. It is the discovery of business opportunities. First of all idea of carrying a business which can be profitably undertaken is conceived either by a person or by a group of persons who are called promoters.
After conceiving the idea the promoters make detail investigations to find out the weakness and strong points of idea to determine, the amount of capital, and to estimate operating expenses and probable income.
When promoters are satisfied to that idea they come in one place and form a company through incorporation process.
Preliminary contracts or pre incorporation contracts may be the documents of arrangement before incorporation or at the phase of promotion. Section 17 of the Companies Act.
Such contracts are generally entered into by promoters to acquire some property or right for and on behalf of the company to be formed.
Promoters have been defined in section 2(i) of Act. Promoters are the persons who incorporate the companies.

Incorporation
The second stage is incorporation of company. All process relating to filing the application to CRO & getting incorporation certificate come under the stage of incorporation.

Capital Subscription
Third stage is capital subscription

Private company can commence business immediately on receipt of certificate of incorporation
But public company commences business after capital subscription stage first among the promoters and second for public.
Through capital subscription public company makes necessary arrangement for raising capital
Invite public for subscription

Commencement
Commencement of business is the 4th Private company can commence business immediately but public company after issuing prospectus and receiving the business commencement certificate. Section 23 and 63.

Incorporation or Registration of Company
(Chapter 2 Section 3, 4, 5, 6 and 7 of the Nepalese Company Act )

Essential documents for Registration of Company are:

Application
Citizenship/ID certificate
MOA 2 copies
AOA 2 copies
Promoter’s agreement (if necessary etc.)
Unanimous Agreement (if necessary etc.)
Approval letter from regulatory, (if necessary etc.)

Board of Directors: Function, Duties and Liabilities

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

(Chapter 6, section 86 to 104 of Nepalese Company Act)

A board of directors is a body of elected or appointed person who jointly oversee the activities of a company or organization. Oversee in the sense of monitor, control and guide through policy formulation and directives.
The body has different name BOD, board of trustees, board of governors, board of managers or executive board etc.
It is often simply referred as “the board”
Board activities are determined by the powers, duty and responsibilities delegated to it by authorities General Meetings & other regulators.
The powers, duties and responsibilities are typically detailed in companies buy laws.(MOA,AOA or others internal rules)
The buy laws commonly also specify the numbers of board members, how they are to be chosen, when and how they are to meet and function.
Section 2(Y) of Nepalese Companies Act ‘director’ means any director of a company this term includes any alternate directors.
Section 2(z) ‘board of directors’ means the board of directors of a company.
Section 2(z1) ‘Managing Director’ means a managing director of a company.
CEO is popular and now in use.
Director is a person occupying a position of a director.
A director is a person who performs the duty of directors.
Directors are the persons who are responsible for direction, control and management of the affairs of a company.
Since company is an artificial person, it is the directors who exercise the powers, and functions of company.
The board of such directors is the board or BOD.

Powers and function of Board of Directors
(Section 95 of Nepalese Company Act)

Governing the organization by fulfilling the objectives.
Selecting, appointing supporting and reviewing the performance of the CEO or manager or managing director.
Insuring the availability of the adequate financial resources.
Preparing and approving the annual budget.
Typically, the board chooses one of directors to be chair or chairperson of the board of directors.
Theoretically, the control of a company is divided between two bodies;
BOD
General Meeting

Practically, it depends on the nature of company.

In small private company, the directors and shareholders will normally be the same people.There is no division of power.

In Large public limited company

The board tends to exercise more of supervisory role. There may be; professional directors (such as a finance director a marketing directors).
The board tends to have more de facto power.

Responsibility & Duties of Board of Director
(Section 99 of Nepalese Companies Act)

A board of director is a group of people elected by the owners of a corporation or a company who have;

Decision making authority
Voting authority (in Meeting)
Specific responsibility is to distinct and separate from the owners (shareholders) or members of company or business entity. (Divorce between ownership and management)
Directors must be individuals.
Directors can be owners, managers or any other individuals elected by business entity.
Some time in exception, board of directors are compared with advisory board or board of advisors.
An advisory board is group of people selected (but not elected) by the person wanting advice.
Advisory board- No decision making authority no responsibilities.
Role and responsibility is also power and duty.
The role and responsibility depends upon the business entity.
House of Lord observed that unless the directors are acting contrary to law or provisions of articles, the powers of conducting the management and affairs of the company are vested in them. (Quinn and Artens v. Salmon (1909) A 442 )
In most legal system, the appointment and removal of directors is voted.

Directors are removed;

By expiry of tenure
By resignation
By resolution of remaining directors only by any cause
By removing by the G.M.

Exercise of Powers by BoD

The exercise of powers by the board usually occurs in meeting. (Section 97 of Nepalese Company Act).
Sufficient notice has to be given to all directors of these meetings in most legal system.
Quorum must be present before taking decision.
In most legal system the power of board of directors is vested in a board as a whole not only in the individual.
Decision is based on majority basis, but minority can claim regarding their interest.
Power must be used by the individual directors by virtue of ostensible authority.
Director exercise control and management of the company, but company are run for the benefit of the shareholders (in theory at least)
The law imposes strict duties on the directors.
Generally, the duties imposed to the directors are fiduciary duties.
Typically, there are two important points in relation to director’s duties.
The directors’ duties are several which must be done jointly.
The duties are automatically associated with company. But it does not mean that director can never stand fiduciary relationship to the individual shareholders.

Fiduciary Duties (on the basis of Court Developed Principles)

Acting in bona fide
Directors must act honestly and in bona fide, not mala fide.
Directors must act in good faith what they consider.
Proper purpose
Directors must exercise their power for proper purpose.
Purpose of company
Whether the purpose is serving the purpose of company or not.
Unfettered Discretion
Duty to avoid conflict of interest
Transaction with company conflict
Use of corporate property & opportunity and company.
Duties of care and skill

(Section 93, 94,95,99,100 & 103etc. of Nepalese Companies Act 2063 BS)

Duties of Directors
Fiduciary duties & Statutory Duty

Fiduciary Duty
Fiduciary means power is entrusted for the benefit of others.

Acting in bona fide

Directors must act honestly and bona fide
They must act in utmost good faith what they consider
They should act in the interest of the company

Directors are not required by the law to live in a unreal region of detached altruism and to act in a vague mood of ideal abstraction from obvious facts which must be present to mind in any honest and intelligent man when he exercise his powers as a directors. (Mills v Mills 1938, 60 CIR 150 an Australian case)

Sometime distribution of dividend may be considered as the act not bona fide act Improper distribution of dividend may reduce the wealth of company but sometime this is considered as honest , not breach of fiduciary duty.

