TyroCity: Company Law Notes

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.

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.

Shares and Its Types

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

Share is a unit or portion of capital of company.
Investments made in any company are divided in numbers of units and each of such units is called share of a company.
Section 2(n) of the Companies Act of Nepal has defined the share as the divided portion of the share capital of company.
The capital of company is divided into small parts & each part is known as share.
Boreland Trustees v. Steel Bros Co. Ltd. 1901 1 ch 297 (Company Law: 12th edi; Ashok K Bagrial P 7 )‘’A share is the interest of shareholder in the company measured by a sum of money for the purpose, of liability in the first place, and of interest in second, but also consisting of series of covenants entered in to by all shareholders inter se.’’
An interest measured by sum of money and made of various rights contained in MoA and AoA.
Vishwanathan v.East India Distilleries 1857 -27. (Company Law: 12th edi; Ashok K Bagrial P 2o7)-‘’Share is merely a bundle of rights and obligations which are regulated by the articles.’’

Nature of Shares

The shares are movable property. Shares can be transferred in the manner provided by the articles.
Section 42 of the Companies Act states that ‘’ the shares or debenture of a company may be sold or pledged like a movable property, subject to this Act as per the provisions of the Memorandum of Association and articles of association

Types of Shares

In simple word, share is a part of share capital of company.
Share is divided portion or part of share capital of company.
The types or kinds are determined on various bases. So, to say particular type is not easy. It depends on the basis of determination.
Company can issue different types of share for its capital formation. As per section 30 of the Act, the company may, by making provisions to that effect in its memorandum of association and articles of association, issue various classes of shares with different rights attached thereto. Section 18 also.
So, inherent rights and obligations determine the types of share. The types of share are based on different types of inherent rights and power of shareholders in such shares.
Such inherent rights may be rights to get dividend, right to refund invested amount in case of liquidation, right to get remaining amount after repayment of loan and other liabilities.
Section 30 of the Act gives permission to public company for issuing of shares with different rights. Types are determined by such different rights.
Generally, public company issues different types of share offering for subscription. In case of private company there is no meaning to say the types of share.
Mainly there are two types of share in practice, as per Nepalese legal provision. Which are;
- Ordinary or equity share
- preference share

Ordinary or equity shares

Equity or ordinary shares are those which actually are not preference shares, equity or ordinary shares do not enjoy any preferential rights. There is no any preference on right; by the name & nature this is ordinary type of share.
The term ‘share’ denotes ordinary share in general conversation. Ordinary share is not defined in detail in the Companies Act. Section 2 (P) of the Act defines ordinary share as a share other than a preference share. This classification is made especially for public company. In case of private company there is no such various categories of share, only the term share is enough for private company.
Though, there is no long definition of ordinary or equity share in our company Act, but it is understood that all shares other than preference shares are ordinary or equity share.
The shareholders of ordinary shares are entitled to get dividend from the net profits of company after the fixed dividend on preference share has been paid – up.
So, there is no preference for ordinary share, ordinary means ordinary.
If there is no profits remain after paying the dividend on preference share, ordinary shareholders will receive no dividends.
Therefore, this type of division of ordinary & preference share is based on the factor of priority of receiving dividend and getting back of capital.
Similarly, ordinary shareholders will get back their capital only after repaying the capital of preference shareholders, when company goes for winding –up.
For the purpose of dividend and repayment of capital, the ordinary shares rank after the preference shares. Generally, the rate of dividend is not fixed in ordinary share. In ordinary share dividend may vary from year to year depending upon profit balance sheet of the company. If huge profit, there is higher dividend, if no profit, there may be no dividend. The board determines the rate of dividend for ordinary shareholders on the basis of profit as per defined legal procedures.
There are so many ways to obtain the ordinary or equity shares. On the basis of such obtaining ways, ordinary share again can be divided in following types;

Promoter Share

When the promoters of company do accept to subscribe some quantity of share at the time of formation or incorporation by mentioning the same in MoA & AoA, these types of shares are known as promoter shares of company.
The share of promoters, subscribed at the time of incorporation, is the promoter share.
The term promoter is defined in section 2(i) of the companies Act, as per this definition “promoter means a person who, having consented to the matters contained in memorandum of association & articles of association to be furnished in the Office for the incorporation of a company, signs the same in the capacity of promoter.’’
The person who promotes the company by taking particular quantity of share is the promoter and such promoters’ share is promoter share.
Promoter shares are allotted in the name of promoter and promoters never pay premium value to subscribe share.
Promoter shares cannot be sold mortgaged or pledged unless the first general meeting held and entire call amount on share is fully paid. – sub section 2 of section 42 of the Act.

