TyroCity: Company Law Notes

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.

Company Law

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

Introduction

Concept and Meaning of Company

History of Company Law

Development of Company Law in England

Features of Company

Types of Company

Types of Company, Details

Incorporation of Company

Capital

Organs of the Company

Amalgamation

Amalgamation (Merger and Take- Over)

Insider Dealing

Insider Dealing

Winding - UP

Modes of Winding – UP

Corporate Criminal Liabilities

Corporate Criminal Liabilities (CCL)

Controls

Account and Audit

Accounts and Audit

Concept of MNCs and Operational Provision

Advantages and Disadvantages of MNCs and Nepalese Context

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.

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.

Transfer of Share

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

The shares of a company are movable property and can be transferred in a manner prescribed by concerned law and articles of association of company.
The transferability of shares is one of the significant advantages of company form of organizations.
Section 42 of the Companies Act of Nepal specifically declares that the shares or debentures of a company may be sold or pledged like a movable property subject to this Act , MoA & AoA.
So, as a matter of fact, it is right of every shareholder to transfer his/ her share. However the manner of transfer may be prescribed by MoA, AoA and respective law.
The MoA & AoA of company can make some preconditions, but cannot absolutely restrict the right of member to transfer there share.
In absence of any restrictions, in the AoA , MoA & law the shareholder has an absolute right to transfer his/ her shares.
Share is a special type of movable property; it is not like gold, furniture and cash etc. Therefore, there are some special laws to regulate transfer procedure viz; the Companies Act 2006, The Securities Act, BAFI Act, NRB Act 2058 B. S. etc.
Transfer of share will be furnished only by fulfilling the prescribed procedures of such special laws.
There are so many ways of transfer of shares from one to another. The share transfer deed document and will paper are the means of voluntary transfer of shares. Non voluntary transfer court order i.e. order of distribution in partition case ( ansa mudda)
As per legal provision of section 42(1) of the Nepalese Companies Act “the shares or debenture of a company may be sold or pledged like a movable property subject to this Act, MoA & AoA.
As per section 42 (2) of this Act the promoter share of a company, other than a private company which has not borrowed loan from any other company, shall not be entitled to sell or pledge any share held by him until the 1st general meeting of company is held and a call on the share issued in his name is fully paid up.
Section 43 of the Companies Act states about the procedures of the transmission of shares or debentures of company. As per this section if any share or debenture is sold, the buyer thereof shall make an application to registered office of the company with a copy of deed and share or debenture certificate. In compulsory transmission there will be order of court. Than the company cross off the name of transferor and enter the name of transferee shareholder debenture holder in the register within 15 days after making of such application. But if any prevailing law on securities provides that no deed of transfer is required for transfer the title, such deed is not required to be produced along with the application to be so made.
The grounds to refusal have been mentioned in section 44 of the Companies Act. As per this legal provision in following circumstances company can refuse to record the transmission; A) If a call on share has not been paid up. B) If the transmission is contrary to the articles of association of company and the agreement concluded between the shareholders. The information regarding transmission will be provided to both transferor and transferee from the date of application.
Section 55 of Nepalese Companies Act states about the ownership of share or debenture. As per this legal provision, if a dispute arises about the ownership of any share or debenture issued by any company, the person whose name is registered in the share or debenture register of company shall, unless otherwise proved, be regarded as the owner of such share or debenture.
Section 45 of the Companies Act describes the other circumstances where the share or debenture may be transmitted by operation of law. Circumstances may be the death or insolvency.
Process of transfer; a) the shareholders should be registered in the Stock Broker’s Office at first. b) Joint application with deed of transfer with original share certificate.
Transfer in case of private company; a) Board decision, b) deed c) application d ) information providing for record to the CRO d) fulfilling the prescribed process of record by CRO.
Restriction on transfer ; by making provisions in AoA & consensus agreement in case of private company section 10 (d) 42(2) section 145(1) (b), if there is no entitlement, as per legal provision such as section 42(2) of Act.
The case of Lun Karan Das Chaudhary V. NRB( A collection of some important precedents of commercial case; part 4 S.No. 42 p. 290) . The transfer of share should not be restricted by making some conditions of contract.
There must be a valid authority or entitlement on share to transfer the share. A person who has no authority or entitlement, such shareholders cannot make a valid transfer of shares. Thus transfer of shares by the husband of a lady shareholder without her authority was held to be void and transferee got no rights by such transferred share.( John Tinson & Co. v. Surjeet Malhan , AIR 1997 SC 1411).

Development of Company Law in England

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

Development of Company Law in England

It is argued that The Development of Company Law was started from England.
The terms separate personality; limited liability and perpetual succession were developed in England before 17th
England is the birth place of development of company law.
The word ‘corporations’ are not novelties. Corporations were known as institutions since very ancient date.

Development of Company Law in England

First Phase: Before 1720 AD

Even in ancient period there were a lot of institutions having separate legal personality in England. These institutions were incorporated through the Crown Charter.
There were some institutions in trade or business sector. Such institutions were known as “Guilds of Merchant’’.
“Guilds of Merchants” were not actually legal personality but some guilds of merchant were recognized by the crown charter. Such guilds of merchant had legal personality as modern company, but the word company had not used for such guilds of merchant.

