Common Law in Nepal

Prior to the unification of all various small kingdoms into single unified country by King Prithivi Narayan Shah Dev, during 1768(1825 Bikram Sambat), Nepal did not had its existence as a country in political term. All small kingdoms were governed by their own legal system based on their religions. The Muluki Ain (the Country Code), introduced in 1853 was the first codified law of Nepal which was later repealed by the existing Muluki Ain 1963 (2020 BS). The Muluki Ain covers both criminal and civil law aspects of the country. [1]

Historical Evolution of Commercial Law in Nepal

Most commercial laws of Nepal are based on the common law system so as the legal system of Nepal. Commercial laws were mainly introduced in the 1930s, during Second World War. The Company Act, 1936 (1993 BS) was the first company law that came into existence in Nepal under the regime of Prime Minister Juddha Shamser Rana. [2] The provisions in law were highly influenced by the British Company Act, 1929.

Company Act, 1950 (2007 BS) was enacted as an amended form of previous act but did not repeal the previous law of 1993 BS. [3]

On 1964, much modern and clear Company Act, 1964 (2021 BS) was introduced with new provisions to establish, run and winding up of companies whether public or private as per the need of business sector. The Company Act, 2053 had come into existence through Royal Seal on 05/03/1997 (2053/11/22 BS). [4] It was a separate Act formulated to address the changed circumstances within the country after political changes in 1990.

Later on 2005 (Ashwin 23, 2062 BS), Companies Ordinance, 2005 had been introduced to repeal forthwith the legislation relating to companies in order to bring “dynamism in the economic development of the country by promoting investments in the industrial, commercial and business sectors through the process of economic liberalization, and further simplify and make more convenient and transparent the processes of establishing, managing and administering companies” [5] . It contained 21 chapters and 188 Sections and addressed almost all provisions comprising to the objectives mentioned in the preamble. It was a new Nepalese company laws legal framework. The Company Act, 2063 has been promulgated on 2006 (Kartik 24, 2063 BS) [6] for obtaining the main purposes. It is the prevailing law of the country. This Act has comprised almost all contemporary aspects of modern business. Therefore, it can be said that the country has come to the age of modern legal framework.

Directors –Duties and Responsibilities

Directors within a company are considered to be a legal personality created by the registration of the company under the Company Act, who are appointed or elected to manage the activities of the company which are determined by power, duties and responsibilities delegated. They are also called as management expertise responsible in allocating the use of resources and providing the strategic direction to achieve the company’s objectives i.e. give the investors a reasonable rate of return on their investments.

Hence, it is very crucial to appoint such persons as a director who can discharge multi-functional attributes in terms of efficient company management and should be equally competent, honest and legally qualified.

Statutory Law Duties

Directors duties in Nepal are considered as a part of common law interpreted in Company Act, memorandum of Association, Article of Association and the Consensus Agreement which are designed to enable the directors to act in the interest of the company and the shareholders thereby limiting their responsibilities to avoid their personal gain and to contribute in good governance.

The Chapter 6 of the Nepalese Company Act 2063 has provisioned duty of director to act in a way that he or she considers, in good faith, would be most likely to promote the success of the company and consequently for the benefit of its members as a whole.

Duty to act in good faith and not for improper purpose. [Section 95 and 99]

Subject to the provisions in the Act, directors should manage all their transactions, exercise of power and perform duties of the company through the board of directors collectively and for the interest of the company and the shareholders [s. 95(1)].

Directors have to take oath of secrecy and honesty before commencing their duties in office. The fiduciary role of act of honesty and in good faith should regard to the interest and benefit of the company and exercise with care, caution, wisdom, diligence and efficiency [s. 99(3,4)]. It is required to appoint independent directors by public companies (s. 86). Directors who breach reporting requirement under the Act are disqualified to become director (s.89).

Duty to act with in powers

Directors are specific duty not to exceed their powers (s.103). Directors have the authority to delegate the power to the employees and other director to work on their behalf however, any loss or damage done to the company from any act or action done by the person beyond his jurisdiction will not be considered as a company’s liability [s. 95(4)].

The board of directors shall not delegate the following powers and shall exercise such powers only by means of resolutions passed at meetings of the board of directors [s. 95(6)]:

(a) The power to make calls on shareholders in respect of amount unpaid on their shares;

(b) The power to issue debentures

(c) The power to borrow loans or amount otherwise than on debentures; 104

(d) The power to invest the funds of the company

(e) The power to make loans.

The directors have the power to form a subcommittee for the furtherance of the business [s. 95(8)].

Duty to avoid conflict of interest.

Directors have to avoid any situations in which they will or could have any direct or indirect interests in contrary to the interests of the company.

No Directors should do anything to derive personal benefit from any transaction [s. 99(1)]. In case of ulterior motive, recovery would be done through sub section 1 of section 108 [s 99(3)]. Directors are required to give beneficial interest on the shares (s. 47) and are equally responsible to provide required information to make a substantial shareholder (s. 50) and in providing financial disclosures to the shareholders (s. 109).

