TyroCity: Company Law Notes

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

Corporate Criminal Liabilities (CCL)

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

Corporate Criminal Liabilities ( CCL)

Criminal liabilities of company
Criminal liabilities of Directors

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

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

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

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

Challenges of CCL

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

Theory of CCL

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

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

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

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

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

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

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

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

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

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

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

Aggregation doctrine
Reactive corporate fault theory
Corporate Menes Rea doctrine

CCL in Nepalese Law

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

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

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

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

CIAA Act 2059,Corruption Prevention Act 2059

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

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

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

Consumer Protection Act 2054

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

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

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

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

The Foreign Employment Act 2064

The Money laundering Prevention Act 2064

Chapter -2

The Income Tax Act 2058

Section 120,123,127,&128etc.

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

Related Cases regarding CCL

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

Features of Company

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

The most distinguishing features of company are as follows;

1. Separate Personality or Distinct Personality or Legal Personality

Company will have separate legal personality after its incorporation.
Other enterprises like Partnership, Proprietorship have no separate legal personality.
Personality different and distinct than shareholders or member.
Distinct personality is the main feature of company. Other features are the outcomes of this main feature.
No material existence but separate personality.
Section 7 of the Companies Act 2063 B.S – “Company to be body Corporate”.
An autonomous and corporate body with perpetual succession.
Company may acquire, hold, sell dispose of, or otherwise deal any movable and immovable property like an individual.
Company may sue and be sued like an individual.
Company may enter in to a contract and exercise the rights and perform the obligation as referred to in such contract.
Different than shareholders/ members after its incorporation.
Common seal.
The concept of separate or distinct personality originated from these cases in different time
Saloman V. Salomon and Co. at the end of 19th century ( See; Company Kanoon of Bharat Raj Upreti)
Piush Raj Pandey v. Tax Office Kathmandu(D.No 1857,NLJ 2040,) (See; Company Kanoon of Bharat Raj Upreti)
Bijaya Kumar Dugar V. Industrial Promotion Board (D.No 7401 NlJ 2061) (See; Company Kanoon of Bharat Raj Upreti)
Abdul Hok V. Das Mal (1910 19 IC 595) (See; Company Law of Ashok K Bagrial)
Lee and Lee’s Air Farming ltd (1960 3 All E.R.420) (See; Company Kanoon of Bharat Raj Upreti)
Company has a legal entity distinct from and independent of its members.

2. Limited liability

One of the important advantages of company is that liability of its member’s is limited.
The creditor can recover their money only from company, not from individual behind the company.
Shareholders are not liable to pay the debt personally dues. This is very limited liability nature of company’s shareholders. Only, company is liable to pay not the shareholders.
Actually limited liability for only its shareholders /members, not for the company.
The shareholders are only liable for the value of their share.
Shareholders liability is limited within the extent of maximum value of their shares amount.
If any shareholder paid the nominal value of its share his liability is nil. But in the proprietorship and partnership firm they are not free from this liability they are individually liable.
Section 8 of the Companies Act.

3. Perpetual Succession (Permanent Existence)

Section 7(1) of the Companies Act 2063 states about this feature.
-A company shall be an autonomous and corporate body with the perpetual secession after its incorporation.

Company shall carry on all of its activities and transactions by its name. (Section 10 (a) of the Companies Act)

Natural persons have age and certain period for fix time but no for company.
Company cannot be ended without fulfilling legal procedure determined by law.
Without dissolution company cannot die.
C.B.Gower: “The death of members leaves the company unmoved. Members may come and go but the company can go on the forever.’’ (Davies Paul L, Gower and Davies’ Principle of Modern Company law 7th Edition, Sweet& Maxwell London)

During the World War- II,
All members and their employers of one American Private Company, were killed by a bomb while they were in a general meeting, but court declared that company can survive even in this situation. Not even a hydrogen bomb could have destroyed a company.

K/g meat suppliers (Guildford ) ltd. Re 1966
(Ashish Adhikary & Sudeep Gautam; Business Law in Nepal p.no 269)

Perpetual succession leads stability and long life to a company as compared to other forms of business organization.