Use of the term ‘Company’

The traders, who generally traded in abroad, used the word ‘company’.
East India Company was established in 1600A.D to provide trade monopoly in India.
There was no clear distinction between unincorporated partnership and incorporated company.

Second Phase: 1720 to 1825 AD

First Company Act: In 27 April 1720, the Bubbles Act 1720 was enforced to prevent the cheating in the name of company. This Act prohibited the companies of not having royal charter.
Enterprises such as banking, insurance, irrigation, canals construction and water supply were permitted to be incorporated in the form of company.
Deed of settlement was developed by lawyer presently known as Memorandum of Association.
The term limited liability, separate personality were developed.

Third Phase: After 1825 to 1855 AD

Trading Company Act 1834.
Companies could be incorporated without Charter.
Chartered Company Act 1837
Joint Stock Company Act 1844 differentiated between Partnership and Joint stock Company.
Limited liability Act 1855.

Modern Company law: 1855 to present time

Limited liability Act was repealed by the new Act named Joint Stock Company Act 1856.
The term MOA, AOA, Capital are defined clearly
Companies Act 1862
Companies’ Winding- Up Act 1890
Directors Liability Act 1890
Companies Act 1965
Companies Act 1989
Companies Act 2006

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.

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

Prospectus of Company

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

Any document, described or issued by a company includes any notice or circular, authentic advertisement inviting deposits from the public.
Document inviting offers to the public for the subscription or purchasing of shares, debenture or securities.
Elements of prospectus;
A valid invitation to the public.
The invitation must be to subscribe or purchase shares or debenture of company.
The invitation must be made by or on behalf of the company.
Only the commercial advertisement is not prospectus.
Section 2 ( m) and 23 & 24 of Nepalese Company Act to know the concept, features and importance of prospectus.

Concept and Meaning of Company

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

Definition of a “Company”

A company is a “corporation” – an artificial person created by law.

A human being is a “natural” person.

A company is a “legal” person.

A company thus has legal rights and obligations in the same way that a natural person does.

A corporation under Company law or corporate law is specifically referred to as a “legal person” i.e. as a subject of rights and duties that is capable of owning real property, entering into contracts, and having the ability to sue and be sued in its own name. In other words, a corporation is a juristic person that in most instances is legally treated as a person, and empowered with the attributes to own its own property, execute contracts, as well as ability to sue and be sued.

The term company implies an association of a number of people for some common object(s). It is more complicated form of association; than other type of business enterprise. It consists of large and fluctuate membership requires a more elaborative organization i.e. should recognize that 1st constitute a distinct, legal person subject to legal duties and entitle to legal right separate from those of its member. It is a legal person and is only created by law and dissolved only in accordance to law. It is not true that company implies an association because even a single person can create a company. Thus a company may be established by one or more persons, should be established with the intention of making a profit, should have one or more objectives and there are mention in memorandum.

Company is competent to have a personality and also regarded as a new person capable of bear right & duties after incorporation. Although it is a legal person has no body, no soul or conscience, no physical existence except in the eye of law.

Accounts and Audit

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

Account

Typically, account means invoice or record of money paid or owed.
A detailed statement of all types of financial transaction.
A recording of monetary dealing
Keeping a ledger/ register relating financial transactions
Account book or ledger Balance sheet or financial statement.

Therefore account is a language of business expressed in monitory form. Account must give a true and fair view. Due to lack of such true and fairness Enron Company, world.com of USA, Satyam Computer of India, were collapsed. The movement of corporate governance in corporate law was started all over in 2006 AD.

Basically, there are 3 types of accountancy:

Financial Accountancy
Only the historical
Picture of financial position and performance
Reporting to external parties
Management Accountancy
Interpretation of financial account
Plan of action of certain presumption and analysis of future prospects.
Cost Accountancy
Measurement of efficiency of cost.
Cost of production and trading (recording)
The aim of cost accountancy is maximizing wealth and profit
Input and output cost
The ratio between input and output, e.g. depreciation cost of machine, house etc.

Preparation of Account:

“Preparation of account must be guided by the universally accepted accounting principle named GAAP (Generally Accepted Accounting Principles)
Because it gives the picture of trust worthy and reliable.

Accounting fundamental:

In course of preparation of account the following principles must be followed.

Ethic is core value of account. So, ethic must be shown in account preparation.
GAAP must be followed double entry book keeping system is applied in account in almost country.
The principles of corporate governance must not be ignored.
Legal provision must not be ignored,

Generally the users of accounting system are of 2 types;

1. Internal party

Management committee, Audit committee, Finance or planning Dept.