Primary share

After incorporation of a company, public company can invite general public to join the company as its share member as an invitation to offer for purchasing its share, such share is allotted or primary share.
Allotted or primary share is that the company makes selling or distributing process at first and makes an invitation for subscribing from issued shares.
Public company have to publish the prospectus to invite public to subscribe its shares (section 23 (1) ), but a private company cannot invite or call on public to subscribe its shares. Section 10 (c). Private company mange the allotment privately as per MoA & AoA or unanimous agreement.
Public company cannot call for more than 50% amount of face value of share with application section 27(3). Therefore, we see the primary share of 100 rupees in practice, but such restriction will not apply for those companies, which are in operation previously by publishing audited fiscal statement of last 3 years.( provision of section 27 (3))

Right Shares

No separate definition of right share in Act.
But legal provision about right shares is mentioned in section 56(5) ,(6), 7, 8 & 9.
Certain preemptive rights to existing shareholders.
In case of increase in share capital of company.
The shares issued with such preemptive right to only the existing shareholders.
Existing shareholders have 1st right to subscribe.

Existing shareholders are given pre- emption at favorable price as per the numbers of their shares.

Bonus Share

A share, which is issued as an additional share to existing shareholders by capitalizing the surplus from the profit and reserve fund of company.
Section 2(q) of Act—‘’bonus share means a share issued as an additional share to shareholders, by capitalizing the saving earned from the profits or the reserve fund of a company ,and the term includes the increase of paid –up value of a share by capitalizing the saving or reserve fund.’’
Issuing bonus share is the means of capitalizing profit or reserve fund instead of distributing cash dividend to company’s shareholders.
It must be issued to the company’s shareholders. Section 179(1) (2).
It has to increase the paid- up capital of company.
It has to capitalize the profit or reserve fund & should not be issued from revaluation of existing other property of company. Section 56 (10).
Special resolution of G.M. & information to CRO is the most for issuing bonus share. Section 179 (1) (2) & 83 (e).

Debenture Share

Debenture is credit obtained by company.
Sometime, in some situation, company can convert its debenture in to shares. Such shares are known as debenture shares.
If there is such provision on MoA & AoA, if there is agreement between debenture trustee & company, if such matter is published in prospectus, at these situations company can issue debenture share.
The terms ‘debenture’ and ‘debenture trustee’ are defined in section 2( s) and 2(t) respectively.
Section 34 includes the provisions relating to debenture. Similarly sub section 4 of section 35 is related with conversion of debenture into debenture share.

Premium Shares

Shares having some additional price more than face value of shares.
Definition is in 2 (z 2) of Act— value in excess of its face value.
Legal provision in section 29.

Forfeited Shares

Sometime there may be a situation where company has to forfeit the shares on the grounds of nonpayment of installment on time.
Legal provision- Section 53(3)

Preference Share

The preference shares are those which have preferential rights than ordinary shares.
Section 2 (o) of Act defines preference share.
Types of share should be mentioned in MoA of company. Section 18(f).
Section 65 states about preference shares of company. Especially section 65 (2) mentions the grounds of issuing the preference shares, by that preference shares can be easily understood.
A preference share must have following preferential rights; a) a preferential right as to the payment of dividend b) a preferential right as to the repayment of capital.
Preference may be on; dividend, rate of dividend, repayment of share amount in the situation of liquidation, having voting right or not, redeemable or non-redeemable after certain period of time and if redeemable redeemed with premium or not etc.
Types of preference shares are; 1). Cumulative and non-cumulative 2).Participating and non- participating 3) Convertible and non- convertible. 4). Redeemable Preference shares.
Cumulative preference shares are those which are assured of dividend every year even if there are no profits in a particular year.
Non-cumulative preferences are those which are assured of dividend only in the situation of profit.
Participating and non- participating preference share; in such shares, shareholders are entitled to participate to surplus profit or surplus assets. Surplus profit means the balance of profit which is left after paying the fixed amount of dividend. Surplus assets means the balance of assets which is left after paying back both the preference and equity shareholders. Voting right also may be basis of participating or non- participating. The participating shareholders participate in both surplus profits and surplus assets. But in non-participating share, shareholders are not entitled to participate. If Mo A is silent about this, it is presumed that all shares are non-participating preference share.
Convertible and non- convertible shares; Convertible preference share can be converted in to equity shares within a certain period, non- convertible cannot be converted into equity shares.
Redeemable preference shares are those the amount of which can be paid back to the shareholders. The capital raised through issue of redeemable shares can be paid back to the shareholders by the company to such shareholders. Company can issue such shares only if it has been authorized by MoA & AoA. Section 65 (5).

