Law Term Paper on “Incorporation of a Corporate Body”

Submitted to
Hari Saran Chakun Sir

In partial fulfillment of the requirements for the

Completion of
Legal Environment for Business in Nepal

By
Ritesh Shakya
Roll no: 19332

8th April, 2019

Historical background on Company Law

Although some forms of companies are thought to have existed during Ancient Rome and

Ancient Greece, the closest recognizable ancestors of the modern company did not appear until

the 16th century. With increasing international trade, Royal charters were granted in Europe

(notably in England and Holland) to merchant adventurers. The Royal charters usually conferred

special privileges on the trading company (including, usually, some form of monopoly).

Originally, traders in these entities traded stock on their own account, but later the members

came to operate on joint account and with joint stock, and the new Joint stock company was

born.

Early companies were purely economic ventures; it was only a belatedly established benefit of

holding joint stock that the company's stock could not be seized for the debts of any individual

member. The development of company law in Europe was hampered by two notorious "bubbles"

(the South Sea Bubble in England and the Tulip Bulb Bubble in the Dutch Republic) in the 17th

century, which set the development of companies in the two leading jurisdictions back by over a

century in popular estimation.

Companies, almost inevitably, returned to the forefront of commerce, although in England to

circumvent the Bubble Act 1720 investors had reverted to trading the stock of unincorporated

associations, until it was repealed in 1825. However, the cumbersome process of obtaining Royal

charters was simply insufficient to keep up with demand. In England there was a lively trade in

the charters of defunct companies. However, procrastination amongst the legislature meant that

in the United Kingdom it was not until the Joint Stock Companies Act 1844 that the first

equivalent of modern companies, formed by registration, appeared. Soon after came the Limited
Liability Act 1855, which in the event of a company's bankruptcy limited the liability of all

shareholders to the amount of capital they had invested.

The beginning of modern company law came when the two pieces of legislation were codified

under the Joint Stock Companies Act 1856 at the behest of the then Vice President of the Board

of Trade, Mr. Robert Lowe. That legislation shortly gave way to the railway boom, and from

there the numbers of companies formed soared. In the later nineteenth century depression took

hold, and just as company numbers had boomed, many began to implode and fall into

insolvency. Much strong academic, legislative and judicial opinion was opposed to the notion

that businessmen could escape accountability for their role in the failing businesses. The last

significant development in the history of companies was the decision of the House of Lords in

Salomon v. Salomon & Co. where the House of Lords confirmed the separate legal personality of

the company, and that the liabilities of the company were separate and distinct from those of its

owners.

Therefore, on the basis of various cases arising the amendments were made to the existing

Corporate law which ultimately have led to the formation of Company Act 2006 A.D.

The concept of Company was for the first time established only in 1993 B.S. (1936 A.D.) under

which Biratnagar Jute Mill was established in 1993 Ashadh 30. Accordingly, Nepal Bank Ltd

was established in 1994 under the Nepal Bank Act, 1994 (1937 A.D.). Subsequently Company

Act 2007 B.S. was enacted by repealing Act of 1993 B.S. This Act was amended in 2018 B.S.

and 2019 B.S. two times and was replaced by the Company Act of 2021 B.S. The Act of 2021

.B.S. is also replaced in 2053 B.S. with incorporation of modern liberal economic principles.
This Act has been replaced by the Companies Act, 2063 (Kartik 17, 2063 B.S./3 rd Nov. 2006

A.D.) It is amended for the first time in Baisakh 19, 2074 B.S.

Meaning of Company

Company denotes a combination or association of more than two persons or a group of persons

to carry out a business. It generally denotes sharing of the risk as well as profit among the

members. The company is a highly flexible form of vehicle for carrying on business. Company is

the legal entity that makes your aim of earning possible through business. To get legal authority

anyone must register the company in Company Register office of Nepal. Company as being legal

entity that allowed group, individual and team of people to apply as firm as an independent legal

organization in Nepal and permit them to produce, sell, service and make benefit. Nepalese

legislation recognized company as independent legal person which has right to sue and being

sued, secured own property, hire employees and make loan in its own name.

Nepalese citizens as well as foreign people can register any company in Nepal as per their

necessity but that should bound by legal criteria of Nepal. Nepalese company has permits any

people can register the following company in Nepal.

 Private company

 One Man company / Sole proprietorship

 Public company

 Not Profit making company

According to the Sec. 2 (a) of the Companies Act, 2063 of Nepal, ‘Company’ means a company

incorporated under this Act.

Companies incorporated under the Companies Act are mostly business companies but they may

also be formed for promoting art, charity, research, religion, commerce or any other useful

purpose. The corporate device, therefore, is one form of associated enterprise.

