Corporate and Other Laws (Vnov 2019,0) PDF

Study Material
For CAP II
Paper 3
Corporate and Other Laws
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NEPAL

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PREFACE
This study material on the subject of “Corporate & Other Laws” has been exclusively designed
and developed for the students of Chartered Accountancy Professional [CAP]-II Level. It aims
to provide the required knowledge to the students so as to gain the general knowledge of
Nepalese Corporate and other laws and their practical application.
It broadly covers the chapters of Nepalese Companies Act, Securities Act, Nepal Rastra Bank
Act & Bank and Financial Institutions Act, Industrial Laws, Labor and Bonus Laws, Insurance
Laws, Audit Laws, Laws Relating to the Negotiable Instruments, Nepal Chartered Accountants
Act & Regulations, Laws of Contract, Foreign Investment & Technology Transfer Act etc.
Students are requested to accustom with the syllabus of the subject and read each topic
thoroughly for understanding on the chapter. We believe this material will be of great help
to the students of CAP-II. However, they are advised not to rely solely on this material. They
should update themselves and refer recommended text-books given in the CA Education
Scheme and Syllabus along with other relevant materials in the subject.
Last but the most, we acknowledge the efforts of Mr. Yugaraj Pandey, Advocate, who has
meticulously assisted for preparation and updating this study material. Similarly, we are also
thankful to CA. Hemanta Raj Ramali who has reviewed this study material for building in this
comprehensive shape.
Due care has been taken to make every chapter simple, comprehensive and relevant for the
students. In case students need any clarification, creative feedbacks or suggestions for further
improvement on the material, they may forward to [email protected] or to the
Education Department at the institute.
November 2019
Education Department
The Institute of Chartered Accountants of Nepal
Table of Content
Chapter 1 : Companies Act, 2063 (1-129)
1. Meaning and Concept of Company 2
2. Lifting of corporate veil 15
3. Formation and Incorporation of Company 23
4. Conversion of Company 31
5. Memorandum and Articles 33
6. Constructive Notice and Indoor Management 51
7. Shares and Debenture 55
8. Reduction of Share Capital 85
9. Buyback of Shares 88
10. Meetings of Company 92
11. Board of Directors 102
12. Accounts and Records of Company 114
13. Audit 119
Chapter 2 : Securities Act, 2063 (131-153)
1. Meaning and Concept of Securities 132
2. Establishment of Nepal Securities Board 133
3. Registration and Issuance of Securities 140
4. Provisions Relating to Stock Exchange 143
5. Securities Business Professionals 148
Chapter 3 : Bank and Financial Institution Act, 2073 (155-208)
1. Meaning and functions of Banks 156
2. Banking regulation 159
3. Incorporation of Banks & Financial Institutions 162
4. License and Conversion of BFIs 169
5. Securities Transactions 174
6. Board of Directors and Chief Executive 179
7. Capital of Banks and Financial Institutions 189
8. Banking and Financial Transactions 192
9. Lending and Recovery of Credits 198
10. Accounts, Records, Details and Reporting 201
Chapter 4 : Nepal Rastra Bank Act, 2058 (209-234)
1. Meaning and Concept of Central Banks 210
2. Formation and Functions, Duties and Powers of Board 213
3. Financial Provisions of NRB 221
4. Monetary Functions and Open Market Operation of NRB 223
5. Monetary Unit, Banknote and Coins 226
6. Foreign Exchange Policy, Regulation and Reserve 229
7. Relation with Government of Nepal 231
Chapter 5 : Industrial Enterprises Act, 2073 (235-256)
1. Meaning and Classification of Industry 236
2. Registration and Licensing of Industry 240
3. Formation of Industry and Investment Promotion Board 243
4. Facilities, Concession and Rebate 246
5. One Stop Service Centre 252
6. Sick Industries and Other Provisions 253
Chapter 6 : Bonus Act, 2030 (Amended 2074) (257-263)
Chapter 7 : Insurance Act, 2049 (265-300)
1. Meaning and Nature of Insurance 266
2. Insurance Board 278
3. Registration and Cancellation of Insurer 280
4. Insurance Intermediaries 287
5. Provision relating to payment of Insurance Claim 291
6. Insurance offence and Other Provisions 295
Chapter 8 : Negotiable Instrument Act, 2034 (301-325)
1. Meaning and Feature of Negotiable Instruments 302
2. Promissory note, Bill of exchange and Cheque 306
3. Negotiation and Endorsement of Instruments 314
4. Presentment and Dishonour of Instruments 316
5. Discharge from Liability 321
Chapter 9 : Labour Act, 2074 (327-375)
1. Fundamentals of Labour Relations 328
2. Employment and Security of Service 331
3. Outsourcing and Foreign Workers 336
4. Working hours, Leave and Remuneration 340
5. Provident fund, Gratuity and Insurance 344
6. Occupational Safety and Health 347
7. Special Types of Enterprises and Services 351
8. Fair Labour Practice, Misconducts and Punishments 355
9. Provision relating to termination of employment 358
10. Settlement of Labour Disputes 362
11. Labor Court and Adjudication of Disputes 367
12. Complaint and Punishment 369
Chapter 10 : Civil Code, 2074 (Part 5) (377-446)
1. Meaning, Nature and Function of Contract 378
2. Essential Elements of a Valid Contract 383
3. Performance of Contract 390
3. Breach of Contract and Remedies 396
5. Contract of Indemnity and Guarantee 400
6. Contract of Bailment and Pledge 407
7. Contract of Sale of Goods 415
8. Contract of Agency 424
9. Contract of Carriage of Goods 438
Chapter 11 : Social Welfare Act, 2049 (447-455)
Chapter 12 : Nepal Chartered Accountants Act, 2053 and Rules, 2061 (457-476)
1. Institute of Chartered Accountants of Nepal 458
2. Council and its Committees 459
3. Membership of the Institute 468
4. Examination, Qualification and Certificate of Practice 471
5. Code of Conducts 473
Chapter 13 : World Trade Organization and Nepalese Laws (477-486)
CHAPER 1 : COMPANIES ACT, 2063
CHAPTER 1
COMPANIES ACT, 2063
The Institute of Chartered Accountants of Nepal 1

CORPORATE AND OTHERS LAW
1. Meaning and Concept of Company
General notes
In simple terms a company means a group of persons associated together for the attainment of a
common end, social or economic. In common law, company is a legal person or entity separate
from, and capable of surviving beyond the lives of its members. Companies incorporated under
the Companies Act are mostly business companies but they may also be formed for promoting art,
charity, research, commerce or any other useful purpose. In juristic point of view a company is a
legal person, just as much as an individual but with no physical existence. Hence, like any juristic
person, a company is legally an entity apart from its members capable of rights and duties of its
own, and endowed with the potential of perpetual succession. An association with a large and
fluctuating membership requires a more elaborate organization which should confer corporate
personality of the association, i.e., should recognize that it constitutes a distinct legal person
subject to legal rights and duties separate from those of its members. Thus the modern companies
can easily and cheaply by being formed under the Companies Act.
It is clear, however, that in legal theory the term implies an association of a number of people
for some common object/s but in common parlance, the word company is normally reserved
for those association for economic purposes i.e., to carry on a business for gain and publicly and
socially responsible. It is, therefore, a combined political, social, economic and legal institution run
by professional managers who hire capital from the investors. It is a legal institution; companies
may formed for purposes other than the profit of their members or to enable a single trader or a
small body of partners to carry on a business. In these companies, incorporation is a device for
personifying the business and normally, divorcing its liability from that of its members despite the
fact that the members retain control and share the profit. Similarly, the companies may formed in
order to enable the investing public to share in the profits of an enterprise without taking any part
in its management.
Meaning of Company
A company is created with the sanction of law and is not itself a human being, it is therefore, called
artificial; and since it is clothed with certain rights and obligations, it is called a person. A company
is accordingly an artificial person.
Section 2 (a) of the Companies Act, 2063 has defined the term company without given its meaning
in details. It states that the company means a company incorporated under this Act.
Marshall CJ. defines a company is a person, artificial, invisible, intangible and existing only in the
eyes of law. It has no physical existence but exist only in contemplation of law
In the words of Lindley J., company is an association of many persons who contribute money or
its worth to a common stock, and employ it in some common trade or business, and who share
2 The Institute of Chartered Accountants of Nepal

the profit or loss arising there from. The common stock so contributed is denoted in money and
is the capital of the company. The persons who contributes it or to whom if belongs are members.
The proportion of capital to which each member is entitled is his share. The shares are always
transferable although the right to transfer them is often more or less restricted. As a natural
consequence of transferability of shares, the company has what is commonly known as perpetual
succession. With the withdrawal or death of a member of a company, the latter does not come
to an end. The life of the company is independent of the lives of the members of the company.
Members may come and members may go, the company continues until it is dissolved.
Gower L.C.B. gives an interesting example. He says, 'During the war all the members of one
company while in general meeting, were killed by a hydrogen bomb. But the company survived,
not even a hydrogen bomb could have destroyed it.
Company and Corporation

In the United States, a corporation is a form of doing business in which the liability of shareholders
for the corporation’s liabilities is limited to the extent of the holding of shares. And, in Great
Britain, a company is a form of doing business in which the liability of members for the company’s
liabilities is limited to the extent of the holding of shares. Further, in the United States, a company
is a generic term for a legal entity conducting business. Thus, it can refer to a sole proprietorship
viz. a partnership, a limited Partnership, or any other type of business entity which are called in
UK as a sole trader. The companies and corporations come in varying types. They are distinctly
different in their management and ownership structures and are established for different reasons.
Difference: The companies and corporations come in varying types. They are distinctly different
in their management and ownership structures and are established for different reasons. The
differences between a company and a corporation can be stated as under.
 Management: a corporation is run by its officers and board of directors. Company is run by
members or managers.
 Directives: the goals and directives of a company are laid out in an operating agreement while
a corporation’s directives are described in its bylaws.
 Taxes and Formalities: corporations are typically subject to fewer taxes with more benefits;
however, companies have fewer formalities conducting fewer meetings with less paperwork.
 Formation: in most states, a corporation must file Articles of incorporation with the secretary
of state while companies file Articles or Certificates of organization.
 Shares: Ownership of a corporation is vested in its shareholders, or those that purchase stock
in the corporation. A company does not issue shares, and each member is designated as
having ownership in the company.

Features/Characteristics of company
The features or characteristics help us to have proper understanding and make distinction between
a company and other business associations. In general, therefore, if an association does possess all
the following features, it can be called as company and if not, it is not a company. The features/
characteristics of modern company can be listed as under-
 Corporate personality/Separate legal entity
The fundamental attribute of incorporation of a company is its independent legal existence

apart from its members. Once a company is incorporated, it is treated as a legal person
distinct from its members and capable to enjoy all the rights as like a human with certain
exceptions. Further, the company is not the agent of shareholders; shareholders cannot treat
the company’s assets as their own; shareholders’ property is not the company’s property;
liability of the company is not the liability of shareholders; directors are not the employer of
the company’s employees and the director’s or shareholder’s liability is not the company’s
liability. Thus, in Salomon v. Salomon & Co. Ltd., 1897 AC 22:
Salomon was a shoe merchant with sound business prospects. He decided to incorporate a
company, namely, Salomon & Co. Ltd. with 7 shareholders including him, his wife, three
sons and two daughters. Board of Directors formed comprising three members- Salomon
himself and two of his sons. The asset of Salomon's business was valued around £40,000 out
of which £20,001 was paid for 20001 shares at the rate of £1 per share. He paid £10,000 for the
secured debenture of the company and provided £10,000 as loan to the company and other
six members subscribed one share by each. After some time his business suddenly decreased
and become unable to repay the loan to the creditor when asked for. The creditor filed case for
the insolvency of the company and at the time of insolvency the total assets of the company
was counted as £6,000 and the creditors' loan to the company around £7,000. Salomon, on the
other hand, claimed that as a debenture holder he should be paid at first than the creditors
claiming that the company is a separate legal person distinct from its members. It was argued
by the creditors that as the company is the singled handed company acting as per the Salo-
mon's will and discretion, there is no difference between the company and Salomon but they
are the same and single entity, hence, claim is untenable.
It was held by the House of Lords that the company is a separate legal person and distinct
from its members though the company was managed by the single hands, that is, Salomon.
The company being a separate legal person, Salomon can bring an action as against the com-
pany where he was the major shareholder and the Managing Director of the company. There-
fore, he should be paid first in priority basis than the creditors as fixed by the insolvency law.
It was observed that 'A company is at law a different person altogether from the subscrib-
ers.....; and though it may be that after incorporation the business is precisely the same as it
was before and the same persons are managers and the same hands receive the profits, the
company is at law not the agent of the subscribers or trustee for them. Nor are the subscribers

as members liable, in any shape or form, except to the extent and in the manner provided in
the Act'.
The principle of separate legal entity laid down in the Salomon's case has been widely accept-
ed with some critics and the principle has been further strengthen in the New Zeeland's case
Lee v. Lee’s Air Farming Ltd., (1960) 3 All ER 429 PC:
A company was formed for the purpose of manufacturing aerial topdressing. Lee, a qualified
pilot, held all but one of the shares in the company and by the articles was appointed govern-
ing director of the company and chief pilot. Lee was killed while piloting the company's air-
craft and his widow claimed compensation for his death under the Workmen Compensation
Act. The company opposed the claim on the ground that Lee was not a 'worker' as the same
person could not be employer and the employee at the same time.
It was held that there was a valid contract of service between Lee and the company and Lee
was, therefore, a worker. Mrs. Lee's contention was upheld. In an Indian case Bacha F. Guz-
dar v. The Commissioner of Income Tax, Bombay [AIR (1955) SC.74]:
The plaintiff (Mrs. Guzdar) received certain amounts as dividend in respect of shares held
by her in a tea company. Under the Indian Income-tax Act, agricultural income is exempted
from payment of income-tax. As income of a tea company is partly agricultural, only 40 per
cent of the company's income is treated as income from manufacture and sale and, therefore,
liable to tax. The plaintiff claimed that the dividend income in her hands should be treated
as agricultural income up to 50 per cent, as in the case of a tea company, on the ground that
dividends received by shareholders represented the income of the company.
It was held that though the income in the hands of the company was partly agricultural yet
the same income when received by Mrs. Guzdar as dividend could not be regarded as agri-
cultural income.
Similarly, this principle of corporate personality or distinct legal entity has been affirmed by
the decision of the Supreme Court of Nepal. Thus, in Piyush Raj Pandey v. Tax Office Kath-
mandu, 2040:
Mr. Piyush Raj incorporated a company along with wife where majority shares were sub-
scribed by him. He was the sole and whole authority to run business and the monies and
assets were under his control and use. When the income tax was in arrear, Tax Office asked
to pay all the tax to be paid by the company. When he failed to pay tax as asked by the Tax
Office, it withheld his immovable property registered in his name. He filed a writ petition
before the Supreme Court claiming that the Office could not charge the shareholder's private
property for the satisfaction of the company's liabilities.
The Supreme Court accepting the plea held that the company being a separate legal person
with distinct personality apart from its members, the Office cannot withhold the shareholders

