Law of Company and Insolvency
Meaning of Company
Generally, a company is a legal entity formed by a group of individuals or organizations for the purpose of conducting business activities. It is an artificial person created by law, separate and distinct from its owners, known as shareholders or members. Limited liability, a perpetual existence, transferability of shares, and ease of raising capital are some of the advantages of the company structure.
In a company, capital, resources, and human effort are brought together to produce goods or services in order to earn profits. The primary objective of a company is to maximize shareholder value by generating profits and providing returns on their investments. As a legal entity, it can enter into contracts, sue, and be sued in its own name.
Nature of Company
1. Separate Legal Entity:
Company is considered a legal entity distinct from its owners, shareholders, and directors. This means that the company has its own legal rights and obligations, can enter into contracts, sue, and be sued in its own name. The company’s liabilities are generally not held against the shares of its shareholders. In addition to limiting the owners’ liability, this characteristic encourages investment.
2. Limited liability:
An important characteristic of a company is its limited liability. The shareholders or members’ liability is limited to the amount they invested in the company. In the event of financial distress or legal issues, creditors are generally only able to claim against the company’s assets rather than the shareholders’ assets.
Their personal assets are not at risk beyond their share capital or the guarantee they have provided. By reducing shareholder risk, limited liability encourages investment and entrepreneurship.
3. Perpetual Succession:
Companies have perpetual succession, meaning they continue to exist regardless of changes in membership or ownership. The life of a company is independent of the life of its shareholders and directors.
Even if the original founders or owners leave or pass away, the company continues to operate. A perpetual existence ensures stability, continuity, and long-term business planning.
4. Transferability of shares:
Company shares represent ownership interests in the company. One of the advantages of a company structure is the ease with which shares may be transferred. There are no restrictions imposed by the company’s articles of association or relevant laws on the purchase or sale of shares by shareholders.
Consequently, shareholders can enter or exit their ownership positions easily, which facilitates liquidity and investment in the company. There may, however, be restrictions on share transfers for certain types of companies, such as closely held private companies.
5. Common seal and contracts:
A company may have a common seal, which is an official stamp used to authenticate documents. It is used as the company’s signature and indicates its consent or agreement.
In some jurisdictions, however, the use of common seals is less prevalent due to the advent of digital signatures and electronic transactions. Contracts and legal documents executed with the common seal are binding on the company.
6. Management and shareholder participation:
The day-to-day operations of a company are typically managed by directors appointed by the shareholders. Companies have a hierarchical structure of management and governance. The owners of the company, the shareholders, exercise control and decision-making authority through their voting rights.
During general meetings, such as annual general meetings, shareholders have the right to vote on significant matters, elect directors, and approve financial statements.
Incorporation of a Company
The whole process of incorporation of a company can be divided into two stages: informal and formal.
1. Informal stage
a. Selection of the Name of the Company
It is important to choose a unique name for the company as the first step in the incorporation process. This name should not already be in use by another existing company.
A government authority or company registrar should be consulted to ensure that the chosen name is available. It also needs to adhere to any legal requirements regarding naming conventions as well as not violate trademarks or copyrights.
b. Preparation of the Memorandum and Articles
The next step is to prepare the Memorandum of Association (MOA) and Articles of Association (AOA). These documents provide the company’s purpose, objectives, and internal regulations and rules.
Company name, registered office address, object clause (main business activities), and shareholder liability are all included in the MOA. The AOA, on the other hand, provides details about shareholders, directors, and meetings of the company.
2. Formal stage
a. Submission of application and documents
After selecting a company name and preparing the MOA and AOA, the next step is to submit an application to the registrar or government authority. In addition to the chosen company name, the application typically includes the MOA, AOA, and other required documents, such as the identity of directors and shareholders, the address proof, and the consent form.
b. Investigation of Application
The government authority or company registrar will conduct an investigation or review of the application once it has been submitted to ensure compliance with all legal requirements. In this process, the information provided may be verified, conflicts with existing companies will be checked, and directors and shareholders’ eligibility will be assessed.
c. Registration and certification of incorporation
The company registrar will issue a Certificate of Incorporation once all requirements have been met and the investigation has been completed. As conclusive proof of a company’s legal status, this certificate provides important information such as the company’s unique registration number, its date of incorporation, its registered office address, and its authorized share capital.