In Re Neel Tedman Holding Pvt. Ltd Only two members were killed in a road accident, the Company was held could operate even after their death. (Ashish Adhikary & Sudeep Gautam; Business Law in Nepal)

Only the shares are traded with due the process, not the company –sec 42(1) (2)
Corporate life of company never ends without following particular legal formalities.
Even One Man Company cannot be ended after the death of the shareholder. It can end by the legal procedures.
Incorporated Association

Section 2(a) &3, 4, 5,6&7 of the Nepalese Company Act

Common Seal
Sec 26

Transferable Share
as movable property
Sec 42, 43

Capacity to sue and being sued
Sec 7(3) of the Company Act

(Bed Krishna Shrestha v. Govinda Krishna Shrestha; Kanoon Bibarnika, 2041,Year 2 p. 13)

Legal capacity to enjoy property right
Sec 7(2) of Nepalese Company Act
Purshotam Aacharya v. Boris Bar & Restruant pvt. Ltd (NLJ 2044 p.934 Decision No. 3206)
Management of representatives
Sec .86, 87 of Nepalese Company Act
“Board of Directors are the brains and the only the brains of company, and does act only through them’’ Bates V. Standard land 1910 2 Ch. 408 at p.16
Registered Office
Section 4 , 5,6 & 10(a) & (b) of Nepalese Company Act

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.

Stages of Incorporation of Company

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

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

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

Promotion
Incorporation or registration
Capital subscription
Commencement of Business

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

Private company cannot invite public to subscribe the shares.

Private company must arrange the capital privately, not publicly.

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

Promotion

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

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

Capital Subscription
Third stage is capital subscription

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

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

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

Essential documents for Registration of Company are:

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

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.

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

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.

Insider Dealing

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

Insider dealing is simply an unauthorized inside trading of corporate securities by the corporate insiders. Abusive self-dealing occurs when the persons having close relation to company abuse this relationship to the detriment of company and investors.
Unpublished inside information’s play very crucial role in securities transactions. There is always chance of such information to be disclosed by directors, shareholders, officials and other people who are involved in management.
Trading of securities by the persons who have price sensitive information with them, which is not available to the person with whom one is contracting at the relevant time may cause harm to one an undue benefit to the others.
Such activities are required to be controlled in order to protect the investment of general public and shareholders.
Insider dealing means any person dealing with sensitive information, which is illegal in many ways by own self or through any other person, which has not publicly disclosed

So, insider dealing is the dealing of securities of company with the benefit of confidential and restricted or unpublished information by such persons through his /her position or relation with the “officials” of the company.

Who are insiders?
(Section 92 of the Securities Act 2063 BS.)

The person who may have inside information due to his / her position such as directors, promoters, shareholders, officials or employees.
Any professionals who obtain inside information are by the cause of delivery of such professional services such as auditors and legal consultants.
Any persons who have capacity or access to obtain such information directly or indirectly.

So, the persons having access to notice or information that is price sensitive are called insiders.

Existing Nepalese Company Act has no explicit provision on insider dealing rather it imposes duty on directors of company to disclose their interest in company.
Section 91 of the Securities Act 2063 BS has provided that ‘’ any person who transacts or causes transacting on securities on the basis of inside information which are not made public that may affect the price of securities or gives notice or information known to him, to any other except to his / her course of duty is deemed to act as insider dealing.
Section 101 the Securities Act 2063 BS provides punishment on the crime of insider dealing. The culprit shall be fined as per value involved in transaction or imprisonment up to one year or both.
The Securities Act further provides that if any person is punished in insider dealing will be disqualified to be appointed as director or manager in public limited company until 10 years from the date of punishment. (Section 108 of the Securities Act 2063 BS).
Any aggrieved persons may recover any loss sustained by him from such person committing crime of insider dealing.
Insider Dealing is regarded as criminal act and included in schedule -1 of State Cases Act 2049 BS.

(Need to look Section 102 of the Securities Act, Sections 32/ 92/93/94/ of the Companies Act and 11 of BaFI Act)

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.

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

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.