personal property against the company's liability to pay tax. The members' property cannot
be for the payment of the company's obligation.
Finally, a company has its separate and independent corporate existence and vested with
corporate personality which is a legal person distinct from those who have incorporated it-the
members. Hence, it is capable of enjoying rights and being subjected to duties which are not
the same as those enjoyed or borne by its members.
 Limited liability
The fundamental attribute of corporate personality from which, indeed, all the other
consequences flow is that the corporation is a legal entity distinct from its members and the
limited liability of the latter. Limited companies are offspring of a proved necessity that is that
men should be entitled to engage in a commercial pursuit without involving the whole of their
fortune in that particular pursuit in which they are engaged. The company being a separate
person, its members are not as such liable for the debts. Hence, the shareholders are liable
towards the liability of company to the extent of the value of their shares and if the shares are
fully paid up no further liability is to be borne by them.
However, companies may be formed with unlimited liability of members or members may
guarantee a particular amount. In such cases, liability of the members shall not be limited to
the nominal or face value of the shares held by them. In case of unlimited liability companies,
members shall continue to be liable till each paisa has been paid off. In case of companies
limited by guarantee, the liability of each member shall be determined by the guarantee
amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.
Further, unless wrong or fraud proves, the BOD or other staffs of the company cannot be held
liable for the loss suffered by the company even resulted from their acts and dealings, i.e.,
they are not personally answerable for the transactions effectuated by them. This principle
of limited liability is an instrumental to protect the shareholders' property against the risk
involved in the business of the company, specifically, in that business adventurous in nature.
It is the most important feature of company from the view point of economic interest of the
shareholders who have invested their money in the company without their direct control to it.
However, in the following cases, a shareholder or member shall lose the privilege of limited
liability:
 Where members of the company are reduced below the statutory minimum, viz., 7
in case of a public company and the company carries on the business for more than 6
months while the members are so reduced, every person who is a member during the
time that it so carries on business after those 6 months and is aware of the fact that it is
operating with fewer than the requisite number shall be personally liable for the whole
of the debts contracted during that time.

 Where in the course of winding up, it appears that any business of the company has been
carried on with intent to defraud creditors; the Court may declare the persons who were
knowingly parties to the transaction personally liable without limitation of liability for
all or any of the debts or other liabilities of the company.
 Perpetual succession
The shareholders or members of a company may come and go but the company run
continuously irrespective of the change of shareholders or directors. A company, therefore,
remains in existence and runs forever until its life is put in to an end with due process as fixed
by the law. Death of all the existing shareholders does not affect the life of the company. If
all the shareholders died in as road accident or in an incident of bomb blast, the company
does not die. As it is a legal person, its life only can be terminated as per the law. Hence, a
company being an artificial person cannot be incapacitated by illness and it does not have
an allotted span of life and the death, insolvency or retirement of its members leaves the
company unaffected.
 Common seal
Seal of company means the seal of a company to be used by it. If the company, as per its
articles of association, is using a separate seal in its business circulations, letters or references
or other formal documents, the seal called the common seal of the company. It is the signature
of the company. When the common seal is affixed in a letter or document, it acknowledges
that the company has accepting the content mentioned therein. Similarly, if there is misuse of
the common seal, the person in default is liable for the loss. It can be in charge of any officials
as decided by the board of directors.
Section 26 of the Companies Act, 2063 has provided the provisions of the company's seal
and its use. A company which intends to use a seal in its transactions shall make the seal in
its name in clear legible letters. The company using the seal, shall use it in any reports and
records to be submitted on its behalf and business letters to be used in its name, statements of
accounts, bills, invoices, requisition order forms, notices and official publications, negotiable
instruments, bills of exchange, promissory notes, and official documents signed or issued on
its behalf. Further, if any person fails to indicate the name of the company while signing the
documents on behalf of the company, such person shall be personally liable for the same.
 Separate property
A company is capable of owing, enjoying and disposing of property in its own name.
Although its capital and assets are contributed by its shareholders, they are not the private
and joint owner of its property. A shareholder does not have even an insurable interest in the
property of the company. The shareholders, therefore, cannot claim as their right to a single
break of the company though it may purchased from his money. The rule is that the asset of
the company is not the assets of its shareholders and the property of the shareholders is not

the property of the company. Further, the shareholders are not, in the eyes of the law, part
owners of the undertaking. It was held by the Supreme Court of India in Bacha F. Guzdar
v. The Commissioner of Income Tax, Bombay that a shareholder is not the part owner of the
company or its property, he is only given certain rights by law, e.g., to vote or attend meetings,
to receive dividends. Similarly, no member can claim himself to be owner of the company's
property during its existence or on its winding up and neither be held liable nor claim any
benefit which the company is entitled. Thus in Macaure v. Northern Assurance Co. Ltd.:
Mr. Macaure held all except one share of a timber company. He had also advanced substantial
amount to the company. He insured the timber of company in his personal name. On timber
being destroyed by fire his claim was rejected for want of insurable interest.
The Court applying principle of separate legal entity held that the insurance company was not
liable. It was observed that even where a shareholder held almost entire share capital, he did
not even have an insurable interest in the property of the company.
 Capacity to sue and subject to be sued
Another fall-out of separate legal entity is that the company, if aggrieved by some wrong done
to it may sue or be sued in its own name against any other persons. Similarly, the creditors or
any other persons can file a case in the name of the company only and, in fact, they cannot file
a case as against the shareholders personally. Further, a company can sue its officials or staffs
as well as its shareholders and they can sue their own company. Hence, if a case filed against
the company is not a case against the shareholders and a case filed by the company to any
other persons is not the case filed by its shareholders or other officials. Hence, as like a natural
person, a company has capacity to bring an action as against other person/s natural or legal
to protect its rights and property. Similarly, the other person/s can bring an action against the
company without charging the board of directors or shareholders in person.
For Example, in a case, a lease deed was executed by the directors of the company without the
seal of the company and later a suit was filed by the directors and not the company to avoid
the lease on the ground that a new term had been fraudulently included in the lease deed by
the defendants. It was held that a director or managing director could not file a suit, unless
it was by the company in order to avoid any deed which admittedly was executed by one of
the directors and admittedly also the company accepted the rent. The case as made out in the
plaint was not made out by the company but by some of the directors of the company and the
company was not even a plaintiff. If the company was aggrieved, it was the company which
was to file the suit and not the directors. Therefore, the suit was not maintainable.
 Transferability of shares
A share is a right to a specified amount of the share capital of a company carrying with it
certain rights and liabilities, while the company is a going concern and in the winding up.
Shares are, subject to certain conditions, freely transferable and the shares of a company are

transferable in the manner provided in the Articles of the company. So that, no shareholder is
permanently or necessarily wedded to a company. The great object was that the shares should
be capable of being easily transferred.
A company cannot refuse to accept transfer of shares except as provided by its articles. It is not
necessary to look to the articles for a power to transfer, since that power is given by the Act. It
is only necessary to look to the articles to ascertain the mode of transfer and restriction upon
it. An absolute restriction on transfer is void but a right of pre-emption is a valid restriction.
Share of the company is transferable as movable property. It is an individual property so can

be transferred and pledged. In case of public company, shareholder can transfer share freely;
but in case of private company, there are some restrictions in transfer subject to memorandum
and articles of association.
 Management by professionals/representatives
It is quite impossible to control and manage the business of the company by its shareholders
where there is large number of shareholders which generally occurs in case of a public limited
company. Therefore, company law has provided the provision of the Board of Directors. The
boards of directors are the representatives of the shareholders as they are elected or selected
in their general meeting. All the authority to manage the business of the company and control
over management rests in the skillful hands of the board of directors and the other officials
appointed by them.
 Borrowing capacity
Company can borrow loan and obtain other credit facilities to meet is business or trade target.
The banks or financial institutions provide loan and other credit facilities in easy manner
to those trade and industry run by the company. Corporate financing is one of the major
banking activities of the banks and financial institutions. While borrowing loan, shareholders'
property need not to be provided as security. Neither the shareholders nor the directors are
personally or collectively liable for the borrowings by the company.
 Imposition of tax
As compare with the private and partnership firms or individual's tax liability, the tax is
imposed to the income of company at high rate. Similarly, there is no provision of tax rebate
or exemption to the income of company as the same enjoyed by an individual or private firm.
Company being a complex and formal business structure, it has to bear various kinds of tax
burden while incorporation, formation capital or operation its business.
 Formalities, publicity and expense
It is one of the demerits of the incorporation that the company has to comply with the
formalities as fixed by the company law and the memorandum and articles of associations.
Similarly, the company has to maintain the publicity of the business and financial documents

to the concerned authority. Therefore, the operation of company and its business is more
expensive as compared with those of the private or partnership firms.
Difference between a company and partnership

The distinction between a company and a partnership is as follows:
 A partnership is created by an agreement among the partners. A company is created by

following the procedure given in the Companies Act.
 A partnership has no separate legal existence apart from that of its partners. A company has a
separate legal existence apart from the members constituting it.
 A partnership does not have what is known as perpetual existence. A company continues till
it is brought to an end by following the procedure given in the Companies Act.
 The liability of a partner is unlimited, whereas the liability of a member of a company is

invariably limited by the amount remaining unpaid on the shares which he is holding.
 A partner cannot transfer his share in the partnership without the consent of all the other
Partners. In the case of a public company/ a member can transfer his shares freely without the
consent of other members. However, in the case of a private company, shares are not freely
transferable.
 The capital of a partnership is limited as it is a business firm with few members having
personal relation and contact. In the case of a company (especially a public company), the
capital is very large as it is contributed by a large number of shareholders.
 The scope of business of a partnership firm can be changed at any time with the consent of all
the partners. Without amending the memorandum under due process the scope of business
cannot be changed by the consent of shareholders in general meeting.
 Every partner is entitled to take Part in the day-to-day management of the partnership firm. A
shareholder has no right to take Part in the day-today management of the company.
 The audit of accounts in the case of a partnership firm is not compulsory. In the case of a
company, audit of its accounts by a qualified auditor, i.e., a CA or RA is compulsory.

Types of Company
The different types of company can be shown as under:
KINDS OF COMPANIES
Incorporated Unincorporated
Statutory Registered
Limited Unlimited
Limited by shares Limited by guarantee Private Public
Private Public Private Public
Classification of companies
1. On the basis of incorporation-
Statutory companies.
Registered companies.
2. On the basis of the extent of liability – Limited by shares

Limited companies.
Unlimited companies. Limited by guarantee
The Companies Act, 2063 has defined the
3. On the basis of number of members- seven types of companies-
Private companies.
Public companies. 1. Private limited company.
2. Public limited company.
3. Company not distributing profits.
4. Holding company.
4. On the basis of control-
Holding companies. 5. Subsidiary company.
Subsidiary companies. 6. Foreign company.
7. Enlisted company
5. On the basis of ownership-
Government companies.
Non- government companies.
Public and private companies

Company either registered or statutory or limited by shares or guarantee may be ether a public
company or a private company. A company is called as a private limited if -
 A company which membership is limited to 101.

 A company which shares are restricted from being transferred without approval of BoD.
 A company prohibited from any invitation to the public of its shares.

By contrast, those companies not coming within the above definition are normally described as
public companies. In other words, a public company means -
 A company which is not a Private company.

 A company which has a minimum paid-up capital of Rs 10 million or such higher paid-
up capital as may be prescribed.
 A company which is a subsidiary of a public company.
 A company minimum number of members as seven who have to subscribe their names
to the memorandum of association but there is no restriction with regard to the maxi-
mum number of members.
 A company which may or may not invite public to subscribe to its share capital. In case, it
decides to invite public to subscribe to its share capital, then it has to issue a prospectus.
In case, it decides not to invite public to subscribe to its share capital and arranges the
capital privately then it need not issue a prospectus; it has simply to submit a statement
in lieu of prospectus with the Registrar of Companies before it can make allotment of
shares.
Distinction between private and public company

Following are the main points of distinction between a private and a public company:
 In the case of a private company minimum number of persons to form a company is one
while it is seven in the case of a public company.
 In case of a private company the maximum number of members must not exceed 101
whereas there is no such restriction on the maximum number of members in case of a
public company.
 In private company the right to transfer shares is restricted, whereas in case of public
company the shares are freely transferable.
 A private company cannot issue a prospectus, while a public company may, through
prospectus, invite the general public to subscribe for its shares or debentures.
 A private company can commence business immediately after receiving the certificate of
incorporation, while a public company can commence business only when it receives a
certificate to commence business from the Registrar.
 Person specified in the AOA have to be present to form the quorum in a private company
but in a public company this number is 3 shareholders representing more than 50% of
allotted shares.
 Two directors may form the board of directors of a private company, while there must
be at least three directors in a public company.

 A private company shall use the last word “Pvt. Ltd." whereas the public company uses
the last word “Ltd”.
 Private company is not required to publish its annual financial statement whereas the
public company is required to publish its annual financial statement.
 A private company enjoys some special privileges. A public company enjoys no such
privileges.
Privileges of private companies vis-à-vis public companies

 A minimum of one person may form a private company.
 A private company may allot shares without issuing a prospectus or delivering to the
Registrar a statement in lieu of prospectus.
 A private company need not obtain a certificate of commencement of business.
 Two directors may form the board of directors.
 There is flexibility as to the holding of general meeting of shareholders.
Company limited by guarantee: Where the liability of the members of a company is limited to a
fixed amount which the members undertake to contribute to the assets of the company in the event
of its being wound up, the company is called a company limited by guarantee.
Holding & Subsidiary companies

A company is known as the holding company of another company if it has control over that other
company. Similarly, a company is known as a subsidiary of another company when control is
exercised by the latter over the former called as a subsidiary company. A company is deemed a
subsidiary of another in three cases: -
 The company controlling composition of the board of directors.

 The company holding of the majority of shares issued.
 Subsidiary of another subsidiary.
Position of holding- subsidiary relation under English law: A company (B) is a subsidiary of
other company (A) –
 Voting Control: Where A holds a majority of the voting right in B.
 Director Control: Where A is a member of B & can appoint or dismiss the majority of its
directors.
 Contract control: Where A is a member of B & controls alone or under an agreement with
others a majority of the voting rights in B.