Acting for proper purpose

Directors must use power for proper purpose of company.
Providing opportunity to their close relative may not be for the purpose of company.
Banks strictly prohibits providing loan for their close relative.
The powers must be exercised within the ambit of authority of company.
They cannot use their power for improper purpose.

Unfettered Discretion

Not to fetter
The discretionary powers or responsibility conferred upon the directors must not be delegated to others.
Section 95(6) of Nepalese company Act the matters which cannot be exercised by the decision of board of directors.
Directors cannot without the consent of company, fetter their discretion in relation to exercise of their powers.
Directors cannot delegate the power of vote in meeting to other or they cannot say that I am not going to vote.

Duty to avoid conflict of Interest

Directors must avoid the conflict of interest between them and company. Good faith must not only be done but must manifestly be seen to be done.
As a fiduciaries, the directors may not put themselves in the position where their interest and duties conflict.
Section 89 (1), ( f )of the Nepalese Company Acts – directors cannot compete directly with the company.
They should not act as the directors of competing company,
When directors himself enters into a transaction with a company, there is a conflict between the director’s interest and duty with company’s interest.
If director falls under such transaction he/she must ensure that the company gets as much out of the transaction but that is very difficult to prove.
Directors must not enter in a transaction which create problem.
Directors must avoid his /her transaction with companies,
Director must disclose and avoid close relative’s direct involvement or any kind of interest in transaction with company.

Duty of care and skill

A director must show reasonable care & skill.
Responsible care & skill.
A director need not exhibit in performance of his duties a greater degree of skill than may responsibly be expected from a person of his knowledge and experience.
Such care & skill should be a responsible care & skill of an ordinary man that might be expected to take on his own behalf.

Statutory Duties of BoD

Duty to disclose interest – Section 92 & 100 of Nepalese Company Act.
Interest in Transaction.
Any kind of interest in appointment of MD/ company secretory or officer of the company.
If he is director of another company.
Transaction on securities of company.

Duty to exercise corporate power

Section 95(1) of Nepalese Company Act – The directors shall use the corporate power according to company law, article of association, and decision of general meeting.

Duty to manage transaction and exercise of power

Section 95(1) of Nepalese Company Act –The directors shall manage all transactions, exercise the power and perform the duties of company through the board of directors collectively.
To present in meeting personally, not through the (proxy).
The directors must be present in person not the proxy, (Section 97 of Nepalese Company Act.)

To participate in general meetings as far as possible.

Section 68 of Nepalese Company Act; Directors required to be present in general meeting as far as possible.
Not to participate and vote which is going to decide his obligation of his misconduct etc. (Section 70(2) of Nepalese Company Act)

To prepare and submit annual account and report as mentioned by law – Section 78,80,109 of Nepalese Company Act.

Duty not to receive remuneration of the directors without decision of G.M.

The director cannot obtain any remuneration or other facilities or incentive without decision of general meeting.

Duty not delegate authority on; – (Section 95 (6) of Nepalese Company Act)

The power to make calls on shareholders in respect of money unpaid on their share.
The power to issue debenture.
The power to borrow the loan.
The power to invest funds of company.
The power to make loan.

Duty and power to appoint MD/CEO (Section 96)

Duty not to take personal benefit, to take oath of secrecy and honesty, (Section 99 of Nepalese Company Act).

Duty to discharge duty on good faith. (Section 99(4) of Nepalese Company Act).

Duty to disclose about securities. (Section 100 of Nepalese Company Act).

Remedies for Breach of Duties

Injunction or declaration
- Section 138 & 139 of Nepalese Company Act provides remedy of injunction also.
Recovery for Damages
- Section 140 of Nepalese Company Act -If any director has caused loss to company while acting contrary to the Act, MOA, AOA or consensus Agreement Company or aggrieved party may demand the recovery of such loss.( need to read whole clauses of this section 140)
Restoration of company’s property
- Section 163 of Nepalese Company Act speaks about realization of amount loss.
Recession of relevant contract
- If a director has concluded a contract beyond the scope of his authority or working scope of company any shareholders may make an application to rescind from implement and avoid the contractual liability.
Summary Dismissal
- Section 89(3) (b) of Nepalese Company Act states that if the general meeting possess a resolution to remove from the post, the director shall not continue to hold the office of director.

Directors’ Liabilities, Immunities and Limitation

The authority of directors is usually determined by the MoA AOA and decision of general meeting (Section 95(1) of Nepalese Company Act)
If all the acts have been performed in good faith within the scope of authority, the directors cannot be held liable personally for such loss or damages.
But if the director fails to perform good faith, the director is liable for such consequences.

Independent Directors

Public company should appoint independent directors under section 86(3) –if 7 directors-1 independent director, if more than 7 - 2 independent directors.
The independent directors should have qualification prescribed in AOA and also have knowledge of and experiences of business of company
The shareholders cannot be appointed as independent director.

Share Qualification of Director

Section 88 of Nepalese Company Act, if AoA specifies the number of shares as a requirement.

Disqualification of Directors – See; Section 89(1) of Nepalese Company Act.

Term of Office of the Directors (See; Section 90 of Nepalese Company Act).

Meeting of Directors

Section 97 of Nepalese Company Act.
Private company as per provision of AOA
For public company shall be at least six times in a year.

Corporate Criminal Liabilities (CCL)

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Corporate Criminal Liabilities ( CCL)

Criminal liabilities of company
Criminal liabilities of Directors

Criminal liability of company is corporate criminal liability, criminal liability of directors also.
The concept of corporate criminal liability is an established concept of developed corporate world.
A company may be liable for criminal offences where an offence is committed by its directing mind. In such cases it is the duty of state to prove that illegal acts were committed and mens rea must be shown to exist. Mens rea can be in form of intention to criminal act or knowledge that the act was unlawful.
It is very difficult to accuse a company of possessing guilty mind, because it has no personal mind or conscience. But sometimes it is expedient to make companies liable to penalties for wrongful acts by attributing to as company, the wrongful acts and thoughts of human beings who are identified with company.
Certain offences cannot be committed by a company such as bigamy. Where imprisonment is necessary a company is a non-human entity cannot commit murder.
a company cannot be testified in person in court for such crimes. That is why, companies should not be held able to commit a wide range of criminal offences. Usually white color crimes fall under corporate crime.
The intention of company can be derived from the intention of its officers and agents.
The basis of imposing liability to company is its independent legal personality. Living persons have mind with knowledge or intention. They have their hands to carry out their intentions. The mind of natural person which directs his acts on behalf of company is the mind of company.
In criminal law, perpetrator of the crimes must be a natural person .But in some condition or moral statute, the legal person are also considered to having the capability of committing crimes,.
The term corporate crime ,white color crime , organizational crime, occupational crime and insider trading or dealing are often used interchangeable. Although close in meaning, those experiences do not suggest the same thing. But it has been taken as same thing in practice.
Occupational crime implies completely different category of crimes.
Occupational crimes, generally, do not refer to crimes committed by corporate entity, instead they refer to those crime committed by corporate employee not in favor of corporation.