Thus the meaning of company can be summarized as follows:

 Company is a group of people working together for business, sharing risks as well as

profit it gains from business.

 Company is also known as a voluntary association or organization of many persons who

contribute money or money’s worth to a common purpose to carry out some trade or

business who share the profit and loss there from.

 Company is an association or persons for carrying on commercial or industrial

enterprises, with a mutual purpose.

 Company is an establishment or institution formed under law and legislation to carry on

commercial enterprises. This includes corporations, and other associations which usually

carry on some form of economic or charitable activity.

Incorporation of a Corporate Body

Establishment or registration of the company or a corporate body as a legal person or legal entity

is known as “Incorporation of a company”. To carry business under the name of a company it is

mandatory to register them first. According to S.5(5) of the Companies Act, 2063 a person

cannot use the name of company to carry any kind of transaction by the name of any institution

or firm unless registration of the company is done with that name. Thus registration of a

company is compulsory to carry any business under its name.

The process regarding registration of a company has been prescribed in Sections S. 3, 4 and 5 of

the Companies Act. The first amendment made in 2074.1.19 allows incorporation of a company

via electronic transmission with digital recording. The electronic registration of the company has

made it easy computer based process. We do not necessarily need to visit time and again to

company registration office to register the company. Checking the name, selecting the name,

purposing the name and submitting the document it is easy and simple process through internet.

Any person desiring to incorporate a company which may be either private, public or company

not distributing profit under chapter IX can incorporate them (S.3). The relevant provisions for

the incorporation of company under Companies Act, 2063 are outlined below:

1. Number of Promoters

For the incorporation of public company, there should be minimum of seven promoters.

However, there is no requirement of maintaining minimum limit, if a public company

incorporate another public company. Further, no any provision setting minimum number of

promoters is made for incorporation of private companies.

2. Paid-up capital of the Company

The minimum paid up capital of public company shall be ten million rupees, except as provided

in the prevailing law or in a notification by Government of Nepal in the Nepal Gazette. However,

there is no any requirement of minimum paid up capital for private company.

3. Name of the Company

A person incorporating the company, at first, should determine whether the proposed name is

available for registration. The registrar shall reject the application if the proposed name is

identical with the name of existing company/company whose registration has been

cancelled/insolvent company and 5 years have not been after cancellation of registration or

insolvency or if it resembles the name of the existing company as it might cause misleading.

4. Application to the Registrar

Any person desirous of incorporating a company shall make an application to the registrar office

in such format and accompanied by such fees as may prescribed under the Company Act.

5. Documents to be submitted

Following are the documents required to be submitted along with the application to the registrar:

 The Memorandum of Association(MOA) of the proposed Company,

 The Article of Association(AOA) of proposed company (But if the promoter agrees to

accept the AOA in the format prescribed for the incorporation of the company with a

single promoter of single shareholder, then the AOA shall not be required to be

submitted),

 In case of a public company, a copy of agreement, if any, entered into between the

promoters prior to the incorporation of company,

 In case of private company, a copy of consensus agreement, if any, entered into,

 Where prior approval or license has to be obtained from anybody under the prevailing

law, such approval or license, for example: approval of Nepal Rastra Bank before

incorporating Banking company,

  Where the promoter is a Nepalese citizen, a certified copy of citizenship certificate and

where promoter is corporate body, a certificate of registration, Board resolution and

major documents regarding incorporation,

 Where promoter is foreign person or company or body, permission obtained under the

prevailing law to make investment or carry on business or transaction in Nepal,

 Where promoter is foreign individual, a document proving the country of his citizenship,

 Where promoter is a foreign company or body, a certified copy of the incorporation of

such company or body and major documents relating to such incorporation.

6. Registration of Company

The Registrar shall, after making necessary inquiries, register such company within 15 days of

making of such application and grant the company registration certificate to the applicant, in the

format as prescribed. The company shall be deemed to be incorporated on the date of registration

of company.

After the incorporation of a company, the matters contained in the MOA/AOA will be binding

on the company and its shareholders as if these were the provisions contained in separate

agreement between the company and every shareholders and among its shareholders (Concept of

body incorporate and corporate independence).

7. Power to refuse to register company

On certain circumstances mentioned below arises, the Company Registrar may refuse to register

a company. These circumstances are:

  If the name of the proposed company is identical with the name or trade mark of the

existing company misleading the existing company.

 If the name or object of the proposed company is contrary to the prevailing law or

appears to be improper or undesirable in the view of public interest, morality, decency,

etc. or reflects motive of a criminal act.