Government Company
The Companies Act, 2063 has provided the various provisions regarding the government
companies but the Act has not defined the term. Under the Indian Companies Act, 2013, a
Government Company is a company in which not less than 51% of the paid-up share capital is held
by the Central Government, or by any State Government or Governments, or Partly by the Central
Government and partly by one or more State Governments and includes a company which is a
subsidiary of a Government Company. The phrase used under the Companies Act, 2063 'wholly
or partly owned by the government of Nepal' refers that the Government Company may be either
fully owned or partially owned by the government of Nepal.
The Audit Act, 2048 under Section 2 (d) defines that "corporate body wholly owned by government
of Nepal" means a corporate body whose all shares of assets are owned by Government of Nepal, or
a corporate body whose all shares or assets are owned by the aforesaid corporate body or by such
corporate body and Government of Nepal and this expression shall also include such corporate
body for whom Government of Nepal is required to bear full responsibility. Further, Section 2 (e)
states a "corporate body substantially owned by government of Nepal" means a corporate body
whose more than fifty percent shares or assets are owned by Government of Nepal.
Sub-section (7) of Section 30 of the Companies Act, 2063 has provided the provision with special
and distinct right of the government of Nepal which is fully or partly owned by the Government of
Nepal, as a shareholder, in accordance with the prevailing law on privatization, the Government
of Nepal may have special voting right in making decision on the following matters, as provided
in the articles of association, so long as the investment to the Government of Nepal is retained in
such company:
 In making decision on a resolution to relinquish the title to an undertaking pursuant to

Clause (a) of Sub-section (1) of Section 105,
 In making decision on voluntary liquidation of the company,
 In making decision to amalgamate the company into another company.
Under Section 164 (1) of the Companies Act, 2063, a company which is fully or partly owned by
the Government of Nepal shall form an audit committee under the Chairpersonship of a director
who is not involved in the day-to-day operations of the company and consisting of a least three
members.
Further, the Companies Act, 2063, under Section 182 (2) has imposed restriction of distribution of
dividend of the Government Companies without approval of the government of Nepal. Therefore,
a company fully or partly owned by the Government of Nepal may distribute dividend only after
obtain in prior approval of the Government of Nepal; and the Government of Nepal may give
necessary directive on the matter of dividend to be distributed by such company.

2. Lifting of corporate veil
General notes
We have seen that the fundamental attribute of corporate personality- from which indeed all the
other consequences flow is that the corporation is a legal entity distinct from its members and the
limited liability of the latter. Hence, it is capable of enjoying rights and being subject to duties
which are not the same as those enjoyed or borne by its members. Further, the following positions
are recognized in company law:
 Company is distinct from its shareholders.

 Company is not the agent of shareholders.
 Shareholders experience is the company’s experience.
 Shareholders cannot treat the company’s assets as their own.
 Shareholders’ property is not the company’s property.
 Liability of the company is not the liability of shareholders.
 Directors are not the employer of the company’s employees.
 Director’s/shareholder’s liability is not the company’s liability.
This position is well established ever since the decision in case of Salomon v. Salomon, 1897 AC 22
was pronounced in 1897 and indeed, it has always been the well recognized principle of common
law, and the argument in favour of limited liability was won decisively in the nineteenth century.
Of course, this decision does not mean that a promoter can with impunity defraud the company
which he forms or swindle his existing creditors.
In the Salomon case it was argued that the company was entitled to rescind in view of the willful
overvaluation of the business sold to it. But the house held that in fact there was no fraud at all
since the shareholders were fully conversant with what was being done. Had Salomon made a
profit which he concealed from his fellow shareholders the position would have been different. In
this particular case, Salomon seems to have been one of the victims rather than villain of the piece
for he had mortgaged his debentures and used the money to try to support the tottering company.
The decision established two results:
 The legality of one-man company and showed that incorporation was a readily available
to the small private partnership and sole traders as to the large public company.
 It revealed that it was possible for a trader to merely to limit his liability to the money
which he put into the enterprise but even to avoid any serious risk to the major part of
that by subscribing for debentures rather than shares. This result seems shocking, and
the decision has been much criticized.

Meaning
Since the Salomon case, the complete separation of company and its members has never been
doubted, there are cases in which the legislature, and to a very small extent the courts, have
allowed the veil of incorporation to be lifted. Therefore, the doctrine that a company has legal and
separate entity of its own has been subjected to certain exceptions by the application of the fiction
that the veil of the corporation can be lifted and its face examined in substance. In the cases where
the veil is lifted, the law either goes behind the corporate personality to the individual members
or directors, or ignores the separate personality of each company in favour of the economic entity
constituted by a group of associated companies.
The doctrine of the lifting of the veil, thus, marks a change in the attitude that the law had
originally adopted towards the concept of the separate entity or personality of the corporation. As
a result of the impact of the complexity of the economic factors, judicial decisions have sometimes
recognized exception to the rule, about the juristic personality of the corporation. It may be that
in course of time these exceptions may grow in number and to meet the requirements of different
economic problems, the theory, about the separate personality of the corporation may be confined
more and more. Before dealing with exceptional situation in which the veil is lifted, it should be
emphasized that the veil never means that the affairs of the company are completely concealed
from inspection.
Cases of lifting the corporate veil

Nevertheless, it has always been recognized that the legislature can forge a sledgehammer capable
of cracking open the corporate shell and even without the aid of the legislative sledgehammer
the courts have sometimes been prepared to have a crack. Normally, however, third parties are
neither bound nor entitled to look behind such information as the law provides shall be made
public; in addition to the veil of incorporation, there is something in the nature of a curtain formed
by the company’s public file, and what goes on behind it is concealed from the public gaze. But
sometimes this curtain also may be raised. It is significant, however, that the courts have only
construed statutes as cracking open the corporate shell when compelled to do so by the clear
words of the statutes; and it is only where the legislative provision justifies the adoption of such a
course that the veil has been lifted. In fact, the doctrine of limited liability or separate personality is
designed to protect the assets of the shareholders or directors from the reach of the creditors; and
this doctrine, lifting the corporate veil, creates special rules to protect the assets of the company
for the benefit of the creditors.
The doctrine of the lifting the veil has been applied in five categories of case: -
1. Where the companies are in relationship of holding and subsidiary companies;
2. Where a shareholder has lost the privilege of and has become directly liable to certain creditors
of the company on the ground that, with his knowledge, the company continued to carry on
business six months after the number of its members was reduced below the legal minimum;

3. In certain matters pertaining to the law of taxes, death duties and stamps, particularly where
the question of the controlling interest is the issue;
4. In the law relating to the exchange control;
5. In the law relating to trading with the enemy where the test of control adopted.
Prof. Gower has pointed out the three set of circumstances only in which the court can lift the veil
of incorporation. They are:
1. When the court is construing a statute, contract or other documents;
2. When the court is satisfied that a company is a mere façade concealing the true facts;
3. When it can be established that the company is an authorized agent of its controllers or its
members, corporate or human.
The court cannot lift the veil merely because it considers that justice so requires. Nor, unless the
case falls within one or both of circumstances (1) and (3) can it have regard to the economic reality
that most company groups are operated as if they were a single entity. And the second case only
is a true example of lifting the veil; in (1) and (3) the separate personality of the company is not
denied but the practical effect of the parties’ rights and liabilities is the same if it had been.
When the case falls within (1) the court may have regard to the economic reality and treat a group
as if it were one entity if that is how the group operates.
The difficulty about (2) is the lack of guidance on the principles for determining whether a company
is a mere façade. The motive might be highly relevant is helpful. It also seems clear that a company
can be a façade even though it was not originally incorporated with any deceptive intention; what
counts is whether it is being used as a façade at the time of the relevant transactions.
Regarding circumstances (3), while it may be possible to establish that in particular transactions a
subsidiary has acted as the authorized agent of its parent or vice versa.
The cases where the corporate veil can lift be stated as under-
A. Under the Express Statutory Provisions: Cases where a statute, contract or other document
provides-
1. Reduction of number of members

If a public company carries on business for more than six months with fewer than seven
or two in case of private company any person who is a member after that six months may
become liable, jointly and severally with the company, for the payment of its debts. It is
only the member who remains after the six months that can be sued and then only if he
knows that it is carrying on business with only six or one member and he is liable only
in respect of debts contracted after the six months and while he was a member. Liability
attached only to the members not the directors.

2. Fraudulent trading
If the company was in the course of winding up, the court could declare that the culprits
were to be personally responsible, without limitation of liability, for all or any of the debts
or other liabilities of the company to the extent that the court might direct. Therefore, if
in the course of winding up of a company it appears that any business of the company
has been carried on with intent to defraud creditors of the company or for any fraudulent
purpose then the court on the application of the liquidator may declare that any persons
who were knowingly parties to the carrying on the business in that manner are to be
liable to make such contributions to the company’s assets as the court think proper. To
establish that intent, what has to be shown is actual dishonesty involving, according to
current notions of fair trading among commercial men, real moral blame. Thus in Re, FG
(Films) Ltd, (1953) 1 ALL ER 615:
The court refused to compel the board of film censors to register a film as an English
film, which was, in fact, produced by a powerful American film company in the name
of the company registered in England in order to avoid certain technical difficulties.
The English company was created with a nominal capital of $100 only, consisting of
100 shares of which 90 were held by the American president of the company. Two out
of three directors were British and all the funds were to be provided by the American
company.
The court held that the real producer was the American company and that it would
be travesty of facts to hold that the American company and American president were
merely agents of the English company for producing the film.
3. Wrongful trading
It operates only when the company has gone into insolvent liquidation and the declaration
can be made only against a person who, at some time before the commencement of the
winding up, was a director of the company and knew, or ought to have concluded, at
that time, that there was no reasonable prospect that the company would avoid going
into insolvent liquidation. There are thus two questions which have to be answered, on
an objective basis. Firstly, should the director have realized there was no reasonable
prospect of the company avoiding insolvent liquidation and, secondly, once that stage
has been reached, did the director take all the steps he or she ought to have taken to
minimize the loss to the company’s creditors? Both these judgments will depend upon
the fact that what sort of company was involved, what were the functions assigned to or
discharged by the director in question, what outside advice was taken and what was its
content? Persons concerned may be criminally liable.

4. Misdescription of the company's name
The officers of the company, of course, make themselves personally liable, notwithstanding
that they are acting for the company, if they choose the contract personally, they are
liable for fine and personally liable for such transactions with third parties. Similarly,
if the correct and full name of the company does not so appear, the signatory will be
personally liable to pay if the company does not. Thus, in Hendon v. Adelman: 1973 New
LJ 637-
Where, a cheque was signed by a director on behalf of the company stating L R Agencies
Ltd. instead of L&R Agencies Ltd. It was held that directors were personally liable on the
cheque.
5. Premature trading
A public limited company must not do business or exercise any borrowing powers until
it has obtained a certificate of commencement of business. If it enters into any transaction
its officers in default, liable to fines. Further, if the company fails to do so the directors
are jointly or severally liable to indemnify the other party in respect of loss suffered by
reason of the company’s failure to comply.
6. Company groups
It has long been recognized that in relation to financial disclosure, it cannot be ignored
if a true and fair view of the overall position of the group is to be presented and that
accordingly when one company control others, parent company, must present financial
statements as well as its own individual statements, thus avoiding the misleading
impression which the letter along might give.
B. Under case law: Cases where a company is a mere facade concealing the true facts:
Broadly, where fraud is intended to be prevented, or trading with enemy is sought to be
defeated, the veil of corporation is lifted by the judicial decisions and the shareholders are
held to be persons who actually work for the corporation. The courts under case law disregard
the corporate personality on the basis of three points; namely:
 Single economic unit argument.

 Corporate veil a mere sham or cloak argument.
 Agency argument.
The different cases where courts lift the corporate veil under case law is discussed herein
bellow:

1. Determination of enemy character of company
Trading with enemy is illegal and against the public policy. To determine the enemy
character of a company the courts may in their discretion examine the character of
persons in real control of the corporate affairs. Thus, in Daimler Co. v. Continental Tyre
& Rubber Co. (1916) 2 AC 307:
A company was incorporated in England for the purpose of selling tyres manufactured
in Germany by a German company. The German company held the bulk of the shares
in the English company. The holders of the remaining shares (except one) and all the
directors were Germans, resident in Germany. During the First World War the English
company commenced an action to recover a trade debt. And the question was whether
the company had become an enemy company and should, therefore, be barred from
maintaining the action.
It was held that a company incorporated in the United Kingdom is a legal entity, a
creation of law with the status and capacity which the law confers. It cannot be loyal or
disloyal. It can be neither friend nor enemy. But it may assume an enemy character when
person in de facto control of its affairs are residents in any enemy country or, whether
resident, are acting under control of enemies. Accordingly the company was not allowed
to proceed with the action. If the action had been allowed the company would have
been used as machinery by which the purpose of giving money to the enemy would be
accomplished. That would be monstrous and against the public policy.
Where there is no such danger to public interest, the courts may refuse to lift the corporate
veil. Thus, in an American case, People’s Pleasure Park Co. v. Rohleder, (1908) 61 SE 794:
Certain lands were transferred by one person to another perpetually enjoining the
transferee from selling the said property to coloured persons. He transferred the
property to a company composed exclusively of Negroes. An action was commenced for
annulment of this conveyance of the ground that all the members of the company being
Negroes, the property had, in breach of the restriction, passed to the hands of coloured
persons.
The court, however, rejected this argument and held that members individually or
collectively are not the corporation, which has a distinct existence separate from that
of its members. It leads its own life… it stands apart as a separate subject and, in
contemplation of law, as a stranger to its own members.
2. Protection of revenue.
The court has the power to disregard corporate entity if it is used for tax evasion or
circumvent tax obligation. In Apthorpe v. Peter Schoenhofen Brewing Co. (1899) 80 LT
395:

Aliens were not allowed to hold land in New York. An English company acquired the
business and assets of a New York company. The business was financed and run by the
English company.
It was held that the American company had become the agent of the English company
and therefore, the whole of its profits were liable to be taxed as the income of the English
company.
3. Prevention of fraud or improper conduct.
The separate legal existence of a company cannot be used as a means to achieve some
illegal or fraudulent purposes. The courts will refuse to uphold the separate existence of
the company where it is formed to defeat or circumvent law, to defraud creditors or to
avoid legal obligations. One clear illustration is Jones v. Lipman (1962) 1 WLR 832:
Lipman, having entered into a contract to sell land to Jones, attempted to defeat Jones’
rights to specific performance by forming a company and conveying land to it. Court
made an order for the specific performance against both holding that it cannot be resisted
by a vendor who has absolute ownership and control of the company in which the land
is vested.
The courts, where satisfied that the real beneficiaries or members have used the corporate
structure as a façade for concealing the true facts, ignore the separate existence of the
company. Thus, in Gilford Motor Co. v. Horne, [1933] 1 Ch 935:
Mr. H was appointed as a managing director of the plaintiff company on the condition
that he shall not at any time while he shall hold the office of a managing director or
afterwards, solicit or entice away the customers of the company. Shortly afterwards, his
employment was terminated under an agreement and he opened a business in the name
of a company and began solicit the plaintiff’s customers.
It was held that the company was a mere cloak or sham for the purpose of enabling
the defendant to commit a breach of his covenant against solicitation. The defendant
company was just a channel used by Mr. H for the purpose of enabling him to obtain the
advantage of the customers of the plaintiff company, and the defendant company ought
to be restrained as well as the defendant H. Similarly, In Creasey v. Breachwood Motors
Ltd. 1993 BCLC 480:
The employer, Welwyn Ltd., dismissed its general manager. He issued a writ alleging
the wrongful dismissal. Shortly thereafter Welwyn ceased trading. The company paid
of all its creditors and then transferred its remaining assets to another company. The
plaintiff obtained a default judgment against the company but by that name it had no
assets and stood dissolved. The transferee company was ordered to pay the decree.

