TyroCity: Company Law Notes

The term dividend may be defined as the part or portion of profit that falls to the each individual unit of shares.
Part of profit of company that is distributed to the shareholders is dividend. Section 182.
But in the event of winding up of company, the dividend means the division of company’s assets among its members.
Any company has the power to distribute its profit to all the shareholders.
The company has an implied power to distribute dividend from its profits. The power to declare dividend need not to be expressly mentioned in MoA & AoA. So, this is implied power of company other than a profit not distributing company.

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).

Stages of Incorporation of Company

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

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

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

Promotion
Incorporation or registration
Capital subscription
Commencement of Business

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

Private company cannot invite public to subscribe the shares.

Private company must arrange the capital privately, not publicly.

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

Promotion

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

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

Capital Subscription
Third stage is capital subscription

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

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

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

Essential documents for Registration of Company are:

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

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

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.

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)

Modes of Winding – up

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

Winding – up

A company comes into existence by a legal process and –when for any reason, it is desired to end its existence; it must again go through the legal process.
Company is an artificial person which is created and ended by law. The process to end the company is related with winding up or liquidation or dissolution of company.

In the words of the professor LCB Gower,
Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. Liquidator is appointed and he takes the control of the company collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

Incorporation is a birth winding up is process of death – both are fulfilled by due process of law and legal formalities.
All assets and liability are brought to close and converted in to cash form for the distribution purpose.
Winding up and dissolution of company is not same thing. A company is said to be dissolved when it ceases to exist as corporate entity. Winding up only proceeds towards the dissolution.
Winding up is the process by which the dissolution of the company is brought about.
At the end of the winding up, the company will have no assets or liability, and it will therefore be simply a formal step for it to be dissolved, that is for its legal personality as a corporation to be destroyed.
The legal entity of company remains in between winding up and dissolution process.
In winding up the company as does not cease to exist; only its administration is carried on through the medium of a liquidator. The property of company still belongs to the company.
Winding up liquidation have been taken in same meaning but dissolution is different.

Modes of Winding up or Liquidation

Basically there are 4 modes of winding up under Nepalese law;
Voluntary winding up
Compulsory winding up
Liquidation by the order of the court.
Cancellation of Registration or deregistration, striking off registration

Voluntary winding up

By adopting special resolution.
In the situation of solvency

Voluntary liquidation starts from special resolution adopted by the company in its general meetings.

As per Section 126(1) of the Companies Act of Nepal the, shareholders of the company may liquidate the company either by adopting the special resolution in general meetings or subject to the provisions contained in MoA and AOA and consensus Agreement.

As per subsection 2 of section 126, the requirements or procedures of voluntary liquidation are as follows.

If the company is able to pay its debts or other liabilities.
There must be solvent company.
There must be declaration in writing of directors to pay the debts and liabilities.
Adoption of special resolution by general meeting and submission in Authority within 7 days, section 126(3)
Appointment of liquidator and Auditor.
Pre-approval from central Bank in case of Banking Sec 76(1) of BaFI Act

Compulsory winding up or liquidation

If any company is declared the insolvent at that situation, such company must be liquidated or wound-up.
that is the situation of compulsory winding up or liquidation.
such liquidation is executed only by the court’s order
Though company law of Nepal recognizes and regularized the compulsory liquidation, the proceedings of compulsory liquidation have been mentioned in detail in Insolvency Act 2063. No procedure under Insolvency Act is started without the permission of court. Court means commercial bench by notification in Nepal Gazette.
Section 4 of Insolvency Act describes the situation to apply for the proceedings of insolvency;
- The company itself which is in insolvent condition.
- The creditors who has invested at least 10% of total credit to the company.
- The shareholders, who has subscribed at least 5% shares of the company.
- The debenture holders who has subscribed at least 5% debentures of company.
- The liquidator appointed for liquidation of company.
- Concerned Authority or regulatory.
- Insolvency Act, sections 4(2), 4(3), 5 etc.

Liquidation by Court’s Order
Sec 139(4) (f) of the Companies Act 2063

If company is carried on or is likely to be carried on as to be prejudicial to rights and interest of any shareholders of the company, shareholder may apply before the court for appropriate order as remedy. At this situation, If court for liquidating the company.