 If the name of the proposed company is identical with the name of a company of which

registration has been cancelled pursuant to the Act or that of a company which has been

insolvent under the law or so resembles such name as it might cause misleading and a

period of five years has not expired after such cancellation or registration or insolvency.

 If the requirements for the incorporation of a company under the Act are not fulfilled or

complied as per S.4 and 11.

8. Appeal against the refusal

If the Office refuses to register any company in any circumstances as said above, it will give

notice to the applicant no later than 15 days from the date of application accompanied by the

reasons therefore. And, If the office refuses to register any company as said above or fails to give

a notice, a person who is not satisfied may file a complaint in the court within 15 days.

Features of the incorporated body

1. Separate legal entity

A company is a creation of law and is called an artificial person. Negatively, it means that the

company is not a natural person. Positively, it implies that a company has an entity of its own
recognized by law quite distinct from that of the natural persons forming it. It is created for the

purpose of enabling a group of persons to conduct some activity in a more convenient way than

would be possible by retaining their identity as individuals. Although invisible and intangible, as

a legal person, the company enjoys almost all the rights of a natural person. It has the right to

enter into contracts and own property. It can sue and can be sued.

Case related to this feature: Salomon Vs Salomon & Co. (1897)

Salomon had a shoes business, which was in proprietorship form. But as his sons become very

interested to be involved into the company. He incorporated a company named “Salomon Co.ltd”

by giving each share to his family members but holding the majority of the shares by himself.

His new company acquired the old one and he established himself as the secured creditor,

majority shareholder as well as the director of the company.

The real problem started after a year when the company’s business saw a downfall. Eventually

he had to liquidate the company, at this time the company’s assets valued 6000 pounds whereas

its liabilities were 16000 pounds. In this situation, the company’s unsecured creditors claimed

their rights over the assets. Their reason was as Salmon was the majority shareholder, creditor as

well as the director, therefore they said Salomon himself was the owner of the company and

hence his credit amounts should not be paid first.

But court didn’t recognize Salomon and Salomon Co. Ltd to be the same entity hence the claim

of unsecured creditors was waved off.

2. Limited liability

The liabilities of a shareholder of a company are limited. A person, by buying shares in a

company, acquires an interest in the company and is at liberty to dispose of these shares
whenever he likes. A shareholder is liable only to pay for his own share in the company. The

creditors of a company are not creditors of individual shareholders and a decree obtained against

a company cannot be executed against any shareholders. It can only be executed against the

assets of the company.

3. Perpetual Succession

A company has perpetual succession. The death or insolvency of a shareholder does not affect its

existence. The right given to the shareholders to transfer their shares without affecting the

position of the company gives the company continuity. As a natural consequence of

incorporation and transferability of shares, the company has perpetual succession.

4. Separate Property

A Company can own, enjoy, and dispose of a property in its own name. While the shareholders

contribute to the capital and assets, the company is the rightful owner of such assets and capital.

Therefore, even if the owner is the majority shareholder he/she should not consider, Company’s

property as his/her own.

Case related to this feature: Mr. Macaura vs Northern Assurance Co. Ltd

Mr. Macaura was the owner of timber estate. He sold his all timber to the Irish Canadian

Sawmills Ltd in which he had almost all the shares making him the owner of the company. He

was also an unsecured creditor for £19,000. He got insurance policies in his own name rather

than company’s name with Northern Assurance covering for fire. Sometime after insurance the

timber caught fire and when he claimed the insurance he was refused. Defendant’s claim was as
Mr. Macaura was not the real owner of the timber, even if he paid the premiums he is not entitled

to receive the insurance amount. This case was taken to house of lords and the lords gave their

verdict on the case as:

 Mr. Macaura had no insurable interest in the timber as it belonged to Irish Canadian

Sawmills Ltd.

 There was no any contract making him responsible to hold the timber on the behalf of his

debt.

 What he owned was Debt and shares which didn’t caught the fire, this showed that he had

no legal/equitable relation to timber.

 His relation was with the company not with the goods.

Therefore, Mr. Macaura didn’t get his insurance amount as it was company’s property not his.

5. Capacity to sue and be sued

As a separate legal entity, an incorporated company has the right to sue other people in addition

to companies. In turn, it can be sued by other companies and people. However, the managing

directors and other directors are not liable to be sued in the name of the company.

Case related to this feature: Foss Vs. Harbottle (1843)

Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria Park

Company". The company had been set up in September 1835 to buy 180 acres (0.73 km2) of land

near Manchester. The company had started its operation and in the Annual general meeting the

financial statements as well as the report were not shown to the minority shareholders. Following
this, the claimants alleged that property of the company had been misapplied and wasted and

various mortgages were given improperly over the company's property. The defendants were the

five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead,

Richard Bealey).

