Kathmandu University School of Management

Balkumari, Lalitpur

Corporate Law

Assignment 2

Submitted To

Mr. Sharan Shankar Paudel

Faculty of Corporate Law in Nepal

Submitted By

Sulakshana Dhungel

BBA Year 3 Sem 2

177028

Group C

Date: 01-05-2020
1) BHP Private Limited has obtained a loan of Rs.3 million from XYZ Bank
Limited against the collateral of company. No shareholder has given any
personal guarantee but Managing Director has given guarantee for 1 million.
The company ran into difficulties and sustained losses. Bank issued a letter to
the company for recovery of the loan. At the time being company has only net
value of the assets Rs.100000. Discuss and answer the following question with
reason and legal ground.
Who is liable for loan Managing Director or company itself and why?

In the given case, BHP which is a private limited company has taken a loan of Rs. 3
million from XYZ Bank against the collateral of the company on which Rs 1 million
has been personally guaranteed by Managing Director but no shareholders have given
any personal guarantee.
Companies Act 2006 Chapter 6 Section 104 titled “Company to be bound|,
subsection (1) says that “Any act done or action taken by or document signed by
at least one director authorized by a company or any person authorized to act
for the company shall be valid and binding for the company”.
As mentioned above, both the company and the director will be liable to pay the loan.
Since the MD personally guaranteed for Rs. 1 million by acting in excess of his
authority, he is liable to pay for the pledged amount given that he has not been
ratified by the general meeting for this act. Hence, the remaining amount up to the
current asset value is liability of the company which is Rs.100000 but the
shareholders do not have to pay the loan back.
2) Mr. Auditor was appointed and fixed his remuneration by 10th Annual General
Meeting of EMB Company Limited. During the time of auditing Mr. Auditor
asked evidence of transaction with Chairperson. Chairperson issued a letter of
termination with Board decision to Mr. Auditor instead of providing such
document stating that Mr. Auditor concealed his disqualification. Discuss and
answer the following question with reason and legal ground.
Whether the decision to terminate Mr. Auditor in his term of office was lawful?

In the case, Mr Auditor has been issued a letter of termination by the Chairperson
when Mr. Auditor asked for evidence of transaction even though no breach by the
Auditor has been mentioned.
According to the Section 119, sub section 1, of Company Act 2063, “No auditor
appointed shall be removed pending his completion of audit of accounts of any
financial year for which he/she was appointed as the auditor.” Section 112 of the
Company Act 2063 (2006) sub-section (1), gives the conditions for
disqualification. Any person who is a director or advisor who is entitled regular
remuneration or cash benefit from the company, or a person involved in the
management of the company or a partner of any of them or/and employee of any
of such partners or a close relative of a director or partner, out of them, or an
employee of such relative is considered disqualified. Also, a debtor who has
borrowed money from the company in any manner and has failed to pay any
dues payable to the company, along with his/her close relatives. A person who
has been sentenced to punishment for an offense pertaining to audit or is
declared insolvent is also considered disqualified. Even the shareholders of the
company holding one percent or more of the paid up capital of the company or
his close relative isn’t suitable to be hired as an auditor of the firm, and neither
is allegedly corrupted, fraud or a criminal offender. Along with the above
situations, any person who works, whether full time or part time, for any
governmental body or any other body owned fully or partly by the Government
of Nepal or any other company or a partner of such person or a person who is
working as an employee of such partner or a person who is authorized to sign
any documents or reports to be prepared by the management of the company is
also considered disqualified. The Board and the Chairman needs to provide
prior information as per the Chapter 8 Section 119 Sub-Section 2 to the Nepal
Chartered Accountants Institute and the concerned regulatory authority about
the removal of the auditor by providing reasons related with breach of code of
conduct, act against interest of company, act contrary to the prevailing law by
the auditor which is not found to be the case in this given question.
In the case, any kind of violation by the auditor has not been mentioned. The auditor
has requested for the transaction lawfully by keeping the interest of the company in
mind. Moreover, even if the auditor breaches the code, prior information has to be
given to Nepal Chartered Accountants Institute with the permission of the regulatory
authority. Hence, the act of the chairperson to terminate the auditor is lawfully wrong.
The auditor has not breached any code and the fiscal year is still ongoing. Moreover,
Section 119 subsection 3 also provides provision for the auditor to defend himself. To
conclude, the action of the chairperson to issue termination letter to Mr. Auditor is
unlawful.