Therefore, corporate crimes are in form of fraud, forgery tax evasion, bank and financial fault and default, misuse of foreign exchange, misrepresentation, fund embezzlement, cheating in government contracts, antitrust in purchasing and sales, activities against health and environmental safety, illegal international transaction insider dealing or trading and other statutory offences which are taken place to create potential criminal exposure for a corporation as well as for those who are involved to perform it.

A corporate misbehavior is considered as corporate crime.
CCL is known as an enterprises liability.
Directors and employees are also a legal person distinct from the company; legal liabilities are in a sense of vicarious liability.

The traditional view was that a corporation could not be guilty of crime, because criminal guilty required intention and a corporation no body that could be imprisoned. The courts refused to corporate criminal liability but modern view is that when the criminal act requested, authorized or performed by the board of directors ,an officer or another directors, an officer or another person having responsibility person having responsibility for formulating policy or high level administrator having supervisory responsibility over the subject matter of the offence acting within the offences acting within the scope of his employment.

Challenges of CCL

Failure to identify or prove corporate intent or malice.
Procedural difficulties to prosecute against a company (accused should be personally present at trial but corporation/ companies cannot present in a criminal trail)
Corporation has no soul and no body.

Theory of CCL

The endorsement of CCL is the development of 20th century – Judicial development, influenced by the “sweeping expansion” of common law principles. The majority of theories of CCL are typical of common law development .They have been constructed on a case- by –case basis.

Principally, a company has ‘’no soul to be dammed and no body to be kicked” but practically, corporation are liable on following basis;

Vicarious liability
Personal liability for breach of statutory duty
Personal liability on the basis of attributing to company the conduct and state of mind of an individual.

Other doctrines or theories have been emerged to held corporations criminally liable. Which are as detailed below.

Agency theory
The agency theory is based on the premises of 2 elements of crime Actus reus and Mens rea. Corporations are purely incorporeal legal entities, they do not possess any mental and only way to connect intent to a corporation is to consider the state of mind of employees. Though companies do not have intention someone within company must have it and the intention of this individual is supposed as the part of the company’s intention, due to the agency relation between company and employees such intention leads to the criminal activities. But the employees must be acting within the scope of employment, the employees must be acting for the benefit of corporation, the act and intent must be imputed to the corporations for making liable the company for the acts of its employees.

1. Vicarious theory/Liability
This is most important thought of CCL

Normally a person is not liable in criminal law for the acts of another. Vicarious liability is an exception of this rule and it is regarded as the constructive liability. Vicarious theory has utilitarian value in extending liability to wrongs committed by lower level officials and employees. However the reasonableness of imposing liability on a corporation has derived on benefit from such acts.

Vicarious liability by ratification, by blood relationship, by special relationship –master and servant , principal and agent, employee and employer.

2. Identification Theory
Under this theory , a company is reasonable for a criminal act of the persons who are directing mind or will of company. The persons who direct and control the company, have committed an offence in course of company’s business such person is treated in law as being the company, company takes responsibilities for those with decision- making authority over matters of corporate policies rather than implementing policy.

The breach of statutory duty by company
This is the doctrine which makes company criminally liable. This occurs where the statutes or regulations make corporation liable The companies Act(Consumer Acts)

Alternative methods for the establishment of CCL
The identification theory is found to be inadequate to deal with the reality of decision making in many modern and big company. That is why some significant principles have been introduced in corporate criminal jurisdictions which are;

Aggregation doctrine
Reactive corporate fault theory
Corporate Menes Rea doctrine

CCL in Nepalese Law

Constitutional provision
- Right to freedom article 12 (3)(f) proviso part
- Right to environment and health-Article 16(1)
- Right to property Article- 19(2) proviso
- Others -The Companies Act 2063 Specially Section; 159(1) (2),160(a-Z1),161(a-k),162,163 of Nepalese Company Act etc.

The Securities Act 2063BS;
– Sections 91,94,95,96,97,98,99,100,101,102,103 etc.

The Muluki Ain (Country Code)
– Chapter of cheating and chapter of Baki Natirneko etc.

Draft of Criminal Code 2067 BS
– Sec 30 “criminal liability for offense committed by a body corporate to be of the doer of the act or who causes to act to be done’’.

CIAA Act 2059,Corruption Prevention Act 2059

Nepal Food Act 2023
– Inferior quality product, adulterated food produce import, sale etc. Sections 5(1), 5(2), 5(3) and 5(4) etc.

The Foreign Exchange Regulation Act 2019
– Punishment for directing mind of body corporate

The Bank and Financial Institution Act 2063
– Sections 70, 71,48,74,35 etc.

Consumer Protection Act 2054

Sections 7,9,10,18 etc.
Inferior quality
Adulterated food
Harmful to health
Any service, production

The Nepal Rastra Bank Act 2058
Sections 95,96,99,100 and 101etc.

The Property Tax Act 2047
Sec 7,24(1),26 etc.

The Revenue Leakage Investigation and control Act 2052
– Evasion &Avoidance of tax

The Foreign Employment Act 2064

The Money laundering Prevention Act 2064

Chapter -2

The Income Tax Act 2058

Section 120,123,127,&128etc.

The Securities Act 2063
– Section 5(f), section 74 Section 101/ chapter 8& 9

Related Cases regarding CCL

Tesco Supermarkets ltd V. Nattrass 1972AC,153 H.L (Find and read)
Bhopal Gas Leak Disaster case (Find and read)
C Metha V. Union of Indian and Shree Ram Food and Fertilizer Industries AIR 1987 (Find and read)
In Nepalese judiciary practice there is no any significant observation which is directly related with CCL.
But some observations of Supreme court of Nepal such as Surya Sharma Dhungel v. Godabari Marble Industries,Thaneshower Acharyaet.et.al V. Bhrikuti Paper Industries are somehow related with the liability of maintaining non polluted environment and environmental safety by enterprises.