The majority shareholders were charged of selling their own lands to the company in inflated

rates as well as they were paying themselves a high rent for the lands that had been acquired by

the company. The case went on to the court and minority shareholder sued the case against the

directors.

But the court dismissed the claim of the plaintiff stating that company after incorporation

becomes a separate legal entity and has its own operations and records. Therefore, company

itself is to be sued rather than the directors involved in it.

6. Transfer of shares

"Articles of Association," which lists the primary purpose of the business and its location, along

with the number of shares and class of stock being issued, if any defines the transferability of

shares among and outside the shareholders.

7. Share capital

As per the Company Act 2063, the minimum paid up capital of public company shall be ten

million rupees, except as provided in the prevailing law or in a notification by Government of

Nepal in the Nepal Gazette. However, there is no any requirement of minimum paid up capital

for private company.

 8. Company seal

The company seal is a tool used to stamp or emboss company's important documents in order to

show the document is certified by, and agreed upon by, the Board of Directors of the

company. The company seal contains the company’s name, its year of incorporation and the state

in which the company was filed. The corporate seal can be said as the official signature of the

company.

9. Professional management

Board of Directors as well as MD/Manager/CEO carry out the operation of business as per the

MOA/AOA with professional management and expertise. Section 96 of the Companies Act,

2063 permits the appointment of the Managing Director and Management of the Company.

10. Publication of financial statements

An incorporated body is needs to maintain a proper book of accounting and has to publish

financial statements and report every fiscal year. It helps shareholders to track the progress and

status of the company.

11. Winding-up

The winding up or liquidation of a company is the process by which a company’s assets are

collected and sold in order to pay its debts. Any money remaining after all debts, expenses and

costs have been paid off are distributed amongst the shareholders of the company. When the

winding up has been completed, the company is formally dissolved and it ceases to exist.

Broadly speaking, a company can be wound up in one of two ways. First, the Court can
compulsorily wind up a company. Secondly, the shareholders or the creditors of the company

can themselves apply to wind up the company in proceedings known as “voluntary winding up”.

12. Lifting the corporate veil

The principle of veil of incorporation is a legal concept that separates the personality of a

corporation from the personalities of its shareholders and protects them from being personally

liable for the company’s debts and other obligations. While a company is a separate legal entity,

the fact that it can only act through human agents that compose it, cannot be neglected. Since an

artificial person is not capable of doing anything illegal or fraudulent, the façade of corporate

personality might have to be removed to identify the persons who are really guilty. This is

known as lifting of the corporate veil.

13. Ruled by MOA/AOA of the company along with prevailing law

MOA and AOA are two types of documents common in forming a limited company. Both

documents are necessary to form such a company as well as a reference document to provide

information for the company’s stakeholders, shareholders, and potential investors. When forming

a limited company, both documents are deposited to the company’s registrar, who approves the

incorporation.

The MOA stands for Memorandum of Association. It outlines the nature of a business entity.

The memorandum includes the company’s name, registered company address, the company’s

aims and objectives, limited liability clause, share of capital, and other related company

information.
The Articles of Association, also known as the Articles of Incorporation, are another important

company document. this document articulates the way the shares are distributed, voting rights of

each class of stock, valuation of intellectual rights, activities of directors including appointments

and meetings, management decisions, and many other intricate and internal processes of a

company.

The document is also designed for shareholders and potential investors in that it outlines the

rules and regulations for internal management of a business. Another characteristic of this

document is that it spells out the types of power, responsibilities, and authority of the elected

directors of the company.

Therefore, in this term paper I have discussed:

1. History of the Company law

2. Definition of the company

3. Process of Incorporation of a Corporate Body in Nepal

4. Features of the Incorporated Body and cases related to it.

Which summarizes the overall aspects of “Incorporation of the Company”.

References

http://www.nepalmissiongeneva.org/downloads/investment/the-companies-act.pdf

https://www.nepallegalservice.com/company-registration-in-nepal/

https://camunchnepal.com/incorporation-of-company-in-nepal/

https://en.wikipedia.org/wiki/Corporate_law

http://www.differencebetween.net/business/planning-activities/difference-between-moa-and-aoa/

http://www.yourarticlelibrary.com/company/features-company/10-principal-features-of-an-
incorporated-company/75890

https://www.youtube.com/watch?v=nwRqQlealR4

https://www.youtube.com/watch?v=mXefo-8Ajk8
ANNEX