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)

Debenture

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

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

Controls over the Management

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.

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

Transfer of Share

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

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

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

Articles of Association (AoA)

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

AoA is another important document needs at the time of incorporation of company.
AoA and Articles of Incorporation (AoI)are same.
AoA regulates the way in which a company’s internal affairs are managed.
(Ashbury Rail Carriage & Iron Company V. Riche 1875 LR 7 HL 653) - “ the articles defines the duties, rights, and powers of governing body as between themselves and company at large, and the mode and the form in which the business of the company is to be carried on, and the mode and form in which changes in internal regulations of company may from time to time, be made.’’
Rules and Regulations for governing body of company or management.
AoA is subordinate to the memorandum.
Rules & Regulations do not exceed provisions of memorandum.
“The Articles of Association are the internal regulations of the company and are for the benefit of shareholders’’( Guiness v. Land Corporation of Ireland 22 ch. D. 349)
Thus, AoA is the collection of rules & regulations, framed for the internal management of the companies.
Section 20 of the Nepalese Companies Act has mentioned about meaning of AoA and matters to be included in AoA.

Amendment of MOA and AOA

There are some special legal provisions relating to amendment of MOA and AOA in the Companies Act 2063 BS.
Generally, a company shall not alter the conditions contained in its memorandum except in the cases, in the mode and to extent for which express provision made in the Act
There are some prescribed conditions for amendments in MOA and AOA in Section 21 of the Companies Act 2063 B.S.
Generally, there may be following conditions of changes in MoA & AoA
- Change in Name
- Change in objects
- Change in Procedures

Change in Name

By special resolution, Section 21(3) - any company can amend its name by adopting a special resolution to that effect at its general meeting and make an application, accompanied by the prescribed fees, for prior approval of the office and if the office gives approval to amend the name as per application so received, the name of the company shall be amended.

So, prior approval of the authority is most for the amendment of name.

Change in Objects

The object’s clause can also be altered but the alteration is subject to a number of restrictions.

These restrictions are for the protection of the interest of the shareholders and creditors.

As per the determined process of sec 21(1) of the companies Act 2063 B.S. the general meeting of a company can amend the MOA and AOA by adopting a special resolution

Special Resolution

Special resolution is most for amendment, except the change in name, in other change giving the information of amendment is sufficient.

As per the legal provision stipulated in section 21(2)- The Company shall give information of amendment made to MOA and AOA to the office within 30 days and the office shall record the same and give information thereof to concerned company within 7 days after receipt of such information.

Restriction on Amendment

On the following basis;

As mentioned the basis in section 6 of Nepalese Company Act ‘power to refuse to register’.
The company cannot amend the objects clauses or name as a routine affair.

Change in Name or objects is necessary for the following purpose;

To conduct its business more economically or efficiently.
To attain its main purpose by new or improved means.
There is only limited scope for change. That is to conduct the business efficiently. The business must be same as before e g. Pharmaceutical Company cannot change objects to carry the business of real state.
For the attainment of the objects.
for the improved means of conducting business.
enabling the company to take advantage of new scientific discoveries and inventions.
to enlarge or change the area of operation
to make changes number of shareholders, capital of company, shares, etc.
to make change in status of company i.e. conversion private to public & public to private company.
to restrict or abandoned any objects specified.
to sell or dispose the whole or any part of undertaking.
to amalgamate with any other company or body of person.
to adopt the new process and procedures mentioned in AOA regarding meeting notice,
to carry on some additional or convenient business under the existing circumstance. e.g. School level company converted in to college and school both or in college only.
In a Public company shareholder has right to challenge in court for amendment within 21 days of that change (Section 21(4)), otherwise it is automatically activate.

Change in Procedures

AOA is related to procedures. The amendment is possible regarding the various procedural aspects.
Section 148 - private company which has no annual general meeting, if they passed the unanimous agreement.