Types of Company, Details

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

There are so many basis to determine the classification of company.

Basis may be function of company, may be objectives of company and may be form of company.

Basis;

Function/Objectives
Profit making company and profit not distributing company.

Responsibility of shareholders in terms of company’s liability

Limited liability company
Unlimited liability company
Guarantee company

All companies are supposed as limited liability Company in the context of Nepal as per the provision of the Companies Act 2063. But in UK and India, there may be unlimited liability company.

Country of incorporation

Foreign company
National company

Basis of profit sharing
Profit-sharing and profit not - sharing company

Mode of capital formation
Public company& Private company

Modality of control
Holding & Subsidiary company

Investments by Government or Private sector
Private company/Government Company/Public Company

But generally, there are following types of companies;

Guarantee and Unlimited company
Private company
Public company
Company not distributing profit.
Government company
Foreign company
Holding and subsidiary company

Guarantee and Unlimited Company

On the basis of liability to be beard
Generally, non-trading companies are formed with a guarantee of liability. A company limited by a guarantee of its members. Such companies are formed for the promotion of art science, culture and sports etc. Such company may be registered with or without share capital.
The article of association shall state the numbers of members with which the company is to be registered section 27(2) of Indian company Act.
Section 13 (3) of the Indian company Act provides memorandum of company limited by guarantee; following things shall be mentioned,
Payment of liabilities of company or of such debts to the extent of particular limitation
Payment of costs, charges and expenses of winding up
Adjustment of right of contributories among themselves, such amount may be required, not exceeding a specified amount.
The liability is already guaranteed, not exceeding a specified amount;
No Shareholders, only members
No guarantee company under the Companies Act 2063 of Nepal

Unlimited Companies;

Section 12 (2) (C) of Indian Companies Act 1956 - two or more persons may form or incorporate company with or without liability. The members are liable for the company’s debts in proportion to their respective interests in the company. The members’ liability is unlimited –There is no share capital.
Section 27 (1) of Indian company Act 1956 - The AOA shall state the numbers of members with which the company is to be registered. Though in these days such companies are very rare.

Private Company

On the basis of the numbers of shareholders, size of capital and mode of capital formation.

Section 2(b) of the companies Act 2063 B.S, of Nepal any private company incorporated under this Act. Section 3(1) (iii) of the Indian Company Act states that a private company means a company which has minimum paid up capital of Rs. One lakh or such higher paid up capital as may be prescribed by its Articles of Association.
The nature of private company can be understood from section 3(1), 9,10, and chapter - 14 and 15 of the Companies Act 2063 B.S.
The minimum number of shareholder of private company shall be one and the maximum numbers of shareholders shall not exceed 50.
Company Act 2063. Section 9 (1) –The numbers of shareholders of a private company shall not exceed 50.
Section 9(3)- If any employee purchased a share of a company under a scheme of selling shares to its employees or any employee who has already purchased a share under such scheme but is not in service of company for the time being shall not be counted shareholder.
As per section 10(b) of the companies Act 2063 BS.- A private company shall add the words Private Limited to it a name as the last word. Public company only ‘limited’ .
However, the profit not distributing company has no compulsion to add pvt.ltd. and ltd.
Section10 (c) - Private company shall not sell its shares publically.
Section10 (d) –A private company shall not pledge or otherwise transfer the title to, its securities to any person other than its shareholder without fulfilling the procedures consensus agreement.
Section 145- “Special provision relating to private company regarding Consensus Agreement”
Section 145(h)- Provision relating to no board of directors.
Section 148- Holding of annual general meeting not required, If the consensus agreement is concluded in this regard.
Section 150- Deemed participation in general meeting.

Communication contract

Hearing, reading and speaking is same as participation (Video Conference Meeting)
No need to be physically presence.
Section 42 (2)-Restriction on sale or pledge of shares or debentures.(Private company may put the provision of restriction clause regarding transfer of in MoA, AoA, and Consensus Agreement)
No need to take prior permission from company register office to run business. Section 63(1) is for only public company.
No need to publish the prospectus publicly. Section 23 is for only public company.

The private company can be divided in to two types on the basis of numbers of shareholders

Single Shareholder Private Company;

Provision relating to single shareholder company Section 152 –Not required to call Meeting of Board of Directors and General Meeting.
Section 153 - Transfer or transmission of shares of single shareholder company,

Company having more than Single Shareholder;

Minimum 2
Maximum 50

Merits of Private Company;

Privilege of not taking permission to run business
Public company must take letter of approval before the running of business .But in case of private company is no such compulsion. (Section 63 of Nepalese companies Act).
Simplicity in incorporation
- Even one man can establish company.
- No need to submit even Articles of Association in Single Shareholder Company.(Section, 4 (2)).
- No need to publish prospectus. (Section 23)
- Convenience to run business from family members from family members of few close persons.
Flexibility in Formation of Board of directors other formalities relating to this matters.
- Easy to run business or run company.
- No need to call meeting in single shareholders company
- No need to form BOD in all types of Private Companies.
- Long-life board of directors but Public Company’s directors’ tenure is only 4 years.
- The tenure can be determined by MOA, AOA, and Consensus Agreement in private companies.
- No compulsion to run general meeting
- No need to be gathered physically. Meeting through communication contract is possible.
- That is why, Private company is privileged company

Public Company;

If we look the Companies Act 2063 BS of Nepal there is no specific definition of public company.

