Business Law Notes for BBS TU/ Law of Company

Law of Company and Insolvency

If any individual has to operate any business or industry, he or she has to establish a firm or company as specified by prevailing law. A company plays very important role to develop trade, commerce, and industry in the world because it is an organization having a separate identity from its promoters and it covers all the areas of the business.

A company has a very significant role in the field of industry, trade, and commerce in the modern world because the business has reserved most of the part of the business and commerce. 

Today from the small to very big type of companies or institutions or organizations of insurance, bank, industry, etc. operate as companies with the participation of private or public or government or non-government, indigenous or foreign faces.

There are different forms of the company and which are different in one another. They may be the sole trading or partnership and so on.

The birth and death (dissolution) of the company happens in accordance with law (Company Act) framed by the state. The Act determines the definition, kinds, procedure regarding incorporation, the legal status of the company, legal status of shares and debentures, composition and function of the board of directors, procedure regarding conducting meetings, rights, duties, liabilities and appointment of the auditor, and process of auditing, dissolution of the company and winding up of the company etc.

The Acts or Regulations or Directives etc are developed by the nations with the objective of developing business of the nation by the means of the company at different times.

The development process of Company Act was laid in England at the beginning of 17^th century. Indian Company Act, 1850, which was based upon the English Company Act, 1844. In the context of Nepal, Company Act, 1993 B.S. is known as the first law promulgated in respect of the company.  

Before the WW-II, investors had rarely come to Nepal for investment. Nepal Company Act, 1993 was issued to organize and run the business of the nation systematically under the administration of late Prime Minister Juddha Shamsher Rana.

Biratnagar Jute mills Ltd was incorporated as a joint-stock company on 30 Ashadh, 1993 B.S. for the first time.

But New Company Act was framed in 2007 B.S. avoiding the weakness existed in the said Act and in course of amending and reforming, the Act was amended in 2018 and in 2019. But it was repealed in 2021 and Company Act, 2021 came into force. 

The Act was also amended eight times. In 2053, Company Act, 2053 was framed and issued by repealing the Act, 2021. In 2062, Companies Ordinance, 2062 was issued for the time being. 

Now the Companies Act, 2063 has been issued. In addition to this Act, the Insolvency Act, 2063 has also been issued for the first time in Nepal in respect of the liquidation of an insolvent company.The Company Act contains 21 chapters and 188 Sections and the Insolvency Act contains 9 chapters and 77 Sections.

Meaning of Company

In simple terms, a company means a group of persons associated together for the attainment of a common goal. The company is a voluntary association of persons formed to run business activities for fulfilling the objective of earning profits by collecting capital and selling shares. 

So the company is an association incorporated by a person or some persons interested to carry on any business or industry or mercantile activity or other lawful trade and the objective is to earn profit by money or money’s worth contribution to the company.

Under Section 2 (a) of the Company Act, 2063 defines the company as “Any company incorporated under this Act.”

Justice James defines the company as “A company is an association of persons united for common object.”

Hence a company is a legal institution the formation of which is known as incorporation that is resulted by the registration in the competent authority as prescribed by the law of the nation. With the incorporation of the company the association of the people gets the status of the company.

A company can be incorporated as a private or a public company. It is clear from the provision of Section 3(1) of the Company Act, 2063, that a single promoter is adequate for the purpose of establishment of a private company but the provision made in Section 9(1) reads that number of the shareholders should not be more than 100.

Similarly, as stated in Section 3(2), at least 7 promoters are needed to incorporate a public company and according to Section 9(2), there is no maximum limit of numbers of the shareholders in the public company.

Moreover, according to Section 166(3) of the Act, in case of a company not distributing profits, at least 5 promoters are necessary but there is no upward limit of members after incorporation of such a company. However, the number of members must not be less than 5.

According to the words of the American Chief Justice Marshall, “A company means person, artificial, invisible, intangible, and existing only in the eye of law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or identical to its very existence.”

Lord Justice Lindley defines, “A company is a voluntary association or organization of many persons who contribute money or money’s worth to common stock and employs it in some trade or business and who share the profit or loss arising there form.”

