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

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.

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.

Capital and its Types

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

The term capital cannot be defined in one sentence or one line. The meaning of capital may vary. It depends on the different situation or context. Generally the meaning of capital is real value of property. So, capital has different meaning according to context.
In simple word, the term capital denotes a particular amount of money with which, a business is started.
In the case of company, the term share capital refers to amount raised by the issue of shares.
Actually, the real value of business is capital.
C. B. Gower ‘’ with the normal business capital is a simple name given to the ‘net worth of business’, the amount by which the value of assets exceeds the liabilities.
By this definition only value of assets which exceeds the liabilities is the capital.
So, what is net worth?
As per Section (2 z 3) of the Companies Act 2063 of Nepal ‘’ net worth means the assets of a company remaining after deducting the paid up capital, reserve, fund or free reserve of whatever designation to which shareholders have right or all other liabilities other than goodwill, if any, of the company as well as loss provisions, if any, from the total assets of the company for the time being.
Capital is highly important to run a company on the basis of limited liability.
Creditors always recover their debt from only the capital of company, not by the shareholders individually or personally.
So, company laws in every state have prescribed a guideline regarding capital raising or formation and its maintenance of limited liability of company.
Mainly, there are three ways to raise capital for company.
By issuing shares
By issuing debenture
By accepting other types of loan
One of fundamental or basic source of capital in company is Share.

Share Capital

Share capital is an important source of company to raise a fund or capital.

By the phrase it is clear that share capital is the capital raised by issuing the share.
Share + capital=share capital.

If so, what is share?

Share is certificate representing a unit ownership in a company.
A share is the interest of shareholder in the company measured by a sum of money, for the purpose of liability in first place and of interest in second, but also consisting series of mutual covenants entered in to by all shareholders (Farwell J in Borland’s Trustee v. Steel Brothers, 1901, 1 Ch 279)
Section 2 (n) of the Companies Act 2063 BS states that share is divided portion of share capital of a company.
Share capital is equity of company. Share capital generally refers the nominal value of all share issued by company.
Every company should mention its share capital in its MoA & AoA.
Share capital refers to the amount of company raised by the issuing of shares.
Issuing of share is mandatory legal provision as per section 18(1) e, f, g, h, i of the Companies Act 2006 of Nepal.
As per these legal provisions;
- The figure of authorized capital of company, the figure of share capital to be issued by the company and the figure of capital undertaken to be paid by promoters must be mentioned in memorandum.
- Similarly, types of shares, inherent right in such shares, value and numbers of shares , restriction (if any) on purchase of shares, promoters’ shares (undertaken to subscribe for the time being) & terms of payment of share amount must be mentioned in MoA.
The CRO will take certain fees on basis such share capital amount as registration fees of company.
The person who has ownership in share of company is known as shareholder of company.
As per section 2(r) of the Companies Act, Shareholder means a person having ownership in the share of company.
According to section 2(n) Share means the divided portion of share capital of a company.
According to Robert R. Pennigton (Pennigton’s Company Law 6th ed p. 136) –Share Capital is amount contributed by shareholders to company’s resources.
The received amount for the price of share is share capital.
The amount contributed by shareholders is main capital of company. Such share capital is the real property of company, not a loan, but property.
Share capital is not refunded until company is liquidated.
The company is not allowed to distribute dividend from such share capital, can distribute only from profit.
There is statutory provision relating to prohibition on purchase by company of its own share.
Section 61(1) of the Companies Act , No company shall purchase its own share (buy- back) or lend money against security of its own share except in particular conditions prescribed by the company Act.
Company is not a creditor and debtor of its own.
So, share capital is fixed capital of company.
The desired goal or nature of business of company determines the share capital of company.
The share capital is depended upon the nature of particular company. For example; Private company, public company, Banking Company, Insurance company, Company as school.
Companies expect profit not sharing company should mention share capital in MoA & AoA in the form of Authorized Capital \ Issued Capital \ Paid up capital.
The share capital is divided on different value units or shares.
So, price value of each share is mentioned in share certificate.

Types of Capital

There are so many types of share capital in the companies.
Basically, The Companies Act 2006 (2063 B. S.) of Nepal has determined following types of share capital.

Authorized Share Capital or Nominal Capital
A

uthorized share Capital is sum of money which is mentioned in MoA as the authorized capital of company.
It is nominal or registered capital of company.
It is maximum amount which a company is authorized to raise by issue of shares and upon which company pays the registration fees of company.
Either the full amount or part of full amount can be issued whenever needs to rise.
Total nominal value of shares which is mentioned in memorandum is authorized capital.
Practically, the size of authorized capital is decorative significance for private company.
Present company Act of Nepal is silent about how much authorized capital should be mentioned in a company, but it is understood that issued & paid up capital must not exceed the authorized capital.
Paid up capital of a public company shall be a minimum of 10 million or one corer rupees. (Section 11 of Act).
So, it is clear, there is a pre-condition regarding authorized capital of a public company that public company shall have a minimum of a 10 million share capital.
No authorized capital is needed for a profit not sharing company.
No such demarcation of authorized capital for a private company in Nepal.
Life & non-life insurance company should maintain their paid up capital 25 corer & 10 corer or 250 million or 100 million respectively. It means the authorized capital of such insurance company should not be less than that figure of amount. Authorized capital of banking company is guided by BaFI Act and NRB Act.
For private company, it depends upon the business volume, nature of business or transactions e.g. vehicle trading company, vegetable trading company, Hydropower Company, constructions company , consultancy service provider company etc.
Authorized capital is maximum limitation of capital of company. So, company cannot issue share above the authorized capital, if issued it will be null & void.
As per section 18(1) (e) of the companies Act, the authorized capital of company must be stated in MoA.
As per legal provision of section 51 (2 ) (a) of Nepalese company Act every company shall prepare the inventory regarding authorized capital and shares of the company.
Section 56 (1 )(a) &( 3) states that the company should give information within 7 days about alteration of authorized capital. If such alteration took place the MoA & AoA must be amended according to such alteration.