The court stated that the takeover of the company’s assets had been carried out without
regard to the separate entity of the company and the interests of its creditors, particularly
the plaintiff. (As being created unjust result)
4. Acting as an agent of shareholders/another company: holding and subsidiary relation.
A company having power to act as an agent may do so as agent for its parent company or
indeed for all or any of its individual members if it or they authorize it to do so. If so, the
parent company or members will be bound by the acts of its agent so long as those acts
are within the actual or apparent scope of the authority. But there is no such presumption
of any such agency relation and in the absence of an express agreement between the
parties which is very difficult to establish. Thus, in D.H.N. Food Distributors Ltd. v.
Tower Hamlets L.B.C. (1976) 1 WLR 852:
D.H.N. had two wholly owned subsidiaries, in one of which the landed property of
the group was vested. While DHN carried on the business of the group, occupying the
property as licensee.
It was held that this group is virtually the same as a partnership in which all the three
companies are partners. They should not be treated separately so as to be defeated on a
technical point. The three companies should, for present purposes, be treated as one and
the parent company, DHN, should be treated as that one. Where there is a relation of
holder and subsidiary between the companies:
 There is presumption that a subsidiary will act in accordance with the wishes of its
parent; they generally do so act.
 Unless the presumption is rebutted, it is proper for the parent and subsidiary to be
treated as a single undertaking.
American Law: Where the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud or defend crime, the law disregard the corporate entity and treat it as an
association of persons. The court has power to disregard the corporate entity if it is used for
tax evasion or to circumvent tax obligation. In certain exceptional cases the court is entitled
to lift the veil of corporate entity and to pay regard to the economic realities behind the legal
façade.

3. Formation and Incorporation of Company
General notes
In the vast majority of cases the company, whatever may be its objectives, will today be formed
under the Companies Act. The promoters will first have to make up their minds which of the
several types of registered company they wish to firm, since this may make difference to the
number and types of documents required, and will certainly affect their content.
Firstly, they must choose either a limited or unlimited company. The main disadvantage of the
latter is that its members will ultimately be personally liable for its debts and for this reason they
are likely to be wary of it if the company intends to trade. If they decided upon a limited company
they must then make up their minds whether it is to be limited by share or by guarantee, and this
is really a matter which will be decided for them by the purpose which the company is to perform.
Only if it is to be a non-profit making concern are they likely to form a guarantee company which
is especially suited to a body of that type.
Further, it should be noted that whether or not the company should have a share capital. Once
more, the decision is dependent on the company’s purpose; if the company is intended to make
and distribute profits a share capital will be appropriate. Similarly, they will further have to make
up their minds whether the company is to a public or private one. The former is use to raise capital
from the public to run the corporate enterprise, and the latter to confer a separate legal personality
on the business of a single trader or partnership. Therefore, the choice will be determined for them
according to whether they want the company to trade for the profit of the members or to perform
some charitable or quasi-charitable purpose.
Theoretically, in general, therefore, the incorporators will have a choice of three types: -
 A public company limited by shares.

 A private company limited by shares.
 A company not distributing profit.
Section 12 of the Companies Act, 2063 has provided the mandatory provision that a company
carrying on the business of banking, financial transactions, insurance business related transactions,
stock exchange business, pension fund or mutual fund, telecommunication service provider
company having paid up capital more than five cores or a company carrying on such other business
or transactions as may be prescribed shall be incorporated as a public company. The registered
private companies till date shall be converted to public company as per this section within two
years from the date of commencement of this section i.e.2074/01/19.

Name of company
The incorporators must next decide on a suitable name. This is of some importance in identifying
an artificial person and the Act provides that it must be stated in the memorandum of association,
on the company’s seal, on business letters, negotiable instrument and order forms and must be
affixed outside every office or the place of business. The company's name must end with the
prescribed warning suffix- Limited or Ltd.
If the name in the opinion of secretary of state or Registrar is such that its use would constitute a
criminal offence or be offensive, cannot be adopted. Similarly, those names which would be likely
to give the impression that the company is connected in any way with the government or local
authority cannot be adopted. Further, the name must not be the same as any name already on the
Registrar’s index of names. Now, however, the incorporators or their professional advisors will
have to search the index and make up their own minds.
Even if they secure registration under a particular name they cannot be certain that they will not
be forced to change it. Where the name of the company is the same as, or in the opinion of the
Registrar, too like a name appearing at the time of registration in the registrar’s index of company
names or which should have appeared in that index at the time, the Registrar can give order to
change the name of such company. The object of provision is two-fold:
 To enable a mistake to be rectified, when the name of the existing company has been
registered either because the name had not been entered on the index.
 To extend the ambit of “the same as” to “too like” that of another. If another company
finds that the new company is trading with a name so similar to its own, as to cause
confusion and face it with unfair competition, the company can complain to change the
name of new company. It will have to be established that both companies are carrying on
the same type of business and that the second is, in effect, cashing in on the reputation
of the first and appropriating its goodwill and connection. If that is established the new
company cannot do business under that name and will either have to go out of business
or change its name.
The registrar may at any time direct it to change its name if, in his opinion, it gives so misleading
an indication of the nature of the company’s activities as to be likely to cause harm to the public.
On a change of name whether voluntarily or because of a direction, the registrar enters the new
name on the register in place of the old and issues an amended certificate of incorporation.
Pursuant to Section 6(1) of the Companies Act, 2063, in the following circumstances the Registrar
may refuse to incorporate company.
 If the name of the proposed company is identical with the name of the company or trade-
mark name in existence being previously registered or so resembles the name of that
company or trademark name as it might cause misleading.

 If the name or objective of the proposed company is contrary to the prevailing law or
appears to be improper or undesirable in view of public interest, morality, decency, eti-
quette etc. or reflects criminal motive
 If the name of the proposed company is identical with the name of a company of which
registration has been cancelled pursuant to this Act or that of a company which has been
insolvent under the prevailing law or so resembles such name as it might cause mislead-
ing and a period of five years shall not expired after such cancellation of registration or
insolvency.
 If the requirements for the incorporation of a company under this Act are not fulfilled.
CRO shall inform the applicant within 15 days from the date of application along with reasons;
if refusal is due to circumstances as mentioned in sec 6(1). Any unsatisfied person may file a
complaint in the court within 15 days if he is not satisfied with the refusal made by CRO or CRO
fails to give notice within 15 days of application.
The Memorandum and Articles

The next step is to prepare the memorandum and articles. These documents shall be in the form
specified by regulation. Before preparing the memorandum and articles, the draftsmen will need
to obtain, from the promoters, information on the matters such as the following: -
 Name and capital of the company

 The nature of the business and objectives.
 The amount of nominal capital and the denomination of the shares into which it is to be
divide along with the matter that whether the shares are to be all of one class or not. If
not what special rights are to be attached to each class.
 Any other special requirements which may deviate from the formal as exemplified by
the appropriate table- quorum or number of directors or provision of managing directors
or chief executive etc.
Lodgment of documents
It is the final step to lodge certain documents at the Company’s Registrar with necessary
signatures of each promoter in the copies of Memorandum and Articles attested by witnesses for
the incorporation of the proposed company. If the company has share capital each subscriber to
the memorandum must write opposite his name the number of shares he takes and must not take
less than one.
Persons desirous to incorporate of a company either private company or public company or

company not distributing profit pursuant to Section 3 of the Act shall make online application to
the Office of the Company Registrar through electronic medium for the approval of the name of
the proposed company. If information of approval of name of company according to Sub-section

(1) is received from the office, the applicant shall have to upload the following documents in the
online system through electronic medium along with an application to the Office in the prescribed
format requesting to incorporate the proposed company:
 The memorandum of association of the proposed company.

 The articles of association of the proposed company.
 In the case of a public company, a copy of the agreement, if any, entered into between the
promoters prior to the incorporation of the company.
 In the case of a private company, a copy of the consensus agreement, if any, entered into.
 Where prior approval or license has to be obtained from anybody under the prevailing
law prior to the registration of a company carrying on any particular type of business or
transaction pursuant to the prevailing law, such approval or license.
 Where the promoter is a Nepalese citizen, a certified copy of the citizenship certificate
and where a corporate body is a promoter, a certificate of registration of incorporation,
decision of the Board of directors, regulating the incorporation of the company and ma-
jor documents regarding incorporation.
 Where the promoter is a foreign person or company or body, permission obtained under
the prevailing law to make investment or carry on business or transaction in Nepal.
 Where the promoters is a foreign person, a document proving the country of his/her
citizenship.
 Where the 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.
Notwithstanding anything contained in Sub-section (2), if the promoter agrees to accept the
articles of association in the format prescribed for the incorporation of a company with a single
promoter of single shareholder, it shall not be required to submit the articles of association of the
proposed company.
Registration and Certificate of Incorporation

Where an application is made for the incorporation of a company pursuant to Section 4, the Office
shall, after making necessary inquiries and obtaining prescribed fees, register such company within
7 days after the date of making the application and grant the company registration certificate to the
applicant, in the format as prescribed signed by him or authenticated under his official seal. This
states that the company is incorporated and, in effect, the company’s certificate of birth as a body
corporate on the date of mentioned in the certificate. If the company is not registered within the
prescribed time, the office shall inform the proposed company within 3 days along with reason
for the same.

Under Sub-section (1a) of Section 5 while verifying the documents related to application and
certificate, the digital signatures shall also be acceptable and the documents can be submitted
through electronic medium.
Certificate is a conclusive evidence of incorporation: Section 5 (2) states that after a company has
been registered, the company shall be deemed incorporated. In general, the certificate is treated
a conclusive evidence of incorporation of a company and no one, in simple, can challenge the
legality in respect of registration to any court of jurisdiction, hence, the certificate is conclusive
evidence:
 That the requirements of this Act in respect of registration and matters precedent and in-
cidental to it have been complied with and that the association is a company authorized
to be registered and is duly registered under this Act and,
 That if the certificate contains a statement that the company is a Public Company, that
the company is such a company.
However, normally, the registration of a company cannot be challenged because of the conclusive
effect of the certificate. The basic objective of this provision is to immune from the problems arising
from defectively incorporated companies. In other words, the validity of the certificate cannot be
disputed on any grounds whatsoever. Thus, in peel’s case: [(1867) 2 Ch App 674
After signature and before registration a proposed memorandum of association had been altered
without the authority of the subscribers so materially that the alteration entirely neutralized
and annihilated the original execution and signature of the document. The company, however,
was registered and the Registrar gave his certificate of incorporation. It was objected that the
memorandum of association had not been signed by seven or indeed by any subscribers and that
the provision of the Act had not been complied with.
It was held that the certificate of incorporation is not merely a prima facie answer, but a conclusive
answer to such objection. When once the certificate of incorporation is given nothing is to be
inquired into as to the regularity of the prior proceedings. Similarly, in Moosa Goolam v. Ebrahim
Goolam: IRL (1913) 40 Cal 1 PC.
The memorandum of association was signed by two adult persons and by a guardian of the
other five members, who were minors at the time, the guardian making a separate signature for
each of the minors. The Registrar, however, registered the company and issued under his hand a
certificate of incorporation. The plaintiff contended that this certificate of incorporation should be
declared void.
Lord MacNaghten said: Their Lordships will assume that the conditions of registration prescribed
by the Indian Companies Act were not duly complied with; that there were no seven subscribers
to the memorandum and that the Registrar ought not to have granted the certificate. But the
certificate is conclusive for all purposes.

Immunity is not absolute: The function of the Registrar in deciding whether or not to register
the company is administrative rather than judicial but a refusal to register can be challenged
by judicial review. In some English cases the courts have explored the possibility of reviewing
the Registrar’s certificates and have come to the conclusion that they should be open to judicial
review. The Attorney-General can apply to the court and may obtain certiorari order to quash the
registration. This was successfully done in R. v. Registrar of Companies, ex P. Attorney-General:
[1991] BCLC476.
A prostitute had succeeded incorporating her business under the name of Lindi St Clair (personal
services) Ltd. (the Registrar having rejected her first preference of Prostitute Ltd or Hookers Ltd)
and with scrupulous frankness, she specified its primary object in the memorandum as to carry on
the business of prostitution.
The court, on judicial review at the instance of the Attorney-General, quashed the registration on
the ground that the stated business was unlawful as contrary to public policy. No action would
taken against the incorporation unless public policy is thought to be involved and will not do so if
all that has occurred is a technical breach of the formalities of incorporation. Further, in England,
the registration of a trade union under the Companies Acts shall be void.
Certificate of commencement of business

A private company can commence business right from the date of its incorporation. But, in
the case of a public company, a further certificate for the commencement of business has to be
obtained. In order to obtain the trading certificate the company must apply in the prescribed form
supported by a statutory declaration in the prescribed form signed by a director or the secretary
of the company. This statutory declaration must state that the nominal amount of the allotted
share capital is not less than the authorized minimum and must specify the amount paid up, the
preliminary expenses and to whom they were paid or payable, and any payment or benefit to a
promoter and what it was for.
Sub-section (1) of Section 63 of the Companies Act, 2063 states that no public company incorporated
under this Act shall commence its business without obtaining the approval to carry on its business.
Under Sub-section (2), a public company shall make an application, along with the evidence
showing the full payment of calls on the shares, out of the amount of shares undertaken to be
subscribed by its prompters, to the office for getting approval pursuant to Sub-section (1) and
Where an application is made pursuant to Sub-section (2) and it so proved that calls on the shares,
out of the amount of shares undertaken to the Office shall grant approval for carrying on the
business. However, if the amount paid up on shares is less than the amount mentioned in Sub-
section (1) of section 11, the Office shall not grant such approval.
The certificate is conclusive evidence that the company is entitled to do business and exercise any
borrowing powers. In order to insure that the company complies with the requirements imposed
on a public company regarding the allotment of the minimum share capital, it must not do business

or exercise any borrowing powers until the Registrar has issued it with a certificate or it has re-
registered as a private company. Unless it does one or other within a year from incorporation, it
may be wound up by the court.
Terms to be abided by the company