As soon as the Certificate of Incorporation is received, the company can begin operating according to the rules and regulations outlined in the MOA and AOA.
Legal Importance and Formalities of Annual General Meetings(AGM)
AGMs are one of the most important corporate governance events for companies, and they play a crucial role in corporate governance. Here is a detailed explanation of their Legal importance:
Legal Importance of Annual General Meeting (AGM)
1. Compliance with company law: In many jurisdictions, AGMs are statutory requirements, and companies are legally required to hold them. Non-compliance with AGM requirements can result in penalties, legal consequences, and the potential loss of certain privileges.
2. Share holder’s rights: As part of the AGM, shareholders are able to exercise their rights and participate in the company’s decision-making process. Among other important matters, shareholders can ask questions, express concerns, and vote on important decisions, such as appointing or removing directors, approving financial statements, declaring dividends, and other significant resolutions.
3. Accountability and Transparency: AGMs promote accountability and transparency by providing shareholders with the opportunity to receive reports from the board of directors and management.
Shareholders can evaluate a company’s performance and hold the management accountable for its actions. These reports include financial statements, annual reports, and updates on the company’s performance, strategies, and future plans.
4. Approval of financial statements: AGMs provide shareholders with an opportunity to review and approve the financial statements of the company, including the balance sheet, income statement, and cash flow statement. The company’s financial reporting is transparent and accountable as a result.
5. Dividend declaration: AGM serves as a platform for the board of directors to propose dividend distributions to shareholders. Shareholders can participate in the decision-making process and approve dividend payouts, ensuring a fair distribution of profits.
6. Election and appointment of directors: The AGM typically involves the election or reappointment of directors. Shareholders can exercise their voting rights for individuals they believe will effectively represent their interests and contribute to the growth and success of the company.
7. Resolution and special business: AGMs provide shareholders with an opportunity to discuss and vote on important resolutions or special business matters, including changes to company articles of association, changes to share capital, the issuance of new shares, or any significant decisions that require shareholder approval.
8. Legal compliance and corporate governance: In order to ensure compliance with legal requirements and promote good corporate governance practices, AGMs play a crucial role. Transparency, accountability, and compliance with regulatory obligations are demonstrated by
companies through AGMs.
9. Assessing board performance: In AGMs, shareholders can hold the board of directors accountable for their actions and assess the board’s performance. In order to increase the effectiveness and transparency of the company’s governance structure, shareholders are able to ask questions about the board’s decision-making, leadership, and governance practices.
Formalities of Annual General Meeting (AGM)
1. Notice: The company’s articles of association or relevant company laws require the company to provide all shareholders with a formal notice of the annual general meeting within a specified period of time.
An agenda detailing the issues to be discussed and voted on must be included in the notice, along with the date, time, and venue of the meeting.
2. Quorum: The quorum at an AGM refers to the minimum number of shareholders required to make it valid. The quorum is usually stated in the company’s articles of association. If the quorum is not met, the meeting may be adjourned or cancelled.
3. Agenda: There are a number of items on the agenda that will be discussed and voted upon during the AGM. Routine items include approval of previous AGM minutes, review of financial statements, election or reappointment of directors, and appointment of auditors, among other significant matters.
4. Voting: AGMs provide shareholders with the opportunity to vote on a variety of matters presented. Voting procedures, including the majority required for resolutions to be passed, are defined in the company’s articles of association or relevant company laws. Voting can take place by show of hands or poll.
5. Minutes: The minutes of the AGM should be detailed and include all discussion points, decisions, and voting outcomes. Minutes are often required to be signed by the meeting chairperson.
6. Reporting: In accordance with the applicable legal requirements, the company must file all necessary reports and resolutions with the appropriate regulatory authorities following the AGM, such as the registrar or stock exchange. Transparency and compliance with regulatory obligations are ensured by these reports.
As part of maintaining good corporate governance practices and fulfilling their obligations to shareholders and regulatory authorities, companies must follow the prescribed legal requirements and formalities related to annual general meetings.
Minutes and Resolutions of a Company
The minutes and resolutions of meetings play a crucial role in documenting discussions, decisions, and actions taken during meetings. Here is a detailed explanation of the minutes and resolutions:
Minutes are a formal record of the proceedings, discussions, and resolutions. In addition to providing an official account of what transpired during the meeting, minutes also serve as a reference for future actions and decision-making. The following points should be considered when drafting minutes.