Dissolution by cancellation of registration or deregistration

the company registrar office may cancel the registration of company on the following grounds. Section 136 of the companies Act 2063
- In a situation of failure to commence the business.
- In a situation of default in submitting the report, for three consecutive financial years
- If he company registrar office has a reasonable grounds to believe that company is not carrying on its business or the company is not in operation.
- Restoration of registration; section 137(a) (b) of the Company Act.

Powers functions duties and liabilities of liquidators

Power to take into custody and control the property of company (section 130 of the Companies Act)
The liquidator shall, mutatis mutandis exercise and perform all the powers and duties as of liquidator under the prevailing law of insolvency. Section 131(1) of Nepalese Company Act
The duties of liquidator are as follows - as per Section 131(2) of Nepalese Company Act
- To prepare and submit books of account to the company registrar office in every 6 months.
- To inform the shareholders of company about progress on the liquidation proceedings in every 6 months.
- To obtain and recover all the properties or amounts required to be obtained and recovered on the behalf of the company and repay and discharge the debts and other liabilities of all the creditors of the company.
- After completion of above acts, to call general meeting of shareholders and present therein a proposed report and return on the distribution of the company to the shareholders.
- To make payment of the amounts to the shareholders, if the shareholders holding at least 75% of the paid up share capital consent proposed report as referred to clause(d)
- To appoint or retain necessary employees
- To submit the final report after completion of liquidation proceeding
- Announcement of cancellation

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

Buy – Back of shares

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

Buy back is the process of purchasing of its own share by company.
Purpose of purchasing is to reduce a number of shares in market and to increase the value of shares in market.
Repurchase of its own shares for reducing the share capital.
The buyback reduces the number of outstanding shares in market.
Buy back is restricted or prohibited. Though it is restricted buy back is allowed in some special conditions prescribed by law. Mainly buy back is permitted on following grounds;
Why company is willing to buyback, objective must be clear and bona fide.
If a company is making profit and if there is sufficient free reserve fund in company.
If a company has an idle cash fund.
Section 61 of the Companies Act of Nepal has prohibited on purchase by company of its own share.
As per section 61(1) of the Companies Act, no companies shall purchase its own shares(buy back) or lend moneys against its securities of its own shares.
But section 61(2) has specified some circumstances, where a company may buy back its shares out of its free reserves available for being distributed as dividend, by giving information to the office of the company registrar.( Circumstances; clause ‘a’ to ‘g’ of section 61 (2)) .
The process and procedures for getting permission to buy back of shares have been mentioned in section 61(3) clauses ‘a’ to g and subsection ‘4’ to ‘10’ of section 61.

Controls of shareholders

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

General meeting; Chapter 5, Sections 67 to 85 of Nepalese Company Act i.e. Appointment of directors by general meeting – section 87 section 92 of Nepalese Company Act; disclosure by directors.
Section 138 to 141 (chapter 12) of Nepalese Company Act – protection of shareholders
Responsibilities and duties of directors, Section 99 of Nepalese Company Act
Section 102 of Nepalese Company Act -prohibition on giving false statement by officers in general meeting.
Section 105 of Nepalese Company Act – restrictions on authority.
Maintaining of accounts (chapter 7) Section 108/109 of Nepalese Company Act
Audit committee –Section 164 of Nepalese Company Act.
Appointment of Auditor; Section 110/111 of Nepalese Company Act
Protection of shareholders rights ; Section138,139,140,141 of Nepalese Company Act
Control by regulatory. Section 120, 121,122,123,124,125 etc. of Nepalese Company Act
Section 78, 79 & 80 of Nepalese Company Act, Return of Reports to CRO
NRB for Banking Companies
Insurance Board –Insurance Companies

Control by Company Board

Chapter 20 Interim provision; Section 169 of Nepalese Company Act, but now it has been sifted in court jurisdiction.

Controls by Court

Chapter 17, proceeding of Lawsuits and punishment; Sections 159,160,161,162,163 etc. of Nepalese Company 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.