Sec2 (c) of the Nepalese Companies Act defines “Public means any company other than a private company”
As per the section 3(1) (iv) of the Indian Companies Act 1956 , (amended in 2000) - A public company means a company which;
is not a private company
has a minimum capital of RS. 5 lakhs or such higher paid up capital, as may be prescribed.
is a private company which is a subsidiary of a company that is not a private company.ie. That is subsidiary of public company.
In India, private company must have Minimum paid up capital 1 lakh, public 5 lakh.
in India, Numbers of members in private company is 2. Public company is at least 7 .Maximum number of private company cannot exceed -50, No limitation of members in public company.
Generally- there are following features of public company as per the provision of the Nepalese company Act.
There must be at least 7 promoters - Section 3(2) of the Nepalese companies Act. There shall be a minimum of 7 promoters for the incorporation of a public company, provided, however, those 7 promoters shall not be required for the incorporation of another public company by any already existed public company.
Mega Bank has 1358 promoters.
section 10(b) public company shall add the word ‘limited’ to its name as last word.
Sec -10 (C) - A private company shall not sell its shares /debentures publicly. It means public company can. As per section 42( 1) of the companies Act ‘’ the share or debenture of a company may be sold or pledged like a movable property”.
Generally there is no restriction in share transfer or sell in public company (Section 42(1)), but until the first general meeting held and the call share amount fully paid up, the shareholder shall not be entitled to sell or pledge.
Every public company shall obtain approval for commencing business section-63(1)
Public company –the tenure of directors shall not exceed 4 years. But in case the directors is appointed by Nepal government or corporate body, as per appointing body desires.
there should be at least 3 directors.
For public company, notice in advance at least 21 days for general meeting. General meeting must be conducted as pursuant to chapter 5 section 67, to 85.
Minimum Paid of capital of public company ten million, section 11, but some special laws such as BaFI Act and Insurance Act have determined more than ten million paid up capital for such special public company.
Compulsory in publication of the prospectus, section 23, 24 / MOA should be published for the purpose of notification for the general public.
Every public company shall have a BOD minimum 3 and Maximum 11- section 86 (2)
The terms office of directors shall be specified in its AoA which shall not 4 years section 90(2), but in case of a private company that is specified in AoA, no limitation of 4 years of tenure.
To be incorporated only as a public company to carry on some specific transaction business of; ( section 12)
Banking Financial Transaction
Insurance Business
Stock Exchange Business
Pension Fund
Mutual Fund
And for such other business.
Not a privileged more formalities, more expenses in operation
More investors – Few persons move the company
Prospectus to be published as per section 23, 24
More supervision from the regulatory for protection of investors’ interest.
Appointment of company secretory section 185.
Different procedures regarding share management. Face value determined by law section 27( 2), allotment of shares section 28, power to issue premium share section 29, dealing in securities section 32, shares with different rights section 30, procedures issuing debenture section 35.
Types of Public Company

Public company can be divided in to two kinds on the basis of modes of selling or purchasing of shares or debentures in stock market.

Listed Public Company

Chapter 4, Section 27, 28 etc.
Section 32, Dealing in securities
Listed in Nepal stock Exchange Market Ltd for the purpose of selling and purchasing of shares and debentures.
Openly traded in shares market.
There may be thousand and lakhs of shareholders in Society.
Such listed public company must have audit Committee.(section 164,165) ( if 30 million or more than this)
Listed public company must obtain approval for issuing shares in public and must inform about the position of shares and debenture to concerned regulatory such as; Company Registrar’s Office, NRB and Insurance Board etc.
Dealing in securities is governed by the Securities Act 2063 BS

Not listed Public company

Not listed in Stock Exchange Market.
Other than listed public companies.

The public company also can be divided in to two types on the basis of identification of investment;

Investment made by general public - Public Company
Investment made by government - Government Company

In India;

Deemed public company like hybrid nature

Mix of nature of private and public company
If any public company invests in private company
If any private company collects fund from General People.
As per the provision of the section 43 (a) of Indian Company Act following nature private companies are supposed as public company
- If any one or more institutions hold more than 25% of paid up capital of any private company.
- If private companies turnover of transaction is more than 10 million per year in a particular period.
- If any private company holds the at least 25% paid up capital of any public company.

There is no such concept of deemed public company in Nepal as per the Nepalese Companies Act.

Conversion of Private Company into Public Company; (Section 13 of Nepalese Companies Act)

Voluntary conversion or Conversion by choice

Section 13(1) (a) Voluntary;

Taking decision to convert into a public company
There must be special resolution
Not capable of being converted into a public company unless and until it fulfills the requirements to be fulfilled under the law for being a public company.
AOA /MOA must be amended
Apply to company registrar office with amended MOA/AOA
If there are new shareholders submission of citizenship
Required registration fee for public company
The statutory provision for public company must be compiled
Paid up capital- Minimum 10 million
At least 7 shareholders or promoters

Compulsory or Mandatory (Section 13(1)(b)and (c));

25% or more of the shares of a private company are subscribed by one or more than one public company. However any shares are possessed by any banking of finance company as trustee, not counted.
25% or more of the shares of a public company are subscribed by private company-such private company.
CRO issues the conversion certificate.

Conversion of Public Company in to Private Company (Section 14)

Only mandatory,

It depends upon the circumstances.
Circumstances of conversion of public company into private company are;
If the number of shareholders of a public company become less than 7.
If public company fails to maintain the required paid up capital because of reduction of capital.
In such situation, public company shall make necessary amendments in MOA and AOA and must be converted into a private company within 6 month.
Application to ‘CRO,’ CRO will give a company conversion certificate.

Government Company;

In the past many years ago, there was a time when the state was concerned only with problems relating to maintenance of law and order.
But now the relationship between the state and economy has under gone a considerable change.
Sometime it is needed that state has to participate in industrial development of country
The legal provision relating to Government Company is the way to make enable the state to undertake business ventures and to combine the operating flexibility privately organized companies with the advantage of state regulation in the matters of public interest.
Due to nature of business, some business must be undertaken by state i.e.; oil, salt, agriculture inputs, communication business only private sectors may not manage such business in the countries like Nepal.
There was a special provision relating to government companies under the past Act company Act 2021
As per the section 137(a) of this past Act there were two ways to establish government company .These are;
Having 51 or more than 51 % shares by government.
Establishing the company by providing shares only for government entities. There is no separate provision and definition regarding Government Company in the present Nepalese Companies Act 2063.
Presently govt. companies are incorporated as public company, not giving name govt. company e.g. RBB
As per Section 173 of present Nepalese Companies Act, government companies shall be converted into public company.
Nepalese Companies Act 2063 has promoted the privatization process for corporations or government companies.

Foreign Company

Section 2(f) of the Companies Act 2063 B.S.
Foreign company means any company incorporated outside the state.
If Company registered in the foreign country want to transact in Nepal, that types of company must be registered in Nepal
Section 154 to 158 ( Chapter -16) of Nepalese Companies Act.
Foreign company cannot establish branch office or liaison office in Nepal without registered in the CRO of Nepal.
Those types of foreign company cannot issue dividend or share without registered in Nepal.

Company Not Distributing Profit

Section 2(h) of Nepalese Companies Act - definition
Any company incorporated under chapter -19, Section 166 & 167 of Nepalese Companies Act.
Such company shall not be entitled to distribute or pay to its members any dividends or any money out of profit earn or saving made for the attainment of any objects.
For the purpose of charitable objectives.
For the promotion of invention, art, science and social activities, etc.