1. Purpose of minutes
Minutes serve several purposes, including the following:
- Record keeping: Minutes provide a detailed record of the meeting, including the date, time, location, attendees, and topics discussed.
- Legal compliance: Minutes show compliance with legal requirements, especially for formal meetings such as Annual General Meetings (AGMs) and Board meetings.
- Accountability and transparency: By documenting discussion, decisions, and actions taken during the meeting, minutes promote transparency and accountability.
2. Content of Minutes
Minutes should generally contain the following information:
- Meeting Details: The date, time, and location of the meeting, along with the type of meeting (e.g., AGM, board meeting, committee meeting) should be recorded.
- Attendees: A list of attendees should include the names of the participants and their roles (e.g., directors, shareholders, company secretaries).
- Approval of previous minutes: The participants should review, discuss, and approve the minutes of the previous meeting, if applicable.
- Discussion and decisions: Detailed summaries of discussions, proposals, deliberations, and decisions should be recorded, including key points raised, opinions expressed, and any resolutions adopted.
- Voting and resolutions: The details of any voting conducted, as well as the results, should be documented. This includes mentioning the resolutions proposed, the votes in favor, against, or abstained, and the outcome.
- Action items: Any action items assigned during the meeting should be recorded with the responsible individuals, deadlines, and follow-up steps.
- Adjournment: The time of adjournment and the date and time of the next meeting, if applicable, should be stated.
As a formal statement, resolutions reflect decisions or actions taken by a company or its governing body, such as the board of directors or shareholders. Here are some key points to consider regarding resolutions. They are usually written and play a crucial role in authorizing and recording significant corporate actions.
Here are few key points to consider regarding resolution:
1. Types of Resolution:
Resolutions are classified based on context and level of authority required. Common types of resolutions include:
a. Ordinary Resolutions: These resolutions require a simple majority of votes (more than 50%) and typically address routine matters, such as the approval of financial statements, the appointment of auditors, or the declaration of dividends.
b. Special Resolutions: For special resolutions to be passed, a majority vote (usually 75% or 2/3) is required. In most cases, they approve substantial transactions, amend the company’s articles of association, or change the company’s name.
c. Board resolutions: Board resolutions are decisions made by the board of directors of a company. They authorize actions such as entering into contracts, appointing officers, approving budgets, or making strategic decisions.
2. Drafting Resolutions:
A resolution should be written clearly and accurately to reflect the decision or action being authorized. It should include relevant information such as the meeting date, the resolution number, context, and specific actions or approvals needed.
3. Voting and Adoption:
Resolutions are typically presented during meetings, where participants vote on whether to approve or reject them. Depending on the company’s articles of association or applicable regulations, the voting process may vary. As soon as a resolution is passed, it becomes legally binding and can be executed by the appropriate party.
4. Documentation and filing:
Resolutions should be properly documented and filed for future reference. It is important to store resolutions securely and to make sure they are accessible to authorized individuals when needed. They may be part of the company’s records, minutes of meetings, or in a separate resolutions register.
In order to maintain accurate records, ensure compliance, and promote transparency within a company, minutes and resolutions play a crucial role.
Legal provision regarding BOD’s Report
The legal provisions regarding the Board of Directors’ (BoD) report differ depending on the jurisdiction and the applicable company law. However, there are common elements and principles that are typically included in the BOD’s report.
1. Reporting requirement:
It is mandatory for the Board of Directors to prepare an annual report that provides shareholders and stakeholders with information about the company’s performance, financial position, and future prospects. Corporate governance guidelines or relevant company legislation may contain specific reporting requirements.
2. Contents of the BOD’s Report:
BOD’s report generally includes the following key components:
• Introduction and Overview: An introduction provides a brief overview of the company’s business, structure, and significant developments during the reporting period.
• Financial performance: As part of the Board of Directors’ report, the audited financial statements, including the balance sheet, income statement, and cash flow statement, are presented. A company’s financial performance may also be explained by a number of significant financial indicators, trends, or events.
• Operational review: The report may include a review of the company’s operations, highlighting key activities, achievements, challenges, and changes in the business model during the reporting period. The company may discuss its market conditions, competitive landscape, and strategic decisions.
