The Companies Directives (Second Amendment), 2079 (2022) (the “Second Amendment”) has been issued by the Office of the Company Registrar (the “OCR”) to make necessary revisions in the prevalent Companies Directives, 2072 (2015) (the “Directives”). The Second Amendment was published on 22 August 2022 (2079/05/06) and was brought to effect since the date of its publication.
The primary objective of the Second Amendment is to facilitate and assist effective administration of Nepalese companies in compliance with the Companies Act, 2063 (2006) (the “Companies Act”).
The key provisions of the Second Amendment have been set out below:
- Authentication of legal documents to be filed in OCR
- The Second Amendment requires the company registration and compliance documents such as (a) Memorandum of Association (the “MOA”), (b) Article of Association (the “AOA”), (c) amended versions of MOA and AOA, (d) unanimous agreement, (e) share transfer, donation or gift documents, (f) share forfeiture documents, and (g) company deregistration documents to be authenticated by licensed legal practitioners or licensed notary public while submitting them at the OCR.
- The company and its authorized representative will remain responsible or be held accountable to prove the validity of the aforementioned documents submitted to the OCR.
- Capacity of NGOs to own shares of other companies
Associations registered under Association Registration Act, 2034 (1977) such as NGOs were not allowed to own shares in companies as per the Directives. The Second Amendment now allows such NGOs to own shares of other companies.
- Exceptional provisions for constitution of quorum in a private company
Clause 10B of the Second Amendment has incorporated certain provisions in relation to the general meeting of a private company, which is generally conducted as per the AOA of the company.
- If a company has only two promoter shareholders who have subscribed equal percentage of shares, the general meeting of the company will not generally be convened without the presence of both the shareholders or their representatives. However, if the two promoter shareholders have subscribed unequal percentage of shares, the quorum of the general meeting will be as determined by the AOA of the company.
- Similarly, if there are more than two promoter shareholders who have subscribed equal or unequal percentage of shares, the quorum of the general meeting will also be as specified in the AOA.
- If the promoter shareholder(s) holding 50% of the issued share capital of the company becomes unavailable for a substantially longer period or is not in contact with the company, the remaining promoter shareholder(s) should send a notice to such promoter at its permanent or temporary address requiring it to be present in the general meeting. The Second Amendment however does not specify if any timeline should be given in such notice.
If the concerned promoter shareholder does not correspond as requested in the notice, the other promoter shareholder must publish a public notice in a national daily newspaper requesting the promoter or its legal heir to contact the company within 35 days.
- If the promoter shareholder or its legal heir again fails to contact despite the public notice, a second public notice must be published in a national daily newspaper requesting such promoter or its legal heir to contact the company within 15 days.
- If the promoter shareholder or its legal heir fails to correspond despite the second notice, the remaining shareholder(s) or its representative representing 50% of the company’s issued share capital can proceed with the general meeting.
- The aforementioned provisions on quorum are also applicable to extraordinary general meetings, formation of board of directors and operations of the company.
- Number of shareholders during conversion of a public company into a private company
- As per the Companies Act, the maximum number of shareholders in a private company is 101. Such cap is not applicable to public companies. In a scenario where a public company which has more than 101 shareholders gets converted into a private company due to insufficient paid-up capital, the Second Amendment has prescribed that such number of shareholders will remain the same after conversion into a private company.
- However, the said number of shareholders cannot be increased after conversion, for example, share transfer increasing the current number of shareholders.
- Name of the company
- Generally, a company cannot be registered with its name having only one word. The Second Amendment provides that a company may be registered with only one word in its name if such word discloses the nature of the company.
- Registration of company at OCR begins upon approval of the proposed name of the company. If the prospective promoters do not submit the registration documents within 3 months from the date of approval of the proposed name, the Second Amendment authorizes OCR to cancel the approved name.
- Rectification of errors
If any errors are found to have been made in the documents already submitted at OCR (such as annual compliance documents, share transfer documents), the Second Amendment allows the company to rectify such error for once. The board of directors will have to pass a resolution for such rectification and resubmission of documents.
- Deregistration of company
The Second Amendment allows for cancellation of registration of a company which is not able to commence its business since its incorporation. The promoter shareholder(s) of such company holding at least 67% shares (instead of the previous requirement of 75%) of the company is eligible to apply for such deregistration. However, this provision is not applicable in case of companies which have already commenced operations but could not continue for any reason.
The Second Amendment however does not explicitly define the term commencement of business.
- Transfer of shares to beneficiary in the event of death of shareholder
- The Second Amendment provides a list of subsequent heirs who are entitled to the shares of a shareholder in the event of his/her death:
- his/her husband/wife will be the primary beneficiary of the title to his/her shares, or
- if such husband/wife waives the right of entitlement to such shares, any such person as desired by the husband/wife, or
- if such husband/wife has died, the nearest heir of such shareholder as per the prevailing laws (for example, son and daughter).
- If there are more than one eligible heir of such shareholder, the shares of such shareholder may be transferred to a single heir if there is mutual consensus among the heirs. In the absence of such agreement, the shares shall be divided proportionately among all beneficiaries.
- The Second Amendment provisions for transfer of shares to a beneficiary upon death of a foreign shareholder. It requires the beneficiaries to file an application to both the Company and OCR with necessary documents (for example, death registration certificate, relationship certificate of the deceased shareholder and the beneficiary, passport of the beneficiary). Such documents must be verified by Nepali Embassy or diplomatic consular office in the concerned country.
- Transfer of shares of closely held public companies
The Second Amendment requires approval from the board and the OCR for transfer of shares of public companies that have not issued shares to the public.
- Dispute Settlement Mechanism
The Registrar of the OCR has the authority to adjudicate complaints made by the company, shareholders, directors or concerned stakeholders pursuant to the Companies Act. The decision so made by the Registrar may be challenged in the Patan High Court within 35 days.
The Second Amendment empowers the Registrar to order parties to settle disputes through mediation facilitated by the OCR. The OCR will appoint a sole mediator or mediators prescribed in its roster. A mediation room shall also be provided, and the cost of mediation shall be mutually determined by the parties and the mediator.