Directors have to provide information between company, about oneself and their close relatives (s. 92) and the approval of general meeting should be required to enter into any transactions between the company and their close relatives (s. 93).

The restriction of authority of directors is provisioned in the Act to enter into certain transactions when the company is being financed (s. 105). Directors are restricticted to give any loans to directors and officers (s.101).

Breach of Act and criminal offences [Chapter 17]

Any director is in a breach of Act in his course of conduct and shall be punished with a fine from Rs. 20,000 to Rs. 50,000 or imprisonment for a term not exceeding 2 years or both punishments when the following will arise:

Where any director performs with recklessness and provides false information in any document of the Company or fails to maintain the information.

Where any director fails to hand over the charge to the successor or the successor who fails to properly take over in relation to company documents, accounts, cash, and goods.

Where any director who is found guilty in doing acts those are beyond the jurisdiction of the board of directors or beyond the scope of work of the company.

Any director who utilize the company cash or goods for his/her personal use without the approval of board of directors or general meeting.

Where any director who fails to give any statements or information to the company (s. 165).

Any director who acts beyond the power given to him/her.

An director or officer who maintains account in contravention of this Act

Any director of officer who fails to provide such extracts of financial statement, annual financial statement or report as required to be provided to the shareholders pursuant to this Act

Any director who receive or give any loan facility or remuneration from the company in a manner to be contrary to the provisions contained in this Act

Any director who fails to do any act required to be done pursuant to Section 60 i.e. directors responsibility in the case of loss of net worth of company.

Does director’s duty hinder entrepreneurial pursuits?

In terms of Nepal, given its emerging economy, it is very crucial and beneficial to step into the global markets and maintain high standards of corporate governance. “Corporate governance” comprises the institutions that govern the relationship between people who manage corporations and all others who invest resources thereon.

The board of directors working for the best interest of the company plays an important role when considering Nepalese growing economy. The board is accountable to shareholders and independent of management. The board of directors have leadership, vision, and independence in making decisions for the best interest of the company and all shareholders.

Given the significant potential advantage of the industries like tourism, international financial centre, hydropower, herbs, software it is highly appropriate place for an investment. Furthermore, the locational advantage between two most growing economies China and India give rise to many opportunities and a role of good corporate governance.

After becoming full-fledged member of the World Trade Organisation (WTO) on 23 April 2004 and a member of two regional trading arrangements; South Asian Free Trade Agreement (SAFTA) on 6 January 2004 and BIMST-EC free trade area on 8 February 8, 2004, Nepal has been a landmark in the economic history to integrate the Nepalese trade and economy at the regional and trans-regional level. Along with that those associations are providing the fundamental benchmarking for Nepal to progress.

According to the company Act, 2063, the director’s nomination process has to be transparent, without any influence of controlling shareholders or management, and be credible to outsiders. For efficiency and effectiveness, the board of directors has the power to set committees to study and screen special tasks on behalf of the board. The directors have the power to express their ideas independently and always and have the advantage of updating themselves with the unlimited information. The board of directors are also provided with an adequate remuneration by the companies. Hence, it is very much likely for the entrepreneurs to get exposed to the global markets and so with the many more opportunities. The directors duties provisioned in the Act, if practiced in a proper way i.e. towards the best interest of the company and the shareholders would give a fundamental foundation of doing long term and sustainable business and that will yield prosper to the employees, directors, shareholders, company and a society at large.

On the other hand the improper utilisation of authority by directors could result the lack of trust and provide lesser interest for the global investors. As stated in the case study of “Corporate Governance: Need & Significance in Nepalese Banking System” in Appendix 1, could derail the business growth and the amount of trust from the shareholders.

Issues (Case Study attached in Appendix 1)

Board members are interested to use public deposits as their own assets which is against the BAFIA 2063, article 48

Generally, Board members (non-executive) are liking to use power like executive or, executive director and executive chairman in the area of loan sanction, employee selection and daily office activities which is again the against the BAFIA, 2063 article 24.

Board members are prohibited to take loan from own company however, it is general practice to take loan directly or, indirectly, Similarly, Board members are restricted to provide collateral for loan purpose for own or, for others however, they try to do directly or indirectly

Board members are inclined to authenticate the minutes after finishing the vested interest

The company enjoying the practice of CEO and Chairperson by the same gentle man are ahead in noncompliance activities

Big houses running much same nature business are manipulating public deposits and transferring the fund within the group in their own interest.

The lack of company Act in providing rights to the shareholders and the investors may result the company to dissolve and lose the opportunities that may have come in the way which the directors as an entrepreneur have taken up.

Conclusion

In view of above, the directors duties set by company Act of a country is to enhance the relationship between directors and the shareholders. The role of directors and their responsibilities could determine the company’s growth and its long term operations thereby profiting its shareholders. Hence, if the duties are well practiced it may open a gateway to several new opportunities. This also means the maximisation in entrepreneurship skills of directors by indulging themselves into new market, technology and a wide range of information. The end result is growth in economy as a whole.