• Corporate Governance and Risk Management: Risk management practices and corporate governance are often discussed in the Board’s report. The company’s risk management framework, internal control systems, compliance with laws and regulations, and the structure and effectiveness of its board and committees may be discussed during this meeting.
• Sustainability and ESG factors: Increasingly, the Board of Directors’ report includes information about sustainability and environmental, social, and governance (ESG) issues. There are a variety of topics that might be discussed, including environmental impact, social responsibility, employee welfare, diversity, and ethical business practices.
• Future Outlook: The Board of Directors may provide an outlook for the company’s future prospects, including anticipated challenges, opportunities, and growth strategies. Additionally, any material uncertainties or forward-looking statements may be disclosed with appropriate disclaimers.
• Dividends and Reserves: The report normally reveals the company’s dividend policy, the recommendation of the Board regarding dividend distributions, and any changes in reserves.
• Director’s Report: Some jurisdictions include a director’s report in the Board of Directors’ report, which details the board’s duties, responsibilities, and activities. Board composition, training and development programs, and stakeholders’ engagement with the board may be discussed.
3. Disclosure and Filling requirements:
In accordance with applicable company laws, the BoD’s report is typically disclosed to shareholders and filed with the regulatory authorities within the specified timeframes. A company’s annual report may have to be published on its website or submitted as part of its annual filing or annual general meeting documentation, depending on the filing requirements.
4. Auditing and Assurance:
The BoD’s report is often subject to external audit or review by independent auditors, which enhances the credibility and reliability of the information presented.
Appointment and Removal of an Auditor
In order to appoint and remove an auditor within a company, specific procedures and considerations must be taken into account. A detailed explanation is provided below:
Appointment of an Auditor:
It is possible to appoint an auditor through different entities or processes. Let’s explore each one in more detail:
i. By the board of directors
Some jurisdictions allow the board to appoint auditors. In assessing potential auditors’ qualifications, independence, and reputation, the board considers their expertise, independence, and reputation.
In most cases, the board appoints the auditors or the management based on recommendations from the audit committee. The appointment is typically subject to shareholder ratification at the next general meeting.
ii. By the general meeting of shareholders:
It is often determined by the general meeting of shareholders whether an auditor should be appointed. A resolution for the appointment of an auditor is usually passed by the majority of shareholders present at the general meeting, either in person or by proxy.
Shareholders have the power to approve or reject the board’s recommendation. Articles of association or relevant regulations may specify specific voting requirements.
iii. By the Office of the Company Registrar:
In certain jurisdictions, the office of the company registrar or a similar regulatory authority may be involved in the appointment of auditors. In many cases, this occurs when the regulatory authority maintains an approved list of auditors. Upon selecting an auditor from the approved list, the company registrar is informed about the appointment.
iv. By the Auditor General’s Office:
In some specific situations, particularly in the public sector, the Auditor General’s office or a similar public oversight body may be responsible for appointing auditors. In this case, the company or entity being audited is subject to specific regulations or requirements regarding transparency and accountability.
A company may choose auditors from a list of approved auditors provided by the Auditor General’s office or the office may appoint auditors directly.
There may also be additional requirements for the appointment of auditors, such as eligibility criteria, independence requirements, and professional certifications. Generally, these requirements are outlined in company laws or auditing standards.
Removal of an Auditor
1. Circumstances of Removal:
An auditor can be removed under a variety of circumstances, including:
- a. Expiration of term: If the auditor’s term has expired, they may be removed or reappointed at the AGM or by written resolution.
- b. Resignation: A company must be notified of an auditor’s resignation, and the resignation may take immediate effect or be subject to a notice period.
- c. Special resolution: A special resolution may be passed by shareholders to remove an auditor before their term expires for reasons such as loss of independence, professional misconduct, or unsatisfactory performance.
The removal of an auditor usually requires a special notice to be given to the company, and the notice must meet the specific requirements laid out in the applicable company laws.
3. EGM (Extraordinary general meeting):
Meetings such as an EGM may be convened to discuss and vote on removing the auditor. Shareholders will have an opportunity to express their views and cast their votes.
4. Filling Requirements:
A company is required to file the necessary documents within a specified timeframe with the regulatory authorities once the auditor has been removed. If applicable, this may include filing a notice of removal and providing relevant information about the new appointment.