Holding and Subsidiary Company

When a company has control over another company, it is known as a holding company. The company which is so controlled is known as a subsidiary company.
If there is another subsidiary company of any company such company is holding company.
A company qualifies as a holding company when it has power to control the composition of the board of directors of another company or holds a majority of its shares.
But both are separate company in the eye of law. A subsidiary company, even a 100 % subsidiary, is separate legal entity and its creator and controller is not to be liable for its acts merely because this company is creator and controller. Nor is subsidiary to be held as an asset of holding company.
The subsidiary company is not branch of holding company. It has different existence or personality than holding company. Holding company is holding company. Because of only a nominal majority on share capital of the subsidiary or because of only control over the board of directors.
But when law and judicial observation permit to examine the transaction of holding and subsidiary company then the subsidiary company may lose some time its separate identity to that extent. It is necessary for the better information of accounts and financial position of group as a whole to the creditor shareholders and public.

Condition of Holding and subsidiary Relationship;

Where the composition of BOD is controlled by other company.
Where the other company holds significant value of its equity share capital.
Where one company is subsidiary of any company that is another’s subsidiary.

Holding and subsidiary company are supposed as separate legal entity. Sometime court can observe the relationship and ignore their separate legal entity on the basis of the doctrine of lifting the corporate veil. Such happens on the particular issue only.
Section 2(d) of Nepalese Companies Act 2063 B.S. defines holding company as having control over a subsidiary company.
Section 2(e) of this Act defines Subsidiary company as any company controlled by a holding company
There is some special legal provision mentioned in Nepalese Companies Act Chapter -13, Section 142, 143 and 144, by these legal provisions holding and subsidiary company can be found in the context of Nepal.

Section 142- control over subsidiary company –

By holding direct or indirect control over the formation of the Board of Directors.
By holding majority shares of the company.

A subsidiary of one subsidiary company will be the subsidiary of the holding company.
Section 143 - Documents to be enclosed
Any holding company shall enclose the documents of its subsidiary company in its balance sheet.

Section - 144; Prohibition on investment in holding company - No subsidiary company shall purchase the share or debenture of holding company or make investment in holding company

Amalgamation (Merger and Take- Over)

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Amalgamation is the process of blending of two or more undertakings into one undertaking.
It is conduct of two or more than two companies by which they make one company.
The ordinary dictionary meaning of amalgamation is ‘combination’.
The effect of amalgamation is to wipe out the merging companies and to fuse them into the new one created.
There are two forms of amalgamation; merger & take – over
Respective legal provision regarding amalgamation or merger are section 177 of Nepalese Company Act and few sections of BaFI Act 2063 BS ( See; respective legal provisions)

Merger:
Corporate combination of two or more than two companies to a single company.

Merger will take place by:

Purchasing assets
Purchasing shares
Acquiring the assets and liability
By scheme of arrangement
A merger is the fusion or absorption of one thing or right into another, where one of subjects is of less dignity importance than the other. Here less important ceases to have an independent existence. When a bigger company with next smaller company wants to join in to one entity, such kinds of fusion of two or more company is called merger. The identity of one company ceases to exist.

Methods of merger

By purchase of shares.
Merger with holding company.
Merger under a scheme of arrangement or compromise.
Merger by scheme of winding –up.
Merger by exchange of shares –followed by winding up.
Winding up by scheme of exchange of share
Merger in public interest in the order of government in India central govt. may order.
In Nepal, for banking companies, NRB. Insurance Board, for Insurance Companies can suggest for the merger.

Take-over

Take – over is the term which is used to describe the acquisition of one company by another generally by buying.
A company wants to control the target company

Debenture

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

The term debenture may be defined as a certificate of loan issued by a company which creates an indebtedness of the company. The companies have to borrow the money for their extension or developments.
The companies’ loan requirement may not be met by a single money lender. The loan may have to be split into several units. The most usual form of borrowing loan by a company is issue of debenture. The public is invited to lend money for a fix period at a declared rate of interest to be paid on such money.
Debenture is a credit obtained by company.
Debenture certificate is the special document of proving the loan of company.
Debenture is one of the ways of capital formation of a company.
C.B. Gower has defined debenture as; debenture is a name applied to a certain types of document evidencing an indebtedness which is normally charged, but not necessarily, secured by a charge over property (Davis Paul L, Gower’s Principle of Modern Company Law 4th edition.)
“Debenture is a document given by a company as an evidence of debt to the holder arising out of loan and most commonly secured by a charge’’. Tophan, Topham’s Company Law 13th P. 168
Debenture itself is not a loan but it is an evidence to secure the loan.
Section 2( s )of the Companies Act has defined debenture as ‘’ any bond issued by a company whether putting its assets as collateral or not’’.
The term relating to debenture “debenture trustee ‘’ has been defined in section 2 (t) as a body corporate undertaking the responsibility for the protection of interest of debenture holders at the time of issuance of debentures by a company.’’
Procedures of issuing debenture have been clearly mentioned in section 35 of the Companies Act of Nepal.
Debenture may be converted in to share ( section 35 (4))
Types of debenture
Redeemable debenture; There is a fixed time frame for redeemable debenture. After expiration of a certain time frame company will pay back the loan amount and the debenture will be redeemed.
Irredeemable or perpetual debenture; There is no already fixed time frame to pay the loan amount. This may be for a long period. The loan amount may be repaid only on any contingency event.
Registered Debenture; There are the debentures which are registered in the name of a particular person and are payable to him. The name of registered holder is placed on the debenture certificate and the company’s register of debentures.
Bearer Debenture; these are the debentures which are payable to the bearer (the holder of debenture).
Convertible and nonconvertible debenture; Convertible in to shares and nonconvertible in to shares.

Modes of Winding – up

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Winding – up

A company comes into existence by a legal process and –when for any reason, it is desired to end its existence; it must again go through the legal process.
Company is an artificial person which is created and ended by law. The process to end the company is related with winding up or liquidation or dissolution of company.

In the words of the professor LCB Gower,
Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. Liquidator is appointed and he takes the control of the company collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

Incorporation is a birth winding up is process of death – both are fulfilled by due process of law and legal formalities.
All assets and liability are brought to close and converted in to cash form for the distribution purpose.
Winding up and dissolution of company is not same thing. A company is said to be dissolved when it ceases to exist as corporate entity. Winding up only proceeds towards the dissolution.
Winding up is the process by which the dissolution of the company is brought about.
At the end of the winding up, the company will have no assets or liability, and it will therefore be simply a formal step for it to be dissolved, that is for its legal personality as a corporation to be destroyed.
The legal entity of company remains in between winding up and dissolution process.
In winding up the company as does not cease to exist; only its administration is carried on through the medium of a liquidator. The property of company still belongs to the company.
Winding up liquidation have been taken in same meaning but dissolution is different.