Company is a creation of law on the condition that it shall be incorporated if it fulfills the conditions
and complies with the requirements. Further, after its incorporation, it has to fulfill the conditions
as provided under the Companies Act and other prevailing laws including the directives and
circulations issued by the regulating authorities or concerned government department or office.
Section 10 of the Companies Act, 2063 has provided that a company incorporated under this Act
shall abide by the following terms, in addition to those set forth in this Act, Memorandum or
Articles of Association:
 The company shall carry on all of its activities and transactions by its name.
 A private company shall add the words “private limited’’ to its name as the last words
and a public company shall add the word “limited” to its name as the last word. Pro-
vided, however, that this provision shall not apply to a company not distributing profit.
 A private company shall not sell its shares and debentures publicly.
 A private company shall not pledge, or otherwise transfer title to, its securities to any
person other than its shareholder without fulfilling the procedures contained in the
memorandum or consensus agreement,
 A company shall not open a partnership or private firm.
 Except as otherwise provided in this Act, a company not distributing profits shall not
distribute dividends to its members or pay directly or indirectly any amount to a mem-
ber or his close relative.
Re-registration of an existing company

Re-registration my take place when a company, at some stage, converts itself into a company of
different type without having to form a brand new company. It is either the private company
becoming public, or the public company becoming private company by passing special resolution
or by the order of court. Further, two or more companies may amalgamate in to a new company or
one or more companies may merge into a company with a distinct body corporate.
Pre-incorporation contracts
Contracts or dealings entered by or with the promoters on behalf of the proposed company not
registered yet are known as pre-incorporation contracts. The general principle laid down under
Section 17 (1) of the Companies Act, 2063 regarding the pre-incorporation contract is that the pre-
incorporation contracts are void-ab-initio and not binding to the company after its incorporation.
It reads that a contract made prior to the incorporation of a company shall be a proposed contract

only, and such contract shall not be binding on the company. The legality of pre-incorporation
contracts can be enumerated as under-
1. Company cannot be sued on Pre-incorporation Contracts
A contract is enforceable and binding if it has been entered by two consenting parties
capable of entering into a contract. The contracts entered on behalf of the company before its
incorporation is not binding to the company because before its incorporation the company
is not a legal entity and has no legal personality. Therefore, one cannot be held liable on a
contract which had not been entered by him. In other words, no contracts can bind a company
before it becomes capable of contracting by incorporation.
2. Company cannot sue on Pre-incorporation Contracts
A company cannot by ratification obtain the benefit of a contract purporting to have been
made on its behalf before the company came into existence. In Natal Land & colonization Co.
v. Pauline Colliery Syndicate:[1904 AC 120]
N Co. entered into an agreement with one C, who acted on behalf of a proposed syndicate.
Under the agreement N Co was to give the syndicate a lease of coal mining rights. The
syndicate was then registered and claimed a lease which N Co refused.
It was held that an action by the syndicate for specific performance or damages is not
maintainable as the syndicate was not in existence when the contract was signed.
3. Binding of Pre-incorporation Contracts
If within the time mentioned in any transactions or within the reasonable time after the
incorporation of a company, the company, through its act, action or conduct, accepts such
act, action or conduct made prior to the date of authorization to commence its transactions or
endorses such act, action or conduct, than such transactions shall be binding on the company
and the other contracting party and the person carrying out such act or action shall be released
from the personal liability.
4. Ratification of Pre-incorporation Contracts
Where the promoters of a company have made a contract before its incorporation for the
purpose of the company, the company cannot ratify a contract entered into by the promoters
on its behalf. However, if the contract is warranted by the terms of incorporation, the company
may adopt and enforce it. The doctrine of ratification applies only, if an agent contracts for a
principal who is in existence and who is competent to contract at the time of contract by the
agent.

5. The rights and liabilities of contracting agent are personal
The person entering in to a contract on behalf of the proposed company is personally liable
to the contract though he has been acting as an agent of the prospective company. The third
party only can bring an action against the person entering in to the contract. The company is
not liable to it.
6. Pre-incorporation contract for Private Company
Notwithstanding anything contained elsewhere in this section, the consensus agreement shall
govern any contract made prior to the incorporation of private company.
4. Conversion of Company
General notes
Conversion of company refers the change of the company's status from one to another, i.e., from a
public limited company to a private limited company or vice-versa. In general such situation occurs
by two ways. The first and common reason is that the promoters or shareholders of the company
either private or public decide as they think better for their economic interests by considering the
business of the company pass a resolution in the general meeting and converted to another type of
company by obtaining approval from the office of the company registrar. This provision gives the
shareholders of a company an opportunity to change their company's status at the time of need
without fresh registration of a new company. Secondly, on a particular fact in a company the law
implies that the company has to be converted from one type to another type, e.g., reduction of
the minimum number of shareholders less than seven or reduction of capital below than the legal
minimum in a public limited.
Hence, after the registration of company either private limited or public limited, its type can be
changed if it is necessary by following the due process of law. In other words, a company initially
incorporated as a private limited can be converted in to a public limited company and vice-versa.
The Companies Act, 2063 under Section 13 and 14 have provided the provisions for the conversion
of company. This provision of the Act makes enable the shareholders to change the nature of their
organization to adjust in the changing business environment without registering a new company.
It removes the rigidity of legal process and saves the time and resources of establishing a new
company and other approval and licensing requirements. The legal provisions containing in the
Companies Act, 2063 regarding the conversion of company are given under.
Conversion of private company into public company

A company registered as a private company when it is required to be a public company may
convert in to a public limited company. Section 13 (1) of the Companies Act, 2063, a private
limited company shall be converted into a public limited company by passing a special resolution.

Provided, however, that no private company shall be capable of being converted into a public
company unless and until it fulfills the requirements to be fulfilled under this Act for being a
public company.
Application for the conversion: When such resolution has been adopted the concerned private
company, shall for being converted into a public company, make an application as prescribed,
accompanied by a copy of the resolution mentioned in that Clause and by the fees as prescribed,
to the office within thirty days after the date of such resolution. On receipt of an application,
the Company Registrar Office shall, if the concerned private company has fulfilled the necessary
requirements for carrying on transactions as a public company, mention in the company register
the contents of conversion of such company into a public company and give a company conversion
certificates as prescribed within sixty days of filing application.
Amendments to the MoA & AoA: In the event of occurrence of a circumstance for the conversion
of a private limited company to a public limited company as referred to Section 13 of the Act, the
concerned private limited company shall make necessary amendments to its memorandum of
association and articles of association.
Effects of conversion: Pursuant to Sub-section (8) in the event of conversion of any private
company into a public company pursuant to this Section, the provisions applicable to the public
company under this Act shall be deemed to be, ipso facto, applicable to that company after the
date of such conversion and all the assets and liabilities of the private company so converted shall
devolve on the successor company.
Conversion of public company into private company
Similarly, a company registered as a public company if not fulfilled the legal requisites to be a
public limited company converts to a private limited company. In this case the public company
loses its characteristics of the public company. Section 14 (1) of the Companies Act, 2063, a public
limited company shall be converted into a private limited company in the following circumstances.
a) Decrease of number of shareholders

It is the statutory requirements that there must be at least seven member in a public limited
company at the time of its incorporation and thereafter during its life time. Whatsoever may be
the reason if the number of shareholders is less than seven, the company shall either increase
the shareholders up to seven within six months or it loses its status as a public limited. If
the number of shareholders of the public company becomes less than seven, the minimum
number of shareholders for a public limited company, the company has to be converted to a
private company.

b) Reduction in share capital

A public limited company other than banking and financial institutions or insurance company
or other company to be registered as public limited company for a specified business as per
the prevailing laws must have 10 million rupees of paid up capital. Therefore, if a public
company fails to maintain its paid-up capital under Section 11 or the paid-up capital is not
maintained because of reduction in capital pursuant to Section 57 of the Companies Act, 2063.
Amendments to the MoA & AoA: In the event of occurrence of a circumstance for the conversion
of a public limited company in to a private limited company Subsection (1) of Section 14 of the Act,
the concerned public limited company shall make necessary amendments to its memorandum of
association and articles of association and convert it into a private company within six months
from the happening of the event.
Application for the conversion: According to Subsection (3) of Section 14, the concerned public
company shall make an application, accompanied by copies of the amended memorandum of
association and articles of association and the prescribed fees, to the Office for being converted
into a private company, within thirty days after the making of such amendment.
Conversion Certificate: On receipt of an application, the Office shall mention in the company
register the contents of conversion of such company into a private company and give a company
conversion certificate, as prescribed, within sixty days.
Devolution of assets and liabilities: Subsection (5) of Section 14 further provides that in the event
of conversion of any public company into a private company, all the assets and liabilities of the
public company to be so converted shall devolve on the successor company.
5. Memorandum and Articles
General notes
Memorandum of association and articles of association jointly constitute the constitution of a
company and all the authorities and persons of the company have to observed the provisions
of them while performing or running the company's business, hence, these documents find the
founding stone of the company's business and authority as well as the internal and external
management of the company. The memorandum contains mainly, the provisions about the nature
or objectives of the company, i.e., the extent of powers to be exercised by the company and the
articles is related to the procedures to be followed by the different organs and officers of the
company to attain the company's objectives.
In one hand, memorandum is the substantive law and articles are the procedural law of a company
and on the other hand, both documents constitute a binding contract between the company and
its shareholders and among the shareholders and the company and the outsiders dealing with the
company. Because of their importance any amendments to the memorandum and articles become

effective only after the approval of a public authority-Office of the Company Registrar or other
regulating bodies or the concerned government department.
The Memorandum of Association of a company is its charter which contains the fundamental
conditions upon which alone the company can be incorporated. It tells us the objects of the
company's formation and the utmost possible scope of its operations beyond which its actions
cannot go. Thus, it defines as well as confines the powers of the company. If anything is done
beyond these powers, that will be ultra-vires (beyond powers of) the company and so void.
Memorandum of Association
The memorandum of association is the document which lays the foundation of a company. It is
the company's charter which contains the fundamental conditions upon which alone the company
can be incorporated. Its five clauses are primary importance as they provide the basis features
of the company’s constitution. The objective clause is the core subject matter of memorandum
of association. Generally, the memorandum includes three objects, namely, main objects to be
pursued on its incorporation; objects incidental or ancillary to the attainment of the objects specified
and other objects. After registration the memorandum becomes a public. While the memorandum
must comply with the provisions of the Companies Act, all other documents of the company
cannot go beyond the memorandum. The document controls the business field of the company
and the conduct of its management through its object clause. It tells us the objects of the company's
formation and the utmost possible scope of its operations beyond which its actions cannot go.
Thus, it defines as well as confines the powers of the company. If anything is done beyond these
powers, that will be ultra vires (beyond powers of) the company and so void.
Why objects?
The fund of company must obviously be dedicated to some defined objects so that the contributors
may know the purposes to which it can be lawfully applied. The statement of objects, therefore,
firstly, gives a very important protection to the shareholders by ensuring that the funds raised
for one purpose are not going to be used in another. Secondly, the object clause affords a certain
degree of protection to the creditor also. The fact that the corporate capital cannot be spent on
any project not directly within the terms of the company’s objects gives the creditors a feeling
of security. Thirdly, by confining the corporate activities within a defined field, the statement of
object serves the public interest also. In fact, its purpose is to enable the shareholders, creditors,
debenture holders and those dealing with the company to know what its permitted range of
enterprise is. In setting out the objects of a company, its memorandum usually states the several
powers which the company will be entitled to exercise in carrying out its objects. Generally, the
memorandum includes three objectives:
 Main objects to be pursued on its incorporation.

 Objects incidental or ancillary to the attainment of the objects specified.
 Other objects.

Lawful purpose: - Every purpose is lawful, unless it is forbidden by law or is contrary to the
public policy. Subject to the purpose being lawful, there is no limit put upon the purposes for
which a company may be formed. Where the purpose is not lawful, or where any of the objects is
illegal, the Registrar may refuse to register; and if registered the certificate of incorporation is not
conclusive for the purpose of legitimating the unlawful part of business, and the registration itself
may be cancelled by the government taking appropriate proceedings.
The memorandum serves a two-fold purpose. It enables shareholders, creditors and all those who
deal with the company to know what its powers are and what is the range of its activities. Thus,
the intending shareholder can find out the field in, or the purpose for which his money is going
to be used by the company and what risk he is taking in making the investment. Also, any one
dealing with the company, say, a supplier of goods or money, will know whether the transaction
he intends to make with the company is within the objects of the company and not ultra-vires its
objects.
Hence, those who deal with the company are deemed to have notice of the contents of the
memorandum. The result is that the outsiders who come into contact with the company have also
to observe the conditions stated in the memorandum. The court cannot impose any liability upon
the company, whether in reference to insiders or outsiders, which would have the effect of taking
out any portion of the corporate money or resources for any purpose not warranted by the terms
of incorporation as specified in the memorandum. Its provisions may be supplemented by the
articles which contain the working rules and procedures for the management of the company’s
affairs.
Contents of memorandum
The memorandum contains basically six clauses including the-
 Name clause.
 Registered office clause.
 Object clause.
 Capital clause.
 Liability clause.
 Association clause.
Section 18 (1) of the Companies Act, 2063 has provided the matters to be stated in the Memorandum
of Association of a company. They are as follows:
 The name of company.

 The address of the registered office of the company.
 The objectives of the company.

 The acts to be carried out to accomplish the objectives of the company.

 The figure of the authorized capital of the company and the figure of the share capital to
be issued by the company for time being and the figure of undertaken to be paid by the
promoter of the company.
 Types of shares of the company, the rights and powers inherent in such shares, value of
each share and number of shares of different types.
 Restrictions, if any, in the purchase or transfer of shares.
 Number of shares which the promoters have undertaken to subscribe for the time being.
 Terms of payments of share amounts.
 Statements that the liability of shareholders shall be limited.
 The maximum number of shareholders in case of a private company.
 Other necessary matters.
The fundamental five clauses require as per Section 18 of the Companies Act, 2063 to be included
in each memorandum of association: (i) the name of the company, with 'limited' as the last word
of the name in the case of a public company and 'private limited' as the last words in the case
of a private company; (ii) the address, in which the registered officer of the company is to be
situated; (iii) the objects of the company, stating separately 'Main objects' and 'other objects'; (iv)
the declaration that the liability of the members is limited; and (v) the amount of the authorised
share capital, divided into shares of fixed amounts. These contents of the memorandum are called
compulsory clauses and are explained below.
 The name clause
The promoters are free to choose any suitable name for the company provided-
 A private company shall add the words “private limited’’ to its name as the last words
and a public company shall add the word “limited” to its name as the last word. Provid-
ed, however, that this provision shall not apply to a company not distributing profit to
be incorporated under Section 166 of the Companies Act, 2063.
 In the opinion of the Companies Registrar Office, the name chosen is not undesirable or
inappropriate.
Every company shall paint or affix its name and the address of its registered office and keep
the same painted or affixed, on the outside of every office or place of business in a conspicuous
position in letters easily legible and in the language in general use in the locality, its name
shall be imprinted in legible characters on its seal and shall have its name and address of its
registered office mentioned in legible characters in all business letters, bill heads, negotiable
instruments, invoices, receipts, etc. of the company.