Insolvency of Company
If a company cannot meet its financial obligations or pay its debts as they become due, it is insolvent. The concept of company insolvency is a critical financial condition that may eventually lead to the liquidation or restructuring of the company. The concept of company insolvency can be explained in detail as follows:
Types of Insolvency
- a. Cash Flow Insolvency: When a company cannot generate enough cash to meet its financial obligations as they are due, they become insolvent. If the company has assets but lacks the cash flow to fulfill its obligations, it may be a temporary liquidity issue.
- b. Balance sheet insolvency: The term “balance sheet insolvency” refers to a situation in which a company’s liabilities exceed its assets. Despite maintaining positive cash flow, the company might not have enough assets to cover its debts.
Consequences of Insolvency
A company’s insolvency can have a variety of consequences:
a. Legal Proceedings: Creditors may initiate legal action to recover their debts, such as filing lawsuits or seeking court orders. The result may be increased financial strain and asset seizures.
b. Restructuring or Rescue: Insolvent companies may explore options for restructuring their debts or undergoing financial restructuring through mechanisms such as debt restructuring, debt-for-equity swaps, or seeking assistance from insolvency professionals in some cases. By taking these measures, the company will be able to improve its financial position and recover more quickly.
c. Liquidation: If a company’s financial situation is unsustainable, liquidation may be the best option. Liquidation involves selling off company assets to repay creditors. A liquidator is usually appointed by the court or by the creditors.
d. Impact on stakeholders: Insolvency can have significant implications for stakeholders. Shareholders might lose their investments, employees might lose their jobs, suppliers might lose money, and creditors might only receive a portion of their debts back.
There are different procedures and laws governing insolvency in different jurisdictions. Common insolvency procedures include:
a. Administration: A process designed to facilitate a company’s financial rescue and restructuring under the supervision of an insolvency practitioner.
b. Receivership: A receivership occurs when a secured creditor appoints one to recover the company’s assets.
c. Liquidation: The process of winding up the affairs of a company, selling its assets, and distributing the proceeds to its creditors.
d. Bankruptcy: Insolvent individuals may be able to file for bankruptcy rather than companies in some jurisdictions.
Nepalese Law of Insolvency
The Insolvency Act, 2063 (2007 AD) governs insolvency matters in Nepal, primarily applicable to body corporate entities. This law aims to facilitate the efficient and fair administration of insolvent entities by providing a comprehensive framework for the resolution of insolvency issues.
Features of Insolvency Act, 2063
1. Applicable only to the insolvency matter of body corporate:
The Insolvency Act, 2063 primarily covers insolvency matters involving body corporate entities, such as corporations, partnerships, and companies. For these entities, it provides a framework for addressing insolvency, restructuring, and liquidation proceedings.
2. Approval of the judicial authority:
To commence insolvency proceedings, the Act requires approval from a judicial authority. This ensures that the insolvency process is overseen by a competent legal body, providing transparency and legal safeguards.
3. Liberal procedure:
For insolvency matters, the Insolvency Act, 2063 follows a liberal procedure. To facilitate efficient and effective resolution of insolvency issues, this law provides flexibility for dealing with financial distress of a body corporate.
There are several methods available to address the financial difficulties of an entity under the Act, including restructuring schemes and liquidation.
4. Restructuring scheme:
In order to achieve solvency and continue its business operations, a financially distressed body corporate may reorganize its operations, debts, and assets under the restructuring scheme introduced by the Act. As well as providing business continuity and job preservation, the scheme aims to provide an alternative to liquidation.
5. Commencing the insolvency proceedings:
A mechanism for initiating insolvency proceedings is provided in the Insolvency Act, 2063. Among the criteria and procedures for initiating the insolvency process are filing a petition with the judicial authority, specifying the grounds for insolvency, and providing relevant financial information.
6. Insolvency and restructuring system:
The Act provides a comprehensive framework for managing insolvency and restructuring. The document lays out the roles and responsibilities of creditors, debtors, insolvency professionals, and judicial authorities in the process.
To ensure a fair and transparent resolution of insolvency cases, the Act specifies the powers and duties of these stakeholders.
7. Provisions of insolvency professional:
An insolvency professional is a qualified individual who is appointed to oversee and manage insolvency proceedings under the Insolvency Act, 2063.
In addition to analyzing the financial condition of the body corporate, devising restructuring plans, coordinating with creditors, and ensuring compliance with the Act, they also ensure compliance with its provisions.