Class Notes

BBIS 2073

Company

Meaning

A company is a business vehicle different from private and partnership firm or NGO and
INGO. It is business vehicle provided by the law of the state to run the business

The Company Act of Nepal 2063 doesn’t give clear definition of company that says
company means “a company that is incorporated under this Act.

The Company Act of Nepal 2063 doesn’t give clear definition of company that says
company means “a company that is incorporated under this Act.

Conventionally Company can be understood as an association of number of people to

carry out business activities for gaining profit. It is legal person created and dissolved
only through legal process. Generally it endowed with the benefit of limited liability

However, changing trend in company law and practice has made traditional/conventional
understanding of company obsolete such as

1. Association of people: one-man company can also be establish

2. Economic purpose: Profit not distributing company
3. Limited liability: Unlimited Liability company

Applicable laws on for Company

1. Company Act 2063

2. Other special Acts for prior approval such as Bank and Financial Institution Acts
2063, Foreign Investment and Technology Transfer Act 2049 etc
3. Other special Acts for subsequent approval of license such as insurance act etc.

Types of company

There are various types of company. Among which some important types of company
can be listed below

1. Private company

Private company is a business company owned either relatively small number of

shareholders or company members which does not offer or trade its company stock
(shares) to the general public on the stock market exchanges; it can commence business
immediately after obtaining certificate of incorporation.

Moreover, private company is closely held company this means that, in most cases, the
company is owned by the company's founders, management or a group of private
investors. They are not required to disclose their financial information to anyone since
they do not trade stock on a stock exchange.
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The popular misconception is that privately-held companies are small and of little
interest. In fact, there are many big-name companies that are also privately held

It can further be categories into two categories they are

1. One man private company – Only one shareholder is there in the company.

2. Multi man private company – The number of shareholder in this type of company are
minimum 2 and maximum 50

2. Public Company

A public company is a company that has sold a portion of itself to the public via an initial
public offering of some of its stock, meaning shareholders have claim to part of the
company's assets and profits.

The main advantage public companies have is their ability to tap the financial markets by
selling stock (equity) or bonds (debt) to raise capital (i.e. cash) for expansion and
projects.

Public company required making available of the earnings reports (among other things)
of the company to shareholders and the public.

To incorporate this type of company in Nepal at list 7 promoters and 10 million paid up
capital should be there. The company law of Nepal has required bank and financial
institution to be incorporated in the form of public company.

These types of company are more regulated than the private company at it has raise
money/capital from the public

It can also be categories into two categories

1. Listed Public Company – Companies that are listed in Security Exchange Board
2. Unlisted Public Company – Public Companies that are not listed in Security
Exchange Board

3. Profit not Distributing Company

Profit not distributing company is a new concept in company law domain. This type of
company is formed for public welfare. Health, education, sanitation are the sector for this
type of company. The minimum number required to form such company is five. Unlike
public and private company the investor of this company are not treated as shareholder.
They are called member. This type of company may earn the profit but do not distribute
to its investor. Generally investor can get salary if they are employee of a company. This
type of company is formed on Health, Education or other philanthropic sector. It can get
donation, gift and charity.
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BBIS 2073

4. Foreign Company

Company that are registered outside the territory of Nepal is called foreign company. It
may be both private or public. This type of company takes birth from the laws of other
country. Two modes are there through which foreign company can enter in to Nepalese
territory.

a. Branch Office
b. Contact Office

5. Holding Company

A type company that directly or indirectly controls over the formation of the board of
directors or holds majority shares of the company then company is treated as a holding
company. Again this type of company can be private or public both.

6. Subsidiary Company

If there is direct or indirect control over the formation of the board of directors or holds
majority shares of the company by another company (holding company) then company is
treated as a holding company.

Major features of company are

Related Provision - Company Act 2063 > Section 6-8, Section 10, Section 42, Section
167

1. Separate corporate personality

A company is a legal (artificial) person distinct from its member which is created by law

It is capable of enjoying rights and duties which are not he same as those enjoyed or
borne by its member

Corporate personality is the basic attribute of any company. All other feature of the
company is simply the expression of this fundamental attributes

Even a single shareholder company has a distinct personality from its shareholder

As a person it has following basic rights

a. Rights to acquire, own, use, sell or otherwise manage the property in its own
name
b. Right to make agreement and enforce it
c. Rights to sue and can be sued
d. Perpetual succession
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BBIS 2073

As a company has a separate personality

Members may come and go, but a company remain unmoved unless dissolved by law

Shareholders/members are not the part owner of the property of the company and they do
not have any direct proprietary rights to the properties of the company

A company can take action to enforce its rights and can be sued for the breach of its legal
duties.