From the above definitions, a company is an artificial legal person, having an independent legal entity or a corporate body, and a common seal, with perpetual succession, capital decided into transferable shares with limited liability.

Essential Characteristics of the Company

The principal essentials of the company are as follows;

Voluntary association

The company is an association of some persons or groups of persons who gathered with their free consent or voluntarily for achieving a common goal.  As stated in the Companies Act, 2063 a company depending upon the mutual consent of its members is formed by the selection and common consent of them.

Independent Corporate Body

The eye of law sees the company as a person. The promoters are the persons who constitute it. The company is always different than its shareholders and promoters. The business goes under the control of the company after its inception. The company is allowed to gather capital and own property by itself. 

The shareholders are not part or co-owner of the company. The shareholders are entitled only to have some rights in accordance with the law. The company is neither an agent nor a trustee of the shareholders. It is a corporate body and it is operated with the support and brain of the natural person.

Limited liability

A company as a legal person is the owner of its assets and is liable to its all the debts. Member’s liability is confined only on their shares which they have paid or they have to pay. The shareholders are eligible to take benefits in accordance with the investment, in their shares and are in the position to bear losses only losing their investment, not furthermore.

Perpetual succession

The company as a legal and artificial person has perpetual succession or continuous existence. The life and death of the company do not depend on its members, that is to say, alteration or death or insanity of shareholders or directors does not affect the existence of the company. The company does its work unless it gets dissolution in accordance with the law. So the company once incorporated never dies except in the case of dissolution. 

Separate property

A company is always split and separate from its members. The company is capable of acquiring, possessing, selling, disposing of or dealing with in any other manner of its movable or immovable property in its own name. The company becoming an owner of its capital and assets enjoys all the rights as individuals. 

The capital and assets of the company are generated from the money invested by its own members. The members of the company do not become the owner of the company’s property because the company itself is the owner of the whole property that belonged to it.

Transferable shares

The company’s capital is divided into small parts is called shares and shares are subjected to transfer. In the case of a public company, the shareholders can transfer their shares or debentures like movables property whenever they like. But the shareholders of a private company cannot freely transfer shares or debenture ownership whenever they like. Except as provided in the MA and AA any shareholder of such a company cannot transfer their ownership in securities.

Capacity to sue and be sued

In necessity, a company can file a case against the person bringing injustice to it and other persons can also sue against it. 

Common seal

A company is an artificial person who has a separate common seal to do its duty work. Such a seal is equivalent to the signature of the company. So, no document can get legal reorganization without seal. It is used as authenticating documents.

Professional management

The company ensures a room for professional and efficient managers therein. Shareholders are competent to take part only in their general meetings and not entitled to interfere in the day to day affairs of the company. So the managers can continue it with new dimensions and experiments of modern managerial methods. 

  

Incorporation of a company

Generally, the term incorporation of a company means the combination of promoter’s decision to establish and make registration of the company. To form a business and converting into the legal organization is called incorporation of company or business.

Registration is the process that gives legal status to the company. 

When a person desires to enter into enterprise or business forming a legal institution, he can have three options, namely first, to form a private firm, second to constitute partnership firm with the help of others or the third to enter the business through a company.

The person willing to run the business under the aegis of a company gets diverse facilities in the field of liability, legal status, personality, constitution, acquisition of property, and the like.

Process of Incorporation

In the case of Nepal, no person can undertake any transaction through any firm or an institution using the word company unless he or she will register the undertaking under the Company Act. It is not sufficient only to desire to run any business or enterprise without incorporation. Following are the major steps of incorporation of the company in Nepal;

Application [Sec. 4 (1) & (2)]

The persons who are engrossed to incorporate the company firstly required to apply for registration. The person eager’s to incorporate a company, whether private or the public must submit an application in the prescribed format in the office. The following document must be presented along with the application-

• The Memorandum of Association (MA) and Articles of Association (AA) of the proposed company,
• In the case of a public company, a copy of the agreement made between the promoters prior to incorporation of the company, if any,
• In the case of the private company, a copy of the unanimous agreement, if any,
• Permission or license required prior approval or permission from any authority,
• A certified citizenship certificate or certificate of incorporation and decision of BD, if the promoter is a corporate body,
• Permission of the concerned authority to conduct business in Nepal, if the promoter is a foreign individual or a company or an agency,
• In the case of the foreigner, the document evidential to prove the citizen of the country, and
• In case of a body incorporated in other countries, the certificate of incorporation and other documents of incorporation.