2. External party

Such as; shareholders, regulators

Objectives of Accountancy

To know the internal objective is fulfilling or not.
To find error and to detect fraud

Right of the shareholders relating to account

Right to inspect the account

Final account gives:

The income and expenditure statement (Financial statement or balance sheet)
Trade Account
Profit – loss account
Profit – loss appropriation
The level of application of accounting fundamentals (corporate governance and law)

Nepalese prospective

Preparation of Account section 108
Section 108(1) of Nepalese Company Act – language Nepali, English; Section 108(2) of Nepalese Company Act – system double entry book keeping ,reflection of actual affairs(true and fair), Section 108(3) of Nepalese Company Act – place to be kept the account book, Section108(4) of Nepalese Company Act – maintaining cash balance.

Liabilities relating to account

Final responsibility is of directors or other officers (Section 108(5) of Nepalese Company Act)
Board of directors must prepare annual financial statement and report of the board of directors Section 109 of Nepalese Company Act.

Audit

Account and Audit are the best instruments for maintaining financial ethic and transparency.
Corporate governance is depended upon the better accounting and auditing of companies.
Generally the term auditing is associated with detecting the fraud errors in account.
But widely speaking, Auditing validates honesty and fairness in financial statement or account and as whole in operational system.
Auditing provides a critical basis for management in taking decisions.
Auditing is an independent valuation of an organization.
So, presently the Auditing is not limited in financial data but Auditing examines the financial as well as operational system of an organization.
In course of Auditing an auditor involves in searching and verifying the accounting records as well as in examining other evidences which supports the financial and operational facts.
Auditing is more concerned with verification of accounting data with determining accuracy and reliability of accounting statement and reports.
Auditing is conducted by obtaining the internal and external data of organization, incepting documents, by observing enquires within and outside of organization and performing other necessary auditing procedures.
Auditing is essential for reduction of risk. Audited financial statements are the means by which business corporations’ reports their operating results and financial position.

As per the value of good corporate governance;

Audits should be performed by individuals who are independent from the management and controlling shareholders of corporation being audited and are knowledgeable in auditing.
Auditor’s should undertake auditing with sufficient information and devote sufficient time and efforts to the task.
Auditors must not reveal, unless required by law, any confidential corporate information learned while auditing.

Therefore, an audit is the independent examination of financial information contained in financial statement of an entity, whether profit oriented or not, conducted with view of expressing an opinion.

Objectives of Audit:

1. Primary objectives

To determine whether financial statements have been prepared in conforming with GAAP or not
To verify that statements reflect true and fair financial position of business organization

2. Subsidiary objectives

detection and prevention of errors
Detection and prevention of fraud.

Types of Audit

1. Statutory Audit
Statutory audit is properly known as annual external audit. It checks financial statement as required by governing laws. It is a financial valuation conducted by external auditor. (Section 110 to 119 of Nepalese Company Act)

2. Internal Audit
It is a profession acting to achieve desired objectives of the organization.

Internal audit is carried out by utilizing a systematic methodology for analyzing the business process, purpose procedures and activities highlighting organization’s problem and recommending solution. Professional are called the internal auditors, who are employed by organization to perform the internal auditing activities

Here, professionals mean internal auditors who are employed by organizations to perform the internal auditing activities.

Internal Audit involves:

Efficiency of operation.
Reliability of financial reporting
Deterring and investigating frauds
Safeguarding assets
Compliance with laws and regulations

Internal Auditors are not merely concerned with the organizations financial controls. Their works include all of the organizations internal controls.

3. Cost Audit

It is an efficiency audit.
The Audit that concluded basically to find out the cost of any product or services. It measures the monetary value of goods and services.
It is conducted to find out machinery tools, equipment and other things.
The price is determined after the fair valuations of goods on the basis of materials used, labor consumed and resources used by it.

4. Social Audit

An outsider, who is a critical friend of a company, can be a social auditor of this company.
Such auditor will check the book and ask the probing questions to find out the effectively of organization’s internal operation and broad external impacts in society or community.
She/he needs not to be expert on accounting and having license of auditing.
Just s/he evaluates the organization’s social responsibility towards the society at large.

5. Legal Audit

Corporate governance and Auditing are correlated
Transparency, disclosure, good process, good decision-making etc. are fundamentals of corporate governance.
Good process denotes doing things according to the laws and best practices.
Legal audit is practiced by such corporate lawyer which examines the position of corporate governance status of entity.

The 19th century laid down the foundation of modern corporation. That is why, that was the ‘century of entrepreneurs’.

The 20th century was the ‘century of management’

Now, the 21st century promises to be the ‘century of corporate governance’.

Financial Audit, legal Audit and Social Audit help to promote the corporate governance.

Therefore, Auditing has a vital role to enforce the law, regulation, and principle of corporate governance.

Proper accounting and auditing is protection measure for security of every stakeholder of corporation.

Appointment of Auditor:

Auditor is appointed to safeguard the interest of shareholders and other stakeholders of company.
It is clear that auditing is an independent examination of financial and other operational information or descriptions of company. Therefore, an auditor must be appointed independently.
Only independent auditor can examine the accounting and other operational records in fair and true basis.
Fair and true view is the essence of auditing.
Section 110 of Nepalese Company Act – every company shall appoint an auditor.
It is suggested to read, Chapter – 8 (Sections 110 to 119) of Nepalese Company Act.