Modes of Winding up or Liquidation

Basically there are 4 modes of winding up under Nepalese law;
Voluntary winding up
Compulsory winding up
Liquidation by the order of the court.
Cancellation of Registration or deregistration, striking off registration

Voluntary winding up

By adopting special resolution.
In the situation of solvency

Voluntary liquidation starts from special resolution adopted by the company in its general meetings.

As per Section 126(1) of the Companies Act of Nepal the, shareholders of the company may liquidate the company either by adopting the special resolution in general meetings or subject to the provisions contained in MoA and AOA and consensus Agreement.

As per subsection 2 of section 126, the requirements or procedures of voluntary liquidation are as follows.

If the company is able to pay its debts or other liabilities.
There must be solvent company.
There must be declaration in writing of directors to pay the debts and liabilities.
Adoption of special resolution by general meeting and submission in Authority within 7 days, section 126(3)
Appointment of liquidator and Auditor.
Pre-approval from central Bank in case of Banking Sec 76(1) of BaFI Act

Compulsory winding up or liquidation

If any company is declared the insolvent at that situation, such company must be liquidated or wound-up.
that is the situation of compulsory winding up or liquidation.
such liquidation is executed only by the court’s order
Though company law of Nepal recognizes and regularized the compulsory liquidation, the proceedings of compulsory liquidation have been mentioned in detail in Insolvency Act 2063. No procedure under Insolvency Act is started without the permission of court. Court means commercial bench by notification in Nepal Gazette.
Section 4 of Insolvency Act describes the situation to apply for the proceedings of insolvency;
- The company itself which is in insolvent condition.
- The creditors who has invested at least 10% of total credit to the company.
- The shareholders, who has subscribed at least 5% shares of the company.
- The debenture holders who has subscribed at least 5% debentures of company.
- The liquidator appointed for liquidation of company.
- Concerned Authority or regulatory.
- Insolvency Act, sections 4(2), 4(3), 5 etc.

Liquidation by Court’s Order
Sec 139(4) (f) of the Companies Act 2063

If company is carried on or is likely to be carried on as to be prejudicial to rights and interest of any shareholders of the company, shareholder may apply before the court for appropriate order as remedy. At this situation, If court for liquidating the company.

Dissolution by cancellation of registration or deregistration

the company registrar office may cancel the registration of company on the following grounds. Section 136 of the companies Act 2063
- In a situation of failure to commence the business.
- In a situation of default in submitting the report, for three consecutive financial years
- If he company registrar office has a reasonable grounds to believe that company is not carrying on its business or the company is not in operation.
- Restoration of registration; section 137(a) (b) of the Company Act.

Powers functions duties and liabilities of liquidators

Power to take into custody and control the property of company (section 130 of the Companies Act)
The liquidator shall, mutatis mutandis exercise and perform all the powers and duties as of liquidator under the prevailing law of insolvency. Section 131(1) of Nepalese Company Act
The duties of liquidator are as follows - as per Section 131(2) of Nepalese Company Act
- To prepare and submit books of account to the company registrar office in every 6 months.
- To inform the shareholders of company about progress on the liquidation proceedings in every 6 months.
- To obtain and recover all the properties or amounts required to be obtained and recovered on the behalf of the company and repay and discharge the debts and other liabilities of all the creditors of the company.
- After completion of above acts, to call general meeting of shareholders and present therein a proposed report and return on the distribution of the company to the shareholders.
- To make payment of the amounts to the shareholders, if the shareholders holding at least 75% of the paid up share capital consent proposed report as referred to clause(d)
- To appoint or retain necessary employees
- To submit the final report after completion of liquidation proceeding
- Announcement of cancellation

Buy – Back of shares

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Buy back is the process of purchasing of its own share by company.
Purpose of purchasing is to reduce a number of shares in market and to increase the value of shares in market.
Repurchase of its own shares for reducing the share capital.
The buyback reduces the number of outstanding shares in market.
Buy back is restricted or prohibited. Though it is restricted buy back is allowed in some special conditions prescribed by law. Mainly buy back is permitted on following grounds;
Why company is willing to buyback, objective must be clear and bona fide.
If a company is making profit and if there is sufficient free reserve fund in company.
If a company has an idle cash fund.
Section 61 of the Companies Act of Nepal has prohibited on purchase by company of its own share.
As per section 61(1) of the Companies Act, no companies shall purchase its own shares(buy back) or lend moneys against its securities of its own shares.
But section 61(2) has specified some circumstances, where a company may buy back its shares out of its free reserves available for being distributed as dividend, by giving information to the office of the company registrar.( Circumstances; clause ‘a’ to ‘g’ of section 61 (2)) .
The process and procedures for getting permission to buy back of shares have been mentioned in section 61(3) clauses ‘a’ to g and subsection ‘4’ to ‘10’ of section 61.

Controls over the Management

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Control over the management -by shareholders, by government, by company law Board for good governance of company. Which we know as corporate governance
Good governance in political and administration sector.
Corporate governance in corporate sector.
Control over the management is the way of application of corporate governance in company or corporation. Control is necessary for check and balance of powers role duties and jurisdiction of overall management including BOD and other stakeholders.
Corporate governance is set of process, customs policies, law and institution affecting the way of a corporation is directed administered or controlled. Corporate governance also includes the relationship among many stakeholders for which corporation is governed. The principle stakeholders are the shareholders, management and the boards of director, other stakeholders are employee, suppliers, customers, lenders regulatory, the environment and the community at large.
Controls of shareholders government and regulatory is essential for check and balance of scope and power of management.
There are so many stakeholders in any company or corporation. The harmonies, accountable, fair, credible, trustworthy and responsible relationship is possible from the check and balance. The way of check and balance is controls over the management.
Controls by different stakeholders such as by shareholders, by regulatory by government and by court is necessary for the protection of rights of shareholders and customers.

Control is the way of achieving the corporate governance which includes the following key elements.

Honesty,
Trust and integrity
Accountability
Responsibility
Mutual respect
Performance oriented
Commitment to the desired goal of corporation.

The important theme of corporate governance is to ensure accountability of certain individuals in a corporation through the mechanism which tries to reduce or eliminate the principal agent problem in corporations.

The corporate governance has some eminent principles which are as follows.

Right and equitable treatment to shareholders
Interest of shareholders and other stakeholders
Role and responsibilities of the board(Management)
Integrity and ethical behavior
Transparency etc.