Section 6 of the Companies Act, 2063, has provided the general guidelines or circumstances in
which the Registrar may refuse to incorporate company.
 Too similar name: In case of too similar names, the resemblance between the two names must
be such as to be calculated to deceive. A name shall be said to be calculated to deceive where it
suggests some connection or association with the existing company. Accordingly, if the name
of proposed company is same or identical with the other company already registered or so
resembles the name of that company as it might cause misleading. Thus, in Society of Motor
Manufacturers and Traders Ltd. a. Motor Manufacturers and Traders Mutual Assurance Ltd,,
(1925) 1 Ch. 675:
The plaintiff company brought an action to restrain the defendant company to use the said
name arguing that the name of the defendant company is too similar or identical to their
name.
But, Lawrence, J., held "anyone who took the trouble to think about the matter, would see
the defendant company was an insurance company and that the plaintiff society was a trade
protection society and I do not think that the defendant company is liable to have its business
stopped unless it changes its name simply because a thoughtless person might unwarrantedly
jump to the conclusion that it is connected with the plaintiff society."
 Criminal or offensive name: If the name is such that its use would constitute a criminal
offence or be offensive
 Government or local authority: If the name of company would be likely to give the impression
that the company is connected in any way with the government or local authority.
 Improper or immoral name: If the name or objective is contrary to the prevailing law or
appears to be improper, immoral or reflects criminal motive.
Further, every officer of a company or any person on its behalf who signs or authorises to be
signed on behalf of the company any bill of exchange, promissory note or cheque, etc., wherein
the name of the company is not mentioned in the prescribed manner, shall be personally
liable to the holder of such bill of exchange, promissory note, cheque, etc., for the amount
thereof unless it is paid the company. Personal Liability will, however, be not incurred in the
following cases:
 The holder of a negotiable instrument, on which the company's name has been incorrect-
ly stated, will not be able to enforce the personal liability against the officer concerned if
the error was due to the holder's own act. (Durham Fancy Goods Ltd. v. Michael Jackson
(Fancy Goods) Ltd. and Another)
 The word 'Limited' is abbreviated to 'Ltd.' (P. Stacey & Co. v. Wallis)
 There is an accidental omission of the word 'limited'. (Dermatine Co v. Ashworth)

In this case, a bill of exchange was accepted on behalf of a limited company. The rubber stamp
of the company was longer than the paper. As a result, the word 'limited' did not appear on the
instrument.
It was held that the directors who accepted the bill of exchange were not personally liable because
omission was neither deliberate nor of negligent origin. It was an obvious error of most trifling
kind and the mischief aimed at by the Act did not here exist.
 The registered office clause
This clause states the name of the State in which the registered office of the company will be
situated. Every company must have registered office which establishes its domicile and it is
also the address at which company's statutory books must normally be kept and to which
notices and all other communications can be sent. The notice of the exact situation (address)
of the registered office may be given to the Registrar within thirty days from the date of
incorporation.
 The objects clause
The objects clause defines the objects of the company and indicates the sphere of it activities. It
characterizes the nature of company. In one hand, it assures the investors that the money called
for one purpose shall not be used for another purpose, hence brings certainty by defining the
goals to be achieved in the future time. However, the objects of company may be changed by
the shareholders by passing resolution as per the Companies Act and articles of association.
On the other hand, the legality and nature of the company based on the objectives, therefore,
the state can regulate the company in better way. A company cannot do anything beyond or
outside its objects and any act done beyond them will be ultra-vires and void and cannot be
ratified even by the assent of the whole body of shareholders. However, a company may do
anything which is incidental to and consequential upon the objects specified and such act will
not be ultra-vires. Thus, a trading company has an implied power to borrow money draw and
accept bills of exchange.
 The liability clause
This clause states the nature of liability of the members. This means that in case of a company
limited by shares, a member can be called upon at any time to pay to the company the amount
unpaid on the shares held by him. Shareholders are not liable more than the face value of their
shares which they have subscribed in the company.
 The capital clause
This clause states the amount of share capital with which the company is registered and the
mode of its division into shares of fixed value, i.e., the number of shares into which the capital
is divided and the amount of each share. If there are both equity and preference shares, then
the division of the capital is to be shown under these two heads.

 The association clause
At the end of the memorandum of every company there is an association or subscription

clause or a declaration of association which reads something like this:
"We, the promoter of ------------- (company's name) agreed to incorporate and manage the
company as per the prevailing laws. The particulars regarding our names, address, signature,
commitment to subscribe the Shares and witnesses as well as other information contained in
this Memorandum is correct and true. We consent to undertake any legal obligation that may
arise, if found to be false, after incorporation of the Company. We hereby agree to be punished
by prevailing law if any of the fact or particular mentioned above is found to be incorrect or
untrue written in this Memorandum of Association."
Then follow the names, addresses, father/husband's name, citizenship No. of the promoters
and the number of shares each subscriber has taken and his signature attested by a witness.
Articles of Association
A company shall frame the articles of association in order to attain the objectives set forth in its
memorandum of association and carry out its activities in a well–managed manner. The articles
of association, hence, constitute the second important document which must be registered in the
case of certain types of company together with the memorandum. Companies are the centre of a
complex web of human relations and they are no longer a wholly private affair. The conflicting
interests of group of persons, like shareholders, who are providers of capital and interested
in dividend; management, who are interested in higher remuneration; the workers, who are
interested in more wages and possibly less work and consumers, who are interested in better
quality at minimum possible prices, have to be held in a state of harmony. The articles constitute
a set of rules regulating the affairs of the company. Each article is a rule for the regulation of
the relations between company and its shareholders and relations between shareholders and
management of the company. The provisions of the articles are binding upon the company in
reference to its members, and vice versa, to the same extent as if they have signed a contract to be
bound by the articles.
The articles of association of a company and its bye laws are regulations which govern the
management of its internal affairs and the conduct of its business. They define the duties, rights,
powers and authority of the shareholders and the directors in their respective capacities and of the
company and the mode and form in which the business of the company is to be carried out. The
Articles of association of a company have a contractual force between company and its members
as also between the members inter se in relation to their rights as such members.
An important implication of the articles is that their provisions amount to a public notice-
constructive notice to all those who deal with the company. They are deemed to have notice of the
manner in which the articles require the company to deal with a particular situation.

The articles of a company must be printed, divided into paragraphs, numbered consecutively,
signed by subscribers to the memorandum in the presence of at least one witness who shall attest
the signatures. Also, articles are to be stamped with requisite stamp and filed along with the
memorandum.
Articles subordinate to memorandum: As between the memorandum and articles, the

memorandum is the dominant instrument. Articles are subordinate to and are controlled by
memorandum. Articles cannot supersede the objects as set out in the memorandum of association.
The memorandum, as we have seen earlier, lays down 'the scope and powers of the company,
whereas the articles govern the ways in which the objects of the company are to be carried out. It
limits and restricts the company’s powers to specified objects and to things incidental or conducive
thereto. It effectually controls the articles in the sense that anything in the articles inconsistent with
any provisions in the memorandum is invalid. The memorandum is, as it were, the area beyond
which the action of the company cannot go; inside that area, the shareholders may make such
regulations for their own government as they think fit. Therefore, articles inconsistent with the
Memorandum is void and ineffective.
Contents of articles
A company shall frame the articles of association in order to attain the objectives set forth in its
memorandum of association and carry out its activities in a well–managed manner. Under Section
20 (2) of the Companies Act, 2063, the articles of association shall state the following matters:
 Procedures for convening the general meeting of the company and notice to be given for
such meeting.
 Number of directors, provision of alternate director, if any, and tenure of directors.
 Provisions relating to the minutes of decisions of the general meeting and the board of
directors, and duplicate copies and inspection thereof.
 If a person has to subscribe shares to become a director of a company, minimum number
of shares.
 In the case of a public company, qualifications and number of independent director.
 Where any professional persons, other than shareholders, are to be appointed as direc-
tors, provisions relating to the number, tenure, qualifications and procedures of appoint-
ment of such persons.
 Powers and duties of the board of directors and the managing director.
 Authority of directors and delegation of authority.
 Quorum for a meeting of the board of directors, notice of meeting and proceedings of
meeting.
 Lien on shares.

 Different classes of shares and the rights, powers and restrictions attached to such shares.
 Provisions relating to calls on shares and forfeiture of shares.
 Provisions relating to the transfer of shares.
 Matters on alteration in share capital.
 Matters on buying back of shares by the company, if the company is to buy back its
shares.
 Appointment of a company secretary.
 Provisions relating to remuneration, allowances and facilities of directors.
 Use of the company’s seal in its transactions, if it is to be so used.
 Accounts, books of accounts and audit of the company.
 Provisions on powers to raise loans or debentures.
 Amalgamation of the company.
 Such matters, if any, as required by the prevailing law to be mentioned in the articles of
association of a company carrying on any specific business.
 Such other necessary matters as required to be mentioned in the articles of association.
Amendment to the memorandum and articles of association

Whatever may the craftsmanship of experts drafting memorandum and articles of association,
it cannot be complete and cannot provide all the provisions for the future time in the changing
context. Therefore, there should be such a provision by which the memorandum and articles
could be amended, i.e., incorporated new provision and repeal as per the business requirements
or need of time. The Companies Act, 2063, has provisioned that the memorandum and articles of
association shall be amended by adopting the due process of law. Section 21 (1) of the Act simply
reads that the general meeting of a company may, subject to Section 6, amend the memorandum
of association or articles of association, by adopting a special resolution to that effect.
After such resolution being passed in the general meeting pursuant to subsection (2), the company
shall give information of any amendment made to the memorandum of association or articles of
association pursuant to Sub-section (1) to the Office within thirty days; and the Office shall record
the same and give information thereof to the concerned company, within seven days after the
receipt of such information.
Objection as to the amendments: Subsection (4) of section 21 of the Act has provided right to
those shareholders dissident to the amendments to challenge it before the court. Therefore, if a
shareholder who is not satisfied with an amendment made to the objectives of the company may,
on fulfilling the following requirements, file a petition, setting out the reasons therefore, in the
court to have that amendment declared null and void:

 A shareholder or shareholders holding at least five percent shares of the paid-up capital
of the company, except the shareholders who consent to or vote for the amendment or
alteration, has to make a petition.
 A petition has to be filed within twenty one days after the adoption of the resolution to
amend the objectives of the company.
 Where anyone is to file a petition on behalf of one or more than one shareholder entitled
to make petition, the petition has to be filed by a person who is authorized in writing for
that purpose.
Power of the Court: Where a petition is filed in the court pursuant to Sub-section (4), the amendment
made to the objectives of the company shall not be effective pending the final decision or order
by the court in that matter. On a petition, the court may issue an appropriate order, specifying the
following terms and conditions:
 Declaring the amendment made to the objectives of the company to be fully or partly
valid or void,
 Requiring the company to subscribe for a reasonable value, the shares and other rights
held by the shareholders making a petition under Sub-section (4), upon being disagreed
with the making of alteration in the main objectives of the company,
 The shares have to be subscribed from the moneys as referred to in Sub-section (2) of
Section 61; and in the case of a company which has no such moneys, issuing an order to
decrease the capital of the company as if the share capital were decreased to the extent
of such subscription by adopting a special resolution by the company; and where such
order is issued, the company shall amend its memorandum of association and articles of
association, subject to the provisions of this Act.
Effects of Court's order: Where an order is issued by the court to fully or partly void the decision
made by the company to amend its objectives, the company shall not be entitled to amend its
memorandum of association or articles of association in that matter without permission of the court
or in a manner contrary to the order of the court. Similarly, where the memorandum of association
or articles of association of a company is altered by an order of the court or the amendment made
by the company is fully or partly endorsed by the court, such alteration or endorsement shall be
enforced as if such alteration or endorsement were made by the general meeting of the company
on its own.
Memorandum and articles of association to be published

Memorandum and articles of association being the constitution of company not only binds the
shareholders and the board of directors but it is binding to those outsiders dealing with the
company. Hence, with a view to give knowledge of the provisions under the memorandum and
articles of association, a public company under Sub-section (1) of Section 22 of the Act shall publish

its memorandum of association and articles of association within three months after getting license
to commence its business.
Similarly, if any amendment is made to the memorandum of association and articles of association
of a public company, the amended memorandum of association and articles of association shall be
published within three months after such amendment.
Further, pursuant to Sub-section (3) a public company shall so keep the memorandum of
association and
Articles of association published pursuant to Sub–section (1) or (2) at its registered office that such
memorandum and articles can be made available as and when so demanded by the concerned.
Doctrine of Ultra-vires
An act against the law-in-force or an act beyond the authority is called as ultra-vires. It is ultra-
vires, for a company to act against or beyond the scope of its memorandum and articles of
association. As the core part of the memorandum is objectives of the company, the doctrine of
ultra-vires implies that any act done by the company must not be beyond the limit of objectives of
the company. Further, the act done by the company is within its authority but it the due process of
doing of such acts has not been followed as stated under the articles of association, the acts become
ultra-vires The general principle applies that the acts ultra-vires to the Act, memorandum and
articles of association are void and not binding to the company and the person doing such act are
personally liable. In Simmonds v. Heffer, 1983 BCLC 298:
A company known as the League against Cruel Sports Ltd. contributed $80,000 to a political party
which committed itself if elected to introduce legislation banning certain sports. The payment
was made in two parts: $50,000 without restriction on its use and $30,000 to be used specifically
for advertising the party’s commitment to animal welfare. Therefore, case is filed to make the
donation as invalid.
The payment of $30,000 was held to be proper but the payment of $50,000 was held to be ultra-
vires as it could be used for the purposes unconnected with the donor’s objects and was therefore
recoverable by the company.
Manner of exercising powers and ultra-vires rule

In Re, Lee Behrens & Co. Ltd. (1932) 2 Ch 46, the following tests were laid down for legitimating
the exercise of corporate powers and to escape the rigor of the ultra-vires rule: -
 Is the transaction reasonably incidental to the carrying on the company’s business?

 Is it done for the benefit and to promote the prosperity of the company?
 Is it a bone-fide transaction?

