Business Law Note for BBS/Law of Company and Auditing

Company Management: Meaning 

The company is an instrument that unites the efforts of a great number of people. They are shareholders, directors, members of the top management team and the department managers, and their subordinates. The shareholders own share capital of a company and bear the risk of the business. So the shareholders are regarded as the owner of the company and it's business and property. 

Legally they are not the owner and do not manage the company unlike sole trading concern and partnership. But they have some rights and privileges of exercising control over the company’s management. They delegate their rights to their elected representatives. The collective form of the directors is known as the Board of Directors, and the shareholders have the company managed through such board. 

Thus BD holds the responsibility to control, operate, and manage the company. Therefore, though the shareholders manage the company theoretically but do the BD in practice.

The shareholders delegate their power or authority to the BD and the BD delegates it's power/authority to CEO of managing director of the company who holds responsibility for the execution of the policies laid down by the BD. 

Departmental managers i.e., production, finance, marketing, and personal managers assist the chief executive. The following figure shows the common form of the management of the company;

Source: Mishra(2006) Mercantile Law 

Board of Directors (BOD)

A company is an artificial legal person having no physical existence and intelligence. Because of this, it itself is inactive and constant. So, the body of a person is necessary to handle the business affairs to make proper management and to instruct and control the parties of the concerned company. For this purpose, the directors are appointed by the shareholders amongst themselves, and the collective form of the directors is called the Board of Directors.

So BD is referred to as an apex and decision-making body of the company. This is such a body that makes all the arrangements relating to the management of the company, through which the objectives of the company may be executed and achieved smoothly. 

In this sense, the BD is composed of the management of the company, through which the objectives of the company may be executed and achieved smoothly. In such sense, the BD is composed of the management, operation, supervision, and control of the company.

Directors are likely to the captions or masters of the company. The way forward and the outlook of the company is based on the ability and competence of directors as the intellectual and chief attention of the company is directly affected and guided by the directors and only they could lead the company in the state to achieve the efficient level of efficiency. 

The interest of the company is the interest of the shareholders and directors. So, while appointing directors, it must not be forgotten that the management of the company may go in the qualified hands.

The following facts are considered in connection with directors:

Composition of the BD/Number of directors (Section 86)

There is no certain demarcation of the number of directors in the BD. It depends upon the structure of a company and the nature of the transactions. The number of directors may be less or more. But it is usually specified by the law itself. 

In the case of the number specified by the Act and the AA, the number of directors must be in accordance with them. The Company Act, 2063 has stipulated the following provisions in respect of the company formed in Nepal.

In the case of a private company, the number of the directors shall be as provided for in its Articles of Association.

In the case of a public company, BD consists of at least 3 and up to 11 directors. While forming BD, if there is the total number of directors up to 7 and more than 7, at least 1 and 2 independent directors must be appointed respectively from among the persons who have the qualification requirements prescribed in AA and having knowledge and experience in the business related to the company.

The BD consists of one chairman, who is selected by the directors from amongst themselves.

Mode of Appointment of Directors (Sec. 86(1), 87)

The provision as to how to appoint directors has been stipulated in the AA of the company. The directors can be appointed by applying the following modes;

• By promoters (Sec. 87(1a)): Directors of the newly formed company are appointed by the promoters of the company. This is done before the first general meeting is held. The appointed directors in this way are called first directors whose tenure remains till other directors are appointed by the AGM.
• By BD (Sec. 87 (1b)): If any vacancy of the directors appointed by the AGM for any reason occurs, such is fulfilled by the BD itself for the remaining period.
• By GM (Sec. 86(1& 87)): In a private company, directors are appointed as provided for in its AA, and general directors are appointed by the GM of the company.
• By corporate body (Sec. 87 (2)): A corporate body can also appoint the directors. Such body holding shares can appoint a director and an alternative director as well to attend the meeting and exercise the voting right in his absence on the proportional basis of the total number of directors and numbers of share held.

Qualification for being directors

To be a director normally no education qualification is required. But personal qualification is needed. According to the Company Act, 2063 and AA of the company, only a person having the following qualification can be appointed as a director of the company:

• Natural person: Only a natural person is qualified to be a director. A company being an artificial person can be a shareholder of the company but not be a director itself on the ground of holding most of the shares of the company. It has to appoint a qualified person as a director of the company.
• Person competent to contract: Any person competent to contract in accordance with law can be a director. It means a person attaining the age above 21 years in the case of a public company, being sound mind and not insane, or being disqualified by law can be a director of the company.
• Solvent: If a person, who is not insolvent and 5 years have elapsed, can be a director of a company.
• Morals: Any person intending to be a director must be moral. His morality must be clean and pure; otherwise, he misses this opportunity.
• Share qualification: Share qualification means a minimum number of shares to be held by the shareholders to become a director. Any shareholder has to hold such a number of shares in his name as has been presented in the AA of the company in order to qualify.   If no such shares have been fixed, he has to subscribe at least 100 shares.    