2. Limited Liability

The liability of shareholder is limited to the face value of shares that they have subscribed
or agreed to subscribed

Shareholder are not require to settle the debts and liabilities of the company from their
personal or family property

However, the limited liability doesn’t apply in following circumstances

a. Where the shareholder or director has given personal guarantee for the loan taken
by the company
b. Where any director or shareholder is liable to pay fine or bear other punishment
for the breach of duty prescribe by law

Example

Zenith Pvt. Ltd. has obtained loan of Rs. 2 million from Birat Bank Ltd. against the
collateral of company. No shareholder or director has given any personal guarantee. The
company ran into difficulties and sustained loses. As per the decision of the shareholder
the company was dissolved. The net value of the assets of the company was only Rs.
100000. Here the Birat Bank cannot claim over the personal property of the shareholder.

3. Transferable share

Share of a company are like movable property. Thus, the share of the company are freely
transferable i.e. can be traded However, the company may provide for restriction in its
MOA and AOA on the transferability of shares

Such as AOA of private company may restrict on the transferability of share: such as

1. Requirement of prior approval from BOD,

2. Requirement to sell the share to the existing shareholder
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BBIS 2073

Law may also provide such restriction. For example, Promoter of public Company cannot
sell their share until the first annual general meeting is held and the called amount is fully
paid up under the Company Act 2063.

Shares of the listed public company can freely be sold and bought in the security market.

Management under the Board

Generally, there are two principle organs in every company

A. General Meeting
B. Board of Director

In a company BOD is an executive body charge with the responsibility of implementing

the decision of the General Meeting and managing day to day operation of the company

So, generally, there is a separation between ownership and management in the company.
Shareholders/members are the owner of the company whereas the board of director is the
principle managing body

Cases for Discussion-1

Mr. Salomon had for many years carried on a prosperous business as a leather merchant.
Afterwards, he decided to convert it into a limited company and for this purpose Mr.
Salomon & company Ltd. Was formed with his wife and five other children as member
and Mr. Salomon as managing director. The company purchased the business as a going
concern for 39000 pound. The price was satisfied by

a. 10000 pound in debenture,

b. 20000 pound in fully paid 1:1 shares
c. Balance in cash

Mr. Salomon subscribed 20001 shares and rest 6 share were subscribe by his six family
members. The company ran into difficulties and it went into liquidation. The asset of the
company were sufficient to settle the debenture but nothing left for unsecured creditor

The unsecured creditors filed the petition with the court arguing that they should be paid
first.

Questions

1. Was Salomon entitled to recover his loan as a debenture holder before other
unsecured creditor?
2. Was Salomon personally liable to pay the unsecured creditor
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Held

The company is at law as different: person altogether from the subscribers… and though
it may be that after the business is precisely same as it was before, and the same person
receive the profits, the company is not in law the agent of subscribers of trustee for them.
Nor are the subscribers, as members, liable in any shape or form, except to the extent and
in the manner provided by the Act.

Salomon v. Salomon & company Limited, Cited from Gower and Davies’ principle of
Modern Company law, 7th edition p. 27

Case 2

Mr. Pandey was the managing director of Nepal Petroleum Company Limited. The
company was to pay Rs. 540000 as income tax to the Tax Office. The Tax Office wrote a
letter to the Land Tax Office to restrict the transfer (rokka) of the land registered in his
and other family member’s name. According The Land Tax Office restricted the transfer
of the land

Mr. Pandey objected the act of the Tax Office and filed the petition with the court to
release the land.

(Mr. Piyush Raj Pandey v. Land Tax Office, Kathmandu, Cited from company Kanoon
2nd edition, by Bharat Raj Upreti)

Questions:

1. Was Mr. Pandey liable to pay the said tax to the tax office from his personal
property
2. Was the act of restriction by the Land Tax Office is lawful?