Issued Capital

Part of authorized capital which is offered for subscription is known as issued capital of company.
Issued capital is the portion of company’s authorized capital that can be issued to its shareholders.
It is not obligatory for the company to issue the whole of the authorized capital for subscription.
In almost situation, company need not necessary all its authorized capital, at that time company can issue lower share than its authorized capital. It depends upon business transactions of company.
The capital that will be collected from issuance of such lower share is actually the issued capital.
Public company must have 10 million paid up capital as per section 11 of the companies Act 2006 of Nepal. So, Issued capital of public company must not be below the 10 million.
As per section 18(1) (e) of the companies Act, the issued capital of company must be stated in MoA.
As per legal provision of section 51 (2 ) (b) of Nepalese company Act every company shall prepare the inventory regarding issued capital and shares of the company.
As per Section 56 (5), if a company is required to increase its issued capital to the extent of its authorized capital, it may increase by adopting an ordinary resolution at the general meeting.
Public company must have 10 million paid up capital as per section 11 of the companies Act 2006 of Nepal. So, Issued capital of public company must be maintained as per this legal provision.
As per special law, some companies such as banking companies & insurance companies must have the issued capital as stated in special law relating to such companies e.g. for insurance company and banking companies.
Private company can determine its issued capital as per the requirements of its business transactions.

Paid – up Capital

In reality, paid up capital is that type of capital which the company actually gets from the shareholders.
By the name, it is understood that paid up capital is the capital which is paid by the shareholders in company.
The paid amount by the shareholders for share is paid up capital of company.
Paid up capital is the amount that has actually been paid – up by shareholders.
The paid – up Capital must be paid by the shareholders, otherwise it is treated as unpaid amount to the company. Like dues.
Public company must have 10 million paid up capital as per section 11 of the Companies Act 2006 of Nepal. So, paid- up capital of public company must be maintained as per this legal provision. Private companies can manage its paid up capital as per its necessity, nature & volume of business transaction.
As per section 18(1) (e) of the Companies Act, the paid-up capital of company must be mentioned in MoA. Private company can mention the paid up capital as per their needs, no any legal instructions for private companies.
As per legal provision of section 51 (2 ) (c) of Nepalese company Act every company shall prepare the inventory regarding paid-up capital and shares of the company.
As per Section 56(1)& (5),every company can make alteration on its share capital by adopting a special resolution in general meeting. It means the paid up capital of company may be altered, if altered, the MoA & AoA must be amended as per section 56(2) of the Companies Act.

Other Types of Capital

Subscribed Capital

Subscribed capital is the amount of share capital which the shareholders have subscribed or agreed to subscribe.
The subscribed capital should be described in balance sheet of company.
Sometime the issued shares of a public company may not be sold or subscribed. The part of issued capital which has been actually taken up or subscribed for the public is the subscribed capital. Which the shareholders have actually subscribed or agreed to subscribe. All issued capital may not be subscribed or agreed to subscribe. So, subscribed capital is the capital which is actually subscribed or agreed to subscribe.
The entire issued capital may be agreed to subscribe or subscribed by public in case of a reputed company because of has lot of good will, but in case of very unpopular or unsound companies the subscribed capital may be less than issued capital.
The subscribed capital is not mentioned in MoA & AoA, it is mentioned only in balance sheet of company.
Though there is no clear provision regarding subscribed capital in Nepalese companies Act, but the concept of subscribed capital is accepted by this Act. That can be found by reading of respective sections of chapter 4 of the Companies Actg. the provisions relating to alteration & reduction of share capital, mentioned in section 56 & 57 of the Companies Act.

Reserved Capital

The capital of a company which can be generated by issuing of share in particular event, if the board feels necessary. The reserved capital is collected from the remaining part of issued capital which is not called for payment or subscribed before.
The reserved capital is the part of issued capital of a company, which the company has not issued but that is the amount within the issued capital. From such part of issued capital, if the board feels necessary, the board can collect the reserve fund from that part of issued capital only in the event of liquidation or insolvency of company.
There will not be provision of reserve capital in all companies. As per the legal provision of section 53(7) of the Companies Act 2063 “ a company which has been making profit for a period of 3 consecutive years or more may , by a special resolution adopted at its general meeting, determine that a call may not be made in respect of certain portion of its share capital not call in expect in case of liquidation or insolvency of company.’’ Such uncalled capital is reserve capital of company.

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.

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.

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

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

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.

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.