TyroCity: Company Law Notes

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.

Advantages and Disadvantages of MNCs and Nepalese Context

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

Concept of MNCs and Operational Provision:

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

From human right perspective

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

Ways are;

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

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

ILO declaration on fundamental principles and rights at work.

Fundamental principles

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

Development:

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

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

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

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

There are several approach that MNC came into existence;

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

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

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

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

Door for diversification of business:

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

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

Advantages and Disadvantages

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

Operational provision in Nepalese context

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

Capital and its Types

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

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

Share Capital

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

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

If so, what is share?

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

Types of Capital

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

Authorized Share Capital or Nominal Capital
A

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

Issued Capital

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

Paid – up Capital

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

Other Types of Capital

Subscribed Capital

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

Reserved Capital

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

Types of Company, Details

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

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

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

Basis;

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

Responsibility of shareholders in terms of company’s liability

Limited liability company
Unlimited liability company
Guarantee company

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

Country of incorporation

Foreign company
National company

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

Mode of capital formation
Public company& Private company

Modality of control
Holding & Subsidiary company

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

But generally, there are following types of companies;

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

Guarantee and Unlimited Company

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

Unlimited Companies;

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

Private Company

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

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

Communication contract

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

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

Single Shareholder Private Company;

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

Company having more than Single Shareholder;

Minimum 2
Maximum 50

Merits of Private Company;

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

Public Company;

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

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

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

Listed Public Company

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

Not listed Public company

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

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

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

In India;

Deemed public company like hybrid nature

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

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

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

Voluntary conversion or Conversion by choice

Section 13(1) (a) Voluntary;

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

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

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

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

Only mandatory,

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

Government Company;

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

Foreign Company

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

Company Not Distributing Profit

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

Holding and Subsidiary Company

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

Condition of Holding and subsidiary Relationship;

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

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

Section 142- control over subsidiary company –

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

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

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

Accounts and Audit

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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.

Concept and Meaning of Company

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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

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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.

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.

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.

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