Corporate governance is the system of structuring operating and controlling a company in order to achieve the following objectives.

To fulfill the long term strategic goals of the owners
To consider and take care of the interest of the different stakeholders or company
To maintain good relationship to customers and suppliers.
To take account of needs of environment and local community.
To ensure proper compliance with all applicable legal and regulator’s requirements

Organization of Economic Co-operation and Development) OECD- defines- corporate governance as a system by which business corporations are directed or controlled.

Check and balance of power of management shareholders and investor’s responsibility and accountability of management and board, Transparency and disclosure respect to law and system, respect to code of conduct, equal treatment to shareholder protection of interest of various stakeholders, a effecting accounting and auditing system are basic element or ingredients of corporate governance.

Therefor control over the management is the method of ensuring right and protecting to stakeholders. The concept and legal provision about controls are directly connected with corporate governance.

But controls should be based on law, policy and grounds of reasonableness otherwise controls may lead the management toward the defunct management.

Advantages and Disadvantages of MNCs and Nepalese Context

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Concept of MNCs and Operational Provision:

National means one nationality connected with particular nation. Vice versa of this is multinational. It means more than one nationality or including several nationalities.
Multinational companies mean such companies those are operating in several countries or more than one country.
Company is an artificial person, incorporation of company gives the birth of company the company where it takes its birth is the nationality of company like a natural person. One company incorporated in one nationality and then transacts in other countries by fulfilling the prescribed legal procedure for operation is the situation of existence of multinational companies.
The headquarters of Multinational Company normally is based on one country and operates on several countries. Typically MNCs functions with headquarters while other facilities are based in location in other countries.
Multinational company is referred to as Multinational Business Enterprises (MBE) Transnational Corporation (TNC).
MNC, MBE & TNC are the same.
The exact model for MNC may vary slightly. But common model of MNC is the positioning of executive headquarters in one nation, while production, business transaction or other types of facilities are located in one or more other countries. It is the operational system of MNC.
In this model, the multinational companies take advantage of benefit of incorporation in a particular country. While also being able to produce goods or services or to transact in the geography where the cost of production or service is lower than the incorporating nationality. It is also the way of operation of MNC.
Another structural model is based on parent and subsidiary company. Parent and subsidiary company also may be MNCs. Parent is based on one nation and operates its subsidiary in other countries around the world. So, the model of operation of MNCs or operational provisions of MNCs may vary.
One approach to set up an MNC involves the establishment of headquarters in one country that oversees a diverse conglomeration that states many different countries and industries with this model.
Following on success of corporate model at a national level many corporations have become transnational or growing beyond the national boundaries to attain sometimes remarkable position of power and influence in the process of globalizing.
Multinational Corporations are important actors in the international system as they are not only major source of investment, trade, and employment but also they exercise considerable influence in economic and social policy of many developing countries in which they operate.
The United Nation Commission on Trade and Development (UNCTAD) is acting in the field of effects of operation of MNCs in the many countries especially in developing countries.
The driving force behind business of MNCs is profit motive and free market economy.

From human right perspective

MNCs should be held accountable and responsible to the host state or affected community for violation of human rights through appropriate legal regime and mechanism.

Ways are;

Reciprocity –the company should give something back to society.
Compensation
Ethical principle

Kofi Anan Launched a ‘’Compact for New Century” in 1999, which stressed the need for business community to observe the human rights, labor standards and environment protection.

ILO declaration on fundamental principles and rights at work.

Fundamental principles

Freedom of association
Right to collective bargaining
Elimination of all forms of forced and compulsory labor.
Abolition of child labor.

Development:

The idea of MNC has been around for centuries. Some trace the origin of MNC concept back to Dutch East India Company of the 17th century.

The corporate structure of Dutch East India Company involved a presence in more than one country.

During 19th and 20th century the idea regarding MNC became increasingly common.

In 21st century this business model continues to be highly desirable.

There are several approach that MNC came into existence;

1st approach:
MNC is to intentionally establish new company with head quarter in one country while producing goods and services in facilities locates elsewhere.

2nd approach:
MNC comes about due to merger b/w 2 or more companies based on different countries.

3rd approach:
Acquisition and hostile takeover also sometimes result in creation of MNC.

Due to the concept of global village, the interdependency in goods and service from one corner of world to another corner is increasingly growing more interconnected each day.

Door for diversification of business:

Possibility to remain solvent, even one subsidiary is posting to a temporary loss.
MNC often creates global business strategy that targets emerging markets in countries that offers maximum growth and profit potential.
Executing a successful multinational strategy can create tremendous value for MNC’S shareholders.
Global company operates in multiple countries.
Before becoming a MNC a company may first sell its product or services in foreign countries with limited risk by exporting or licensing its product in that company.
To expand foreign market, to save on shipping or transportation cost and foreign tariffs the MNCs are establishing or incorporating.
A company typically becomes a MNC when it makes direct investment in foreign countries to establish operations and conduct business there. That gives the company more control over its business in the country.

A company can setup its operation in a foreign country from scratch by establishing its own manufacturing distribution and retail operation or use several other strategies to build its foreign presence. It can establish branches or partnership with and established firm in a foreign country. It can buy complete ownership or a controlling stake in a foreign country. A company that aims for a larger approach can form a long term global partnership with another company to invest and penetrate multiple foreign markets

Advantages and Disadvantages

A MNC benefits from international growth opportunity that may not exist in its home market.
It may be able to manufacture its products in a foreign country cheaper than it can in its home country.
MNCs can minimize the effect of foreign currency exchange rate fluctuation.
MNCs can take advantages of lower tax in foreign country, especially in developing countries.
The disadvantage is operating in foreign countries poses risk.
A company is exposed to a country’s law regulations and political environment that can less stable than those in its home country.
Investors in MNCs can take benefit from their international diversification for example investing in a multinational food company that generates a significant percentage of its profit in other countries gives an investor’s exposure to growth potential of those countries.

Operational provision in Nepalese context

Section 154 to 158 (Chapter 16) of Nepalese Company Act has mentioned about operational legal provision of foreign company which is related with MNC. The provisions of ;
Branch office
Liaison office or contact office
Registration compulsory
Incorporation process
Approval from concerned regulatory, ministry department or regulatory
Registration fee, determined by notification in Gazette.
Account and Audit of foreign company
Power to attorney
Cancellation or registration and liquidation of foreign company.
Similarly, Foreign Investment and Technology Transfer Act 2049 (FITT Act) BS also creates space for foreign company.