These tests were approved and followed in the various cases subsequently and in Rolled Steel
Products Ltd. v. British Steel Corporation. 1984 BCLC 466, Browne Wilkinson J. summaries the
position as follows:
 To be ultra-vires, a transaction has to be outside the capacity of the company and not
merely in excess or abuse of the powers of it.
 The question whether a transaction is outside the capacity of the company depends sole-
ly upon whether, on the true construction of its memorandum of association, the transac-
tion is capable of falling within the objects of the company as opposed to being a proper
exercise of the power of the company.
 If the transaction falls within the objects of the company, it is not ultra-vires and accord-
ingly it is not void.
 If a company enters into a transaction which is intra-vires but in excess or abuse of its
powers, such transaction will be set aside at the instance of the shareholders.
 A third party, who has notice that a transaction, intra-vires, was entered into in excess
or abuse of the powers of the company, cannot enforce such transaction against the com-
pany.
 The fact that a power is expressly or impliedly limited so as to be exercisable only for the
purpose of the company’s business does not put a third party on inquiry as to whether
the power is being so exercised, i.e., such provision does not give him constructive notice
of excess or abuse of such power.
An ultra-vires act, being void, cannot be set right by subsequent ratification. And the directors
who throw away the company’s money on an unauthorized object are personally liable to make
good the company’s loss. The effect is that a bank or other person lending to a company for the
purposes ultra- vires the memorandum cannot recover. If there is a power to borrow and raise
money, the method of raising finances is not to be gone into.
Powers which are not implied

The following powers have been held not to be implied unless provided expressly and void.
 Acquire any business similar to company’s own.

 Entering into agreement with other person or companies for carrying on business in
partnership or for sharing profits, joint venture or other arrangement.
 Taking shares in other companies having similar objects.
 Taking shares of other companies where such investment authorizes the doing indirectly
that which will not be intra vires if done directly.
 Promoting other companies or helping them financially.
 A power to sell and dispose of the whole of a company’s undertaking.

 A power to fund for political purposes.

 A power to give gifts and donations or contribution for charities not relating to the ob-
jects stated in the memorandum.
 Entering into contracts of surety ship or guarantee.
Therefore, if a company incorporated by or under a statute, acted beyond the scope of the object
stated in the memorandum of association, such acts were void as beyond the company’s capacity
even if ratified by all the members of the company. But the English Companies Act, 2006 has
considerably reduced the scope of the doctrine.
Prospectus
A prospectus, as per Section 2 (m), means a prospectus to be published by a company pursuant
to Section 23. It includes any document described or issued as prospectus, any notice, circular,
advertisement or other document inviting deposits from the public or inviting offers from the
public for the subscription or purchase of any shares in or debentures of a body corporate. Thus, a
prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall
be called a prospectus if it satisfies two things-
 It invites subscriptions to share or debentures or invites deposits.

 The aforesaid invitation is made to the public.
However, a public company limited by shares, generally, issues shares to the public for this it has
to issue a prospectus. In that case it has to follow the procedure below.
After the certificate of incorporation is obtained, the affairs of the company are taken over by the
first directors appointed in accordance with the provisions of law. They will elect one of their
members as the chairman of the Board of Directors, if none is named in the articles of association.
The Board attends to the following matters:
 Appointment of various expert agencies such as bankers, auditors, secretary, etc.

 Entering into underwriting contract, brokerage contracts.
 Making arrangements for the listing of shares on stock exchanges.
 Drafting a prospectus for the purpose of issue to the public.
The appointment of a banker is necessary as it has to receive the share application along with
application moneys. The appointment of first auditor is in the hands of Board of directors and it
becomes necessary as we shall see later, to make the appointment before the issue of prospectus.
The appointment of company secretary is obligatory in case of companies having the prescribed
paid-up share capital. In other companies also, the appointment of a company secretary is desirable.
Section 23 of the Companies Act, 2063 has A public company shall publish its prospectus prior
to issuing its securities publicly. Prior to the publication of prospectus, the prospectus signed

by all directors of the company has to be submitted, along with a written application made to
the Securities Board for approval, under the prevailing laws on securities. Unless and until the
Securities Board approves and gives permission for the public issue and a copy of such prospectus
is registered with the office, no company or no person, on behalf of such company, shall publish,
or cause to be published , the prospectus of such company.
If the prospectus submitted is approved by the Securities Board, the concerned company shall
give to the Office information thereof, in writing, accompanied by a copy of the approval letter
of the Securities Board; and on receipt of that information, the Office shall register the prospectus
pursuant to this Section. Provided, however, that if it appears that any matter contained in this Act
has not been complied with, the Office may refuse to register it.
In publishing the prospectus, the company shall also mention that the prospectus has been
approved by the Securities Board and registered with the Office, and the date thereof. The covering
page of each prospectus shall also mention that such prospectus has been registered and that the
Securities Board or the Office shall not be liable to bear any kind of responsibility in respect of
the matters mentioned therein. Prior to the approval by the Securities Board of the prospectus of
any company, the concerned company shall make a declaration before the Securities Board that
the provisions of this Act have been complied with; and the Securities Board may, if it deems
necessary, seek opinion of the Office on that matter.
Contents of the prospectus:

The Companies Act, 2063 has not stated the matters to be included in the prospectus. The contents
to be provided in a prospectus can be divided into three parts. In the first part, brief particulars of
the company, secondly, the financial information of the company and finally, statutory and other
information. In general, a prospectus includes the following matters-
Brief particulars: The brief particulars of the company are to be given about matters mentioned
below:
 General information: Under this head information is given about-

 Name and address of registered office of the company.
 Name/(s) of stock exchange/(s) where application for listing is made.
 Declaration about refund of the issue if minimum subscription of 50 per cent is not re-
ceived within 90 days from closure of the issue.
 Date of opening of the issue.
 Date of closing of the issue.
 Name and address of auditors and lead managers.
 Names and address of the underwriters and the amount underwritten by them.

 Capital structure of the company: It includes-

 Authorised, issued, subscribed and paid-up capital.
 Size of the present issue, giving separately reservation for preferential allotment to pro-
moters and others.
 Terms of payment, how to apply and special tax benefits.
 Particulars of the issue: It includes the objects, project cost and means of financing (in-
cluding contribution of promoters).
 Company management and project: It includes- History and main objects and present
business of the company, promoters and their background, location of the project, collab-
orations, if any, nature of the product, export possibilities, future prospects, stock market
data for share/debentures of the company including high and low price in each of the
last three years and monthly high and low during the last six months, if applicable, cer-
tain prescribed particulars in regard to the company and other listed companies under
the same management which made any capital issue during the last 3 years. Outstanding
litigations relating to financial matters or criminal proceedings against the company or
directors, management perception of risk factors (e.g., sensitivity to foreign exchange
rate fluctuations, difficulty in availability of raw materials or in marketing of products,
cost,/time over-run, etc.)
Further, general Information shall include information on matters like:
 Consent of directors, auditors, solicitors, managers to the issue, Registrars to the issue,
Bankers of the Company, Bankers to the issue and experts.
 Change, if any, in directors and auditors during the last 3 years and reasons therefore.
 Procedure and time schedule for allotment and issue of certificates
 Names and address of Company Secretary, legal advisor, Lead Managers, Co-managers,
Auditors, Bankers to the issue.
 Authority for the issue and details of resolution passed therefore.
Financial information: It includes-
Reports of the auditors of the company with respect to its profits and losses and assets and
liabilities, and the dividends paid during the five financial years immediately pretending the issue
of prospects;
Report by the accountants (who should be named) on the profits or losses for the preceding 5
financial years and on the assets and liabilities on a date which must not be more than 120 days
before the date of the issue of the prospectus.

Statutory and other information: It includes the information about-
 Minimum subscription.
 Expenses of the issue.
 Underwriting commission and brokerage.
 Previous public or rights issue; if any, giving particulars about date of allotment, re-
funds, premium/ discount, etc.
 Issue of shares otherwise than for cash.
 Commission or brokerage on previous issue.
 Particulars about purchase of property, if any.
 Revaluation of assets, if any.
 Material contracts and time and place where such documents may be inspected.
 Debentures and redeemable preference shares or other instruments issued but remain-
ing outstanding on the date of the prospectus and terms of their issue.
Procedures regarding the issue of prospectus

A public company without issuing its prospectus cannot issue its securities for the public
subscription. The general procedures to be followed while publishing prospectus have been
provided under Section 23 of the Companies Act, 2063. Other procedures to be fulfilled in
publishing the prospectus and the matters to be set out in the prospectus shall be as mentioned
in the prevailing law on securities. The common procedures or steps to be abided by a company
while issuing a prospectus can be stated as under-
 Prior to the publication of prospectus, the prospectus signed by all directors of the com-
pany has to be submitted, along with a written application made to the Securities Board
for approval, under the prevailing laws on securities. [Section 23(2)]
 Unless and until the Securities Board approves and gives permission for the public issue
under Sub-section (2) and a copy of such prospectus is registered with the office, no com-
pany or no person, on behalf of such company, shall publish, or cause to be published ,
the prospectus of such company. [Section 23(3)]
 If it appears that the prospectus submitted pursuant to Sub-section(2) omits any im-
portant matter or contains any unnecessary matter the Securities Board shall cause such
prospectus to be amended or altered as required and grant approval to publish it in
accordance with law. [Section 23(4)]
 If the prospectus submitted pursuant to Sub-section (2) is approved by the Securities
Board, the concerned company shall give to the Office information thereof, in writing,
accompanied by a copy of the approval letter of the Securities Board; and on receipt of

that information, the Office shall register the prospectus pursuant to this Section. Pro-
vided, however, that if it appears that any matter contained in this Act has not been
complied with, the Office may refuse to register it. [Section 23(5)]
 If any person demands for a copy of the prospectus registered pursuant to Sub-section
(5), the Office shall provide such copy by collecting the prescribed fees. [Section 23(6)]
 In publishing the prospectus pursuant to Sub-section (1), the company shall also mention
that the prospectus has been approved by the Securities Board and registered with the
Office, and the date thereof. [Section 23(7)]
 The covering page of each prospectus shall also mention that such prospectus has been
registered pursuant to this Section and that the Securities Board or the Office shall not
be liable to bear any kind of responsibility in respect of the matters mentioned therein.
[Section 23(8)]
 Prior to the approval by the Securities Board of the prospectus of any company, the con-
cerned company shall make a declaration before the Securities Board that the provisions
of this Act have been complied with; and the Securities Board may, if it deems necessary,
seek opinion of the Office on that matter. [Section 23(9)]
Liability for untrue statements in the prospectus

The prospective shareholders are entitled to all true disclosures in the prospectus. The persons
issuing the prospectus are bound to state everything accurately and not omit material facts. A
statement included in a prospectus shall be deemed to be untrue-
 If the statement is misleading in the form and context in which it is included.

 Where the omission from a prospectus of any matter is calculated to mislead, the pro-
spectus shall be deemed in respect of such omission, to be a prospectus in which an
untrue statement is included.
The expression 'included' with reference to a prospectus means, included in the prospectus
itself or contained in any report or memorandum appearing on the face thereof or by reference
incorporated therein or issued therewith. Thus, in Rex v. Kylsant, (1992) 1 K.B, 442:
A company issued a prospectus. All the statements included therein were literally true. One of
the statements disclosed the rates of dividends paid for a number of years. But dividends had
been paid not out of trading profits but out of realised capital profits. This material fact was not
disclosed.
It was held that the prospectus was false in material particulars and Mr. Kylsant, the managing
director and chairman, who knew that it was false, was held guilty of fraud and hence, liable for
loss caused to the investors.

A person who has applied for shares in the company and who has been allotted shares has certain
remedies against the company and the persons issuing the prospectus. But a buyer of shares in
the open market or a subscriber to the memorandum has no such right. If, however, a prospectus
is issued with the object of including Persons to buy shares in the open market, any person who
buys shares even in the open market on the basis of the statements made in it has a right of action
if the statements are untrue or there is material omission from the prospectus. A false statement or
omission of material facts gives rise to civil as well as criminal liability.
Under Section 24 of the Companies Act, 2063, it shall be the duty and obligation of the concerned
company to abide by the matters contained in the prospectus. Under Sub-section (2), the directors
who have signed the prospectus as referred to in Sub-section (1) shall be liable for the matters
mentioned in that prospectus. Similarly, if any published prospectus contains false statements
made maliciously or deliberately and any person sustains any loss or damage by reason of his/
her subscription of securities on the faith of that prospectus, the directors who have signed
that prospectus shall be personally liable to pay compensation for the actual loss or damage so
sustained.
Exemption from the liabilities: The proviso under Sub-section (3) of Section 24 has stated that a
promoter who resigns before the decision made by the company to publish the prospectus or who
on becoming aware of any false statement in the prospectus, publishes a notice of that matter to
the information of the general public prior to the sale or allotment of securities or who proves
that he/she did not know that the prospectus contained any false statement shall not be liable to
bear such compensation. Hence, in the following cases, the directors or other person signing the
prospectus may relieve from the liabilities and shall not be liable to bear such compensation.
 Where a promoter who resigns before the decision made by the company to publish the
prospectus.
 Where on becoming aware of any false statement in the prospectus, publishes a notice
of that matter to the information of the general public prior to the sale or allotment of
securities
 Where he proves that he/she did not know that the prospectus contained any false state-
ment.
 Where he proves that there was reasonable ground to believe the facts so stated were of
true or there was no reason to believe that the facts were untrue.

6. Constructive Notice and Indoor Management
General notes
The memorandum and articles provides fundamental statutory provisions to regulate the
management of a company and bind the company to the members and the members to the
company by constituting a contract between them. And those who become subsequently, members
of the company are bound by its constitution. By setting up the objectives of the company, the
memorandum determines the business area and limits of the companies' authority and the working
procedures which have to be observed by the directors and officers of the company. The legality
of transactions sanctioned by the officers of company depends upon the thorough compliance of
the provisions incorporated under the memorandum and articles. The act not warranted by the
memorandum and articles are ultra-vires being beyond the authority of company. The purposes
of these documents are, firstly, to bring certainty in the corporate functions heading towards a
fixed target or objectives. Secondly, make responsible the officer to their works with observance
of corporate governance. Thirdly, protect the assets of company from the direct access of outsiders
entering into the dealings with the company through unscrupulous directors or officers of
company. Fifthly, to impose obligation to the officer of company to run corporate functions and
proceedings as per the rules and they cannot defend as against the outsiders by their own default.
Hence, the persons dealing with the company also have to be observed and assured that whether
or not the particular business comes within the ambit of the companies' power.
The memorandum and articles give raise to two doctrines of company law, namely, constructive
notice and indoor management. Constructive notice compels those dealing with the company
to consult for their own protection the provisions of the memorandum and articles and to deal
with the company only in the manner prescribed. It is the principle which imposed obligation
to those dealing with the company to take notice of the provisions under the memorandum and
articles. It implies that every person dealing with a company is aware with the memorandum and
articles and afterward cannot make defense of ignorance of the provisions as they were existed. In
reality, a person may not have knowledge of the memorandum and articles, he cannot be excused
on that basis. In other hands, the rule of indoor management compels to those handling the
company’s affairs to assure proper internal proceedings because they cannot prejudice outsiders
by raising internal irregularities of their own making as a defense. The complex management
system of modern companies and their functions are beyond the understanding of a common
people and they have no time and opportunity to inspect all the documents regarding the internal
management of company. In such situation if the dealings with the company are held void under
the strict construction of constructive notice, it would be detrimental to the outsiders. In fact,
the rule of indoor management is an exception to the application of constructive notice, i.e., the
rigorous effects of constructive notice is water downed by the rule of indoor management.