Disqualification of Director

A person is not always capable of being appointed director of a company. The companies Act, 2063 has in section 89 (1, 2) stipulated the following provisions in respect of disqualification of a person for being appointed as director:

• If he is below the age of 21 years in case of a public company,
• If he is of unsound mind or an insane,
• If he is declared insolvent and 5 years have not gone,
• If he is punished on the charge of corruption or an offense involving moral turpitude. But in case of a private company, a period of 3 years has not elapsed from the date of the expiry of such sentence,
• If he has a personal interest in any contract or agreement with the concerned company or in its business or transaction,
• If he has not paid any amount payable to the company,
• If he has been punished with a penalty of Rs. 20,000 to Rs. 50,000 or up to 2 years imprisonment or both or a penalty of Rs. 10,000 to Rs. 50,000 he will not be eligible to be appointed till the elapse of 1 year and 6 months respectively after the completion of such punishment.
• If he is punished on the charge of theft, fraud, forgery or misrepresentation or embezzlement of goods or fraud entrusted to him and 3 years have not elapsed from the date of expiry of such a sentence.
• If he does not possess qualification as prescribed under the existing law applicable to the company operating any specific business or if he has any disqualification prescribed under such law.
• If he is a director of a company which has not submitted the reports and return to the office required under this Act for the consecutive 3 financial years,
• If he is the shareholders of the company,
• If he has no experience of at least 10 years in the related sector after obtaining at least graduation degree on any subject such as management, economics, business, finance, accountancy, statistics, law, etc.
• If he is a close relative of officials of the company,
• If he is an auditor of the company of his partner.

Terms and Tenure of the Directors

According to section 90 of the Company Act, 2063, directors are appointed for a certain term, according to the Act. Term of the directors of the private company is as provided for in its AA. As provided for in the AA, terms of directors of public companies are up to 4 years. But;

• If the government appoints anyone as a director then his tenure is remaining continue up to the government wants so.
• If any new director is appointed at the place of existing director then newly appointed director will have tenure equal to the tenure of the original director.
• The director may be re-appointed under the existing laws.

Meeting of the BD

The supreme and decision-making level of any company is called BD. Ordinarily the directors exercise their powers through resolutions passed at the meeting of the board. So, a meeting of the BD must be held in every company. The Company Act, 2063 contains the following rules regarding the board’s meeting of the company;

• Time to call a meeting (Sec. 97(1, 2))

In case of a private company meeting of the BD is governed by its AA and in case of a public company, such meetings must be held at least 6 times in a year. But the interval period between two meetings should not be more than 3 months.

• Party calling meeting (Sec. 98 (1, 2))

The parties calling a meeting of BD are given below;

• Secretary: Except as otherwise provided in the AA of a company, the company secretary, or chairman of the BD or chief executive of the company may call its meeting.
• Director himself: Although the BD’s meeting may be called by the company secretary, any director representing at least 25% of the total number of directors may make a written application specifying an agenda of discussion for calling BD’S meeting. In such case, such must be called within 7 days of receiving the application by the chairman. In case it is not called within the period, the concerned the director may call it.
• Notice of the board meeting (Sec. 98)

The matters related to the notice regarding the board’s meeting must be as provided for in the AA. Written notice of the meeting and agenda must be given to every director in the address provided by him to the company and such notice may also be given through electronic means of communication.

• Attendance of directors (Sec. 97(3))

The directors must-attend meetings of the BD personally. Attendance by way of the proxy of directors is not held valid.

• Quorum (Sec. 97(4.5))

In the absence of a quorum, the meetings of BD are not conducted. At least 51% of the total number of directors must be present in its meetings, but for this purpose the directors who have no right to cast vote on any matter in the board meetings as provided under this Act are not counted.

• Minutes (Sec. 97(7-10))

As in the GM of the company, in the meeting of the BD a separate minute book must be kept properly for the evidence of such meeting. It must be signed by at least 51% of the directors present in the meeting. The dissenting opinion is also allowed. The decision taken in the meetings is valid, even if any director fails to sign the minute.