But, if the promoters agree with the articles of association prescribed for incorporation, a company having a single promoter or a single shareholder need not require submitting articles of the proposed company.

Registration fee [sec 4(1)]

The act has mentioned the word ‘fee’ but has not prescribed in detail. However, at the time of submitting the application, necessary fees must be submitted to the office along with the application. 

In case of failure of depositing fees, the office can refuse to register the application. The fee for registration is subject to the capital structure of the company, the government fixes fees from time to time by publishing a notice in the Nepal Gazette.

Inquiry and refusal to the registration [Sec. 5(1) & 6(1, 2)]

Upon receipt of the application for incorporation of the company, the Registrar must, within 15 days of the receipt of the application, investigate necessary things in respect of the application. The Registrar has the right to refuse the register a company if he finds the following circumstances during the inquiry of investigation over such an application.

• If the name of the proposed company is identical with the name of any other the company previously registered and is in existence at present or having a similar name creating confusion.
• If the name or objective of the proposed company seems contrary to the existing laws or to the improper or undesirable from the viewpoint of public interest, decency, etc., or it conveys the sense of the criminal act,
• If the name of the proposed company seems identical or may create confusion with the name of a company deregistered under this Act or declare insolvent under the existing law and 5 years of such deregistration or insolvent has not elapsed.
• If the requirements for incorporation of the company under this act are not fulfilled.
• If the Registrar refuses to register a company relying on any of the above circumstances, the applicant must be given notice mentioning the reasons for refusal within 15 days of the receipt of the application for this propose.

Certificate of registration or incorporation [Sec 5 & 10]

As stated in Section 5(1) and (2) of this Act, the Registrar, after making necessary examination and finding the application reasonable must register the company within 15 days of the receipt of the application for the incorporation and provide an incorporation certificate of the company to the applicant in the prescribed format. After registration, the company is deemed to have been incorporated. 

In addition, Section 5 (3) has made a provision that the company registration book must be maintained in the prescribed format for the evidence of incorporation of the company.

According to the provision made in Section 10 (b), the company incorporated as mentioned above must, in case of a private company, mention the words “private limited” and a public company must mention the word “Limited” after the names respectively.

 

Commencement of business [Sec. 63 (6), (1-3)]

After obtaining an incorporation certificate of the company, step as to commencement of business arises. But all types of companies cannot commence their business as soon as they are incorporated. As per the provision of the Act, a private company generally can commence its business as soon as it gets a certificate of incorporation but a public company cannot commence its business as soon as it gets its certificate of incorporation.

According to this, a public company must obtain a certificate of commencement of business from the office before commencing business. For obtaining this certificate, the promoters must submit an application to the office with the information that they have already paid the full number of shares undertaken to be subscribed by them. After receiving an application, the office grants approval to the company for the commencement of its business.

A certificate of incorporation or registration VS commencement of business

Basis of Distinction	Certificate of Incorporation	Certificate of Commencement
Requirement	All the companies need such a certificate.	It is needed only for public companies.
Purpose	To register a company is its motive.	To enable a public company to commence business is its motive.
Time	At or during the establishment of the company, it is taken.	After the incorporation of the company it is taken.
Payment of Fee	Payment of the fee is needed to have it	The payment of fees is not needed to have it.
Submission of Document	The submission of a memorandum, articles of association, etc., are needed to get this certificate.	To avail certificate of commencement the document certifying payment for shares by the promoters must have been submitted to the OCR.

References

Mishra B.P. (2014), 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