Constructive notice
The rule simply states that those who deal with the company are deemed to have notice of the
contents of the memorandum and articles. Therefore, anyone having dealing with a company
was deemed to have knowledge of the contents of its object clause. The result, therefore, of this
rule is that where the businesses being carried on by the company were known to the third party
and, whether he actually knew it or not, were ultra-vires, he would be unable to sue the company.
There are different aspects of this principle-
 The members are deemed to be aware of the contents of the memorandum and articles.
Other persons who have dealing with the company are also affected with notice of what
is contained in them, but are not bound to make further inquires and may assume that
the internal management of the company has been regular and is being carried on as per
the memorandum and articles.
 For example, the articles required that all documents should be signed by the managing
director, secretary and the working director of behalf of the company. A deed of mort-
gage was executed by the secretary and the working director only. It was claimed that
the company should be held liable. The court held that no claim would lie under such
a deed. The court said that the mortgagee should have consulted the articles before the
deed was executed. Therefore, even though the mortgagee may have acted in good faith
and the money borrowed applied for the purpose of the company, the mortgage was
nevertheless invalid.
 However, the doctrine of indoor management protects the third parties who have acted
in good faith. The rule of constructive notice is confined only to the extent of powers
under the memorandum and articles and there is no constructive notice as regard the
manner in which the power is exercised.
 A further aspect of constructive notice is that persons dealing with the company are tak-
en not only to have read those documents but also to have understood them according
to their proper meaning. Persons dealing are presumed to have understood not only the
company’s power but also to all such documents as are required to be registered with the
Registrar such as, special resolutions and particulars of charges. It is suggested that there
should be constructive notice to only such documents as are open to public inspection.
The doctrine of constructive notice has been abolished in England by Companies Act, 2006 in
reference to the memorandum and articles and now the basic requirement is that dealing with the
company should be in good faith and without actual notice that the memorandum and articles
were being violated. The result is that in favour of a person dealing with a company in good
faith, any transaction decided on by the directors should be deemed to be within the capacity of
the company and free from any limitations under the memorandum and articles on the director’s
powers, and the second of which relieved the other party of any obligation to inquire about those
matters. This, however, was no help when the transaction was beyond the company’s capacity;
and it covered only transactions decided on by the directors, and protected only the third party

dealing with the company in good faith. Hence, a third party, who has dealt with the company
through its board of directors or with someone authorized by that board, will be protected so long
as he has acted in good faith.
Similar approach has been adopted by the Companies Act, 2063, hence, the effect of the
constructive notice has been minimised and the company has been made responsible for the acts
of its directors towards the third parties dealing with the company in good faith. Section 104 of the
Act has provided that any act done or action taken by or document signed by at least one director
authorized by a company or any person authorized to act for the company shall be valid and
binding for the company.
Further, where any person does any transaction with a company in good faith, such transaction
shall be binding for the company; and nothing contained in memorandum of association, articles of
association of the company or in any resolution adopted by the general meeting or in any agreement
concluded between the company and its shareholder shall be deemed to have made any limitation in
or restriction on the authority of the director or the authorized person to do such transaction.
Provided, however, that if any officer does any act or transaction in excess of his/her authority,
such officer shall be personally liable for such act or transaction unless such authority is ratified
by the general meeting pursuant to this Act; and the company may also recover from him/her the
loss or damage, if any caused to the company from such act or transaction.
Indoor management
The doctrine of constructive notice is designed to protect the company’s interest as well as the
interest of the shareholders from the undesirable acts of the company’s officers including the
directors to other officers appointed by them. By contrast, the doctrine of indoor management
has been developed to rescue the third parties or to enable them to be secured from the internal
irregularities committed by the directors which they should manage.
Similarly, it saves the third parties from the rigour of the strict implication of the doctrine of
constructive notice. This implies that the outsiders are not bound to inquire whether the act of the
directors which is related to internal management, had been properly and regularly performed.
Even where the directors exceed their powers or infringe the restrictions imposed upon them,
the company may be bound; for an outsider dealing with the company is required to see, that the
transaction on the face of it is regular and consistent with the articles. The strangers are justified in
assuming that all matters of indoor management have been done regularly. Thus, in Royal British
Bank v. Turquand: (1856) 6 E. & B. 327
The directors of a company borrowed a sum of money from the plaintiff. The company’s articles
provided that the directors might borrow on bonds such sums as may from time to time be
authorized by a resolution passed at a general meeting of the company. The shareholders claimed
that there had been no such resolution authorizing the loan and, therefore, it was taken without
their authority.

It was held that the company is bound by the loan. Once it was found that the directors could
borrow subject to a resolution, the plaintiff had the right to infer that the necessary resolution must
have been passed.
This rule was enunciated by the courts to mitigate the effects of the constructive notice doctrine.
As that doctrine has now been abolished the rule is no longer often of direct relevance when
third party has dealt with the company through the board of directors. It importance, now, is in
situations where, instead, third party’s dealings have been with some officer or agent other than
the board.
The rule is of great practical utility. It has been applied in a great variety of cases involving
rights and liabilities. It has been used to cover acts done on behalf of the company by de facto
directors who have never been appointed, or where appointment is defective, or who, having
been regularly appointed, have exercised an authority which could have been delegated to them
under the company’s articles, but never has been so delegated, or who have exercised an authority
without quorum.
Thus, where the directors of a company having the power to allot shares only with the consent of
the general meeting, allotted them without any such consent; where the managing director of a
company granted a lease of the company’s properties, something which he could do only with the
approval of the board; where managing agents having the power to borrow with the approval of
the directors borrowed without any such approval, the company was held bound.
Exceptions to the rule: The rule of indoor management is subject to the following exceptions:
 Knowledge of the irregularities: The first and the most obvious restriction is that the rule has
no application where the party affected by an irregularity had actual notice of it. Knowledge
of an irregularity may arise from the fact that the person contracting was himself a party to the
inside procedure. Case Law: Howard v. Patent Ivory Manufacturing Co.
The directors could not defend the issue of debentures to themselves because they should have
known that the extent to which they were lending money to the company required the assent of
the general meeting which they had not obtained.
Negligence/Suspicion of Irregularity: A person cannot claim the benefit of the rule of indoor
management, in the circumstances under which he would have discovered the irregularity if
he had made proper inquiries. Further, where circumstances surrounding the transaction are
suspicious, and therefore invite inquiry, the outsider cannot claim the benefit of this rule.
 Forgery: The rule of indoor management will not apply where a document on which the person
seeks to rely on is a forgery. A company can never be held liable for forgeries committed by
its officers. Such acts are void-ab-initio. Case Law: Ruben vs. Great Fungall Consolidated Co.
(1906)

Ruben lent a company a sum of money on the security of a share certificate. The secretary had
forged the signatures of the two directors and had affixed the seal on the certificate without
authority. The company refused to register the share certificate. Ruben claimed damages relying
on the Turquand’s rule. It was held that he could not do so because the rule did not apply where
the document was forged.
Acts outside apparent authority: The rule of indoor management does not apply where a person
acting on behalf of the company exceeds any authority given to him. A person who enters into a
transaction with a company official who has acted beyond official powers will not be protected by
the rule of indoor management. Case Law: Anand Lal vs. Dinshaw & Co. (1942)
P accepted a transfer of company’s property from its accountant. Since such transaction is
apparently beyond the scope of the accountant’s authority it was void.
No Knowledge of contents of MOA & AOA: A person who has not actually read the memorandum
and articles and who was not at the time he entered into the contract, aware of their content cannot
seek to rely on the doctrine of indoor management. No one can rely and act upon something of
which he was infact completely ignorant.
7. Shares and Debenture
General notes
The securities which a company can issue fall into two primary classes which legal theory tries
to keep rigidly separated but which in economic reality merge into each other. The first of these
classes is described as shares; the second as debentures. The basic legal distinction between
them is that a share constitutes the holder is a creditor of the company but not a member of it.
The capital of a company is raised in general by issuing it securities, i.e., Share and Debenture.
A share is a right to a specified amount of the share capital of a company carrying with it certain
rights and liabilities, while the company is a going concern and in the winding up. Shares are
simply, a bundle of rights of intangible rights against the company which had issued them. Share
certificates are not valuable property in themselves but just an evidence of the true property
which are the proportionate interests of the shareholders in the ownership of the company. On
the other hand, the debenture simply means a document acknowledging a loan made to the
company and providing for the payment of interest on the sum borrowed until the debenture is
redeemed, i.e., the repayment of the principal sum. It may or may not be under seal and so does
not necessarily imply that any charge is given on the company's assets, though such a charge
usually exists.

Meaning of shares
In common sense share refers a right to a specified amount of the share capital of a company
carrying with it certain rights and liabilities while the company is a going concern and in the
winding up. Thus, a share of a company in the hands of a shareholder signifies a bundle of right
and obligations but it is not a negotiable instrument. A company may issue all shares with same
rights and obligations. However, it may issue different types of shares with different rights and
liabilities attached to them so as to satisfy the needs of different types of investors.
Section 2 (n) of the Companies Act, 2063 has defined the term share as the divided portion of the
share capital of a company. In fact, share is a unit or part of the share capital of a company divided
into the equal denomination. For example, the share capital of a company is Rs. 100000/- and if it
is divided at the rate of Rs. 100/-, the number of unit is 1000, i.e., there are 1000 number of shares.
Each unit of is called as one share. A share signifies the following:
 The interest of a shareholder in the company, i.e., the right to dividend, attend meetings,
vote and share surplus assets of the company, if any, in the event of the winding up of
the company.
 The liability of the shareholder in the company to pay calls on shares until fully paid up.
The shareholders liability towards the liabilities of company is determined by the face
value of shares which he has subscribed. If the shares are fully, there is no need to pay to
meet the liabilities of the company.
 The rights of the shareholder to transfer the shares subject to the articles of association
as the shares are classified as movable property transferable in the manner provided in
the articles.
 Binding covenants on the part of the company as well as the shareholder as given in the
Articles of the company
Nature of shares
The members’ shares entitled them to an equitable interest in the assets. For shareholders no longer
share any property in commons; at the most they share certain rights in respect of dividends,
return of capital on a winding up, voting and the like. Today it is generally stated that a share is a
chose in action. The theory seems to be that the contract constituted by the articles of association
defines the nature of rights which, however, are not purely personal rights but instead confer
some sort of proprietary interest in the company though not in its property. The company itself is
treated not merely as a person, the subject of right and duties, but also as a res, the object of rights
and duties. It is the fact that the shareholder has rights in the company as well as against it, which,
in legal theory distinguishes the member from the debenture holder whose rights are also defined
by contract but are rights against the company and, if the debenture is secured, in its property, but
never in the company itself.

One thing at least is clear that the shares are recognized in law as well as in fact, as objects of
property which are bought, sold, mortgaged and bequeathed. They are indeed the typical items
of property of the modern commercial era and particularly suited to its demands because of their
exceptional liquidity. The important fact is that his shareholding causes him to become a member
of an association, normally, with right to take part in its deliberation by attending and voting at
its general meeting.
Further, the concept of nominal value of share is meaningless and may be misleading except in so
far as it determines the minimum liability. Thus in Short v. Treasury Commissioners: [1948] A.C.
534, HL
The whole of the shares of Short Bros. were being acquired by the Treasury under a Defence
Regulation which provided for payment of their value “as between a willing buyer and a willing
seller”. They were valued on the basis of the quoted share price, but the shareholder argued that,
since all the shares were being acquired, stock exchange prices were not a true criterion and that
either the whole under taking should be valued and that the price thus determined apportioned
among the shareholders, or the value should be the price which one buyer would give for the
whole block, which price should be similarly apportioned.
The court upheld the method adopted and rejected both the alternative suggested, the first because
the shareholder were not part owners of the undertaking, and the second because the regulation
implied that each holding was to be separately valued. Normally, the shareholder’s rights will fall
under three heads:
 Dividends.
 Return of capital on a winding up and.
 Attendance at meeting and voting.
Unless there is some indication to the contrary, all the shares will confer the like rights to all three.
Classes of shares
The share carries certain rights and is subject to some obligations. A company may issue all shares
with same rights and obligations. However, it may issue different types of shares with different
rights and liabilities attached to them. The prima facie equality of shares can be modified by
dividing the share capital into different classes with different rights as to dividends, capital or
voting or with different nominal values. In such a case, the rights attached to the different classes
of shares are called class rights. The class rights normally relate to voting, dividends, return of
capital or share in the surplus assets of the company (the last two rights being available at the time
of winding up) and are invariably set out in the articles of the company. The most common classes
of shares are Preference and Equity or Ordinary shares.

1. Preference Shares: It means, in the case of a company limited by shares, that part of the
capital of the company which carries of preferential rights as to-
 Payment of dividend at a fixed amount or at a fixed rate during the lifetime of the com-
pany.
 Repayment of capital on winding up.
The Companies Act, 2063 under Section 65 has authorised the company to issue preference
shares as provided for in this Act, memorandum of association or articles of association.
Matters to be disclosed: As per Section 65 (3), the following maters, inter alia, shall be
disclosed while issuing the preference shares:
 Whether preference is given to receive dividends against ordinary shares;

 Percentage of dividends receivable by preference shareholders;
 Whether dividends get cumulated every year (cumulative) or profits are distributed only
in a year wherein profit is made (non-cumulative);
 Whether preference is given while paying amount of share in the event of liquidation of
company;
 Whether voting right is attached there to; and if voting right is attached, whether such
right is available only in the case of preference share or also in other matters;
 Whether voting right is available also in other matters pursuant to Clause (e) , the pro-
portion to which such right is exercisable;
 Whether preference shares can be converted into ordinary shares;
 Whether the amount of preference shares can be redeemed (redeemable) or cannot be
redeemed (irredeemable) after a certain period;
 Whether, in redeeming preference shares, premium is payable on redemption.
Redemption of preference shares: Where any redeemable shares are issued, the shares
shall not be redeemed unless they are fully paid. Subsection (5) of Section 65 of the Act has
stated that the preference shares shall be redeemed out