Boards Reports  

The BD is an executive and decision-making part of the company. It must manage all the affairs of the company, exercise power and perform duties within the scope of Company Act, AA, MA, and the decision taken in AGM.

Shareholders are the actual owners of the company. Therefore they should have full information about transaction, profit, loss and financial position, etc. of the company. The BD has all the information about all such things. 

The shareholders remain unable to get such actual information unless and until the BD presents actual information to the GM. So, the BD has to prepare or make ready or submit its report of such things within the viewpoint of rendering information. 

Thus the BD prepares or reports of BD refers to annual financial statements and separate reports of the board which must be prepared separately but in the same period of time. They are discussed below:

• Annual Financial Statement/AFS (Sec. 109(1-3), (5-6))

The AFS must be prepared by the BD of a public company in the prescribed format every year at least 30 days before the holding of the AGM, and in case of a private company, it must be prepared within 6 months from the date of closure of its financial year. Such statements must also be approved by the BD and audited. Contents of the ASF are as follows:

• Balance sheet including all the record up to the last day of the fiscal year,
• Profit and loss account for the fiscal year, and
• Description of cash flow of the fiscal year
• Such an annual financial statement must be approved by the BD of the company.

• Separate Report of Boards/ SRB (Sec. 109(4, 7))

It is the most significant report of the BD. As provisioned by the Companies Act, 2063, the BD of every public company or a private company with the paid-up capital of 10 million rupees or more or with an annual turnover of 10 million rupee or more must also prepare a separate report, stating carious matters or contents in addition to the AFS.

Contents of Special Report of BD/

Source: Mishra(2006) Mercantile Law 

Audit and Auditor

All the companies whether these are private or public, have to audit their accounts of affairs. All the actual information can be obtained from the audit if the accounts related to the income, achievement, objective, fulfillment, and financial status of the company. Every company has to present an audit report in the General Meeting for discussion. So company law has made the provision for compulsory auditing of books of accounts of the companies.

The person who audits is called an auditor. He is one of the authorities and independent persons of the company with the authority to audit accounts. According to Section 110 of the Company Act, 2063 every company must appoint an auditor to audit accounts. 

The auditor so appointed may also audit account of any branch office of the company established even in the foreign country, if any, unless otherwise provided under the existing law of the country, where such a branch office is located.

• Who can appoint the auditor?

An auditor is appointed by any of the following means or authority;

• As per the provision of Section 111(1), the general meeting can appoint an auditor in case of the public company
• According to section 111(1-3) of the Company Act if the company is a private company the auditor can be appointed as per the provisions of AA and MA of the company. The auditor so appointed remains in the office until the next AGM is held. The name of the auditors so appointed must be notified to the office within 15 days of such appointment.
• If no provision has been made in the AA and MA, the general meeting is responsible
• According to Section 111 of the Company Act, the BD can appoint a person as an auditor until the FGM held
• As per section 113 of the Company Act, 2063, the office of company registers at the request of the BOD

Disqualification for the appointment of an auditor

According to section 112 of the companies act, 2063 in some case, a person cannot be appointed as an auditor. So any of the following persons or the firms or the companies in which they are partners cannot be appointed as an auditor and cannot remain in the office even if appointed earlier to the office;

• Any director, advisor, person or employee or worker of the company, or any partner an employee of such partner or close relatives or employee of such relatives, partner of a director or employee or the company,
• Any director of the company or person failing to pay dues payable to the company within the time limit or is in such affairs or such person’s close relatives,
• Any person who has been convicted of any charge pertaining to auditing, and a period of 5 years has not been elapsed,
• Any shareholders of the company or close relative of the person who has obtained shares of 1 % or more of the paid-up capital,
• Any person who has been declared insolvent,
• Any person convicted for the offense of corruption or fraud or criminal offense involving moral turpitude and a period of 5 years has not elapsed from the date of such conviction.
• As regards a public company, any person working as a fulltime or part-time employee in any government or non-government entity or any person authorized to sign in any document or report prepared by the company,
• Any  person or corporate body with limited liability
• Any person having personal interest with the transaction of the company

Removal of auditor

A person once appointed as an auditor does not remain in the office for life long. The company act, 2063 has specified some provision in this respect. So, generally, an auditor can be removed or can get dismissed from the office in any of the following circumstances:

• In the case of contradictory acts (Sec. 119(2))

In the following cases, an auditor may be removed by applying the same process whereby he was appointed as auditor;

• If he breaches code of conduct of auditors, or
• If he does any act against the interest of the company which has appointed him as the auditor or
• If he commits any proceed which is against the provisions of the existing law of the land.

To remove an auditor, prior information must be given to the Nepal Chartered Accountants Institute, with the approval of the regulatory authority, if any, authorized by the existing law for the regulation business of the company concerned, and in the absence of such authority, with the officer’s approval.

An auditor may be removed or dismissed from the office in the following cases too;

• In the case of non-reappointment

An auditor appointed by the BD before holding off the FAGN is removed from his office if the appointment is not confirmed by the meeting.

• In the case of expiry of the term

When the auditor was selected by the FAGM or OCR and now after completion of AGM such an auditor gets separated from the assigned duty.

• In case of removal by BD

In case a person other than the auditors registered or licensed under existing law as appointed as an auditor of a company, the BD can remove him as per instruction.

• In the case of the closedown of certificate and license

In case of the closedown of certificate and license of auditing, the auditor gets dismissed.

• In case of a provision for removing

In case of the provision regarding the removal of the auditor provided for the MA or AA or in UA of a private company, the auditor can be removed by applying such provisions.

• In case of losing qualification

If an auditor seems to be disqualified due to any cause arising disqualified him after the appointment, he can be removed.

• In case of a special resolution passed

If the AGM passes a special resolution for the removal of the auditor, the auditor will get dismissed from his office.

• In the case of new auditor’s appointment by OCR

When the office selects and fixed a new auditor with an order to settle/liquidate the company then the existing auditor routinely gets dismissed from his office.

• In case of another auditor appointed (Sec. 127 (7))

In case a company liquidated voluntarily appoints new auditor, the former gets dismissed.

• In case of death and insanity of auditor

If the auditor dies or becomes insane, he gets dismissed

Rights and Powers of an Auditor

The Company Act, 2063 has recognized some of the right or powers of the auditor are as follows;

• Right to access the accounts of the company (Sec. 114)

An auditor is entitled to access the accounts and books of the company appointing him to find the correct information. He can demand all the accounts, bills, vouchers, leaders, records, and so on of the company with the directors, an employee at any time during the office hours and officials furnish such matters to him for the sake of auditing as soon as possible.

• Right to ask for an explanation (Sec. 114)

In the course of auditing, the auditor can ask the concerned officials to give an explanation on the accounts as he finds necessary.

• Right to visit all the branches

If the company has more than one braches, the auditor can visit the branch offices and examine all the accounts kept therein. If different auditors have been appointed for each branch, the related auditor can check accounts of the related branch.

• Right to get the opportunity (Sec. 119(2))

An auditor cannot be removed before the completion of his terms. If the auditor is dismissed from the assigned duty then he has the right to get a rational chance to protect.

• Right to request for calling EGM (Sec. 82(2))

In the course of auditing accounts of a public company, if the auditor thinks it necessary to call the EGM for any reason, he can request the BD for calling such a meeting. If the BD fails to call such a meeting, he can apply in the OCR explaining the reason and the OCR has to call such a meeting.

• Right to attend the EGM

The auditor is entitled to attend even the EGM called at the request made by him. He can put forward his opinion in the discussion held in respect of the accounts.

• Right to Correct the wrong statement

If the auditor knows that the directors have given the wrong statement about the financial position and financial activities of the company, he is entitled to correct or alter such a wrong statement.

• Right to take legal and technical advice

In the course of auditing the accounts if any legal or technical problem occurs, the auditor is entitled to tale advice of the concerned expert in that regard.

• Right to prepare audit report independently

An auditor is entitled to prepare audit reports independently. An auditor is always autonomous to do an audit of the company. He can execute this work without the influence of anybody. If one does not help him or disturb in his work, he can refuse to do auditing. Besides, he is entitled to mention any problem faced by him in his report during the auditing.

• Right to get remuneration (Sec. 118)

An auditor is entitled to get remuneration for the actions performed by him ordinarily. The remuneration is provided after the auditor will submit the report of the audit. The company is responsible to provide remuneration to the auditor.

References

Mishra B.P. (2006), Mercantile Law, Kathmandu: Asia Books Distributers

Upreti Shreepraksh. (2018), Business Law, Kathmandu: Samjhana Publication Pvt Ltd

Kuchhal M.C. (1978), Mercantile Law, New Delhi: Vikas Publishing House Pvt Ltd

Panday Yugraj. (2019), Business Law, Kathmandu: Asmita Books Publisher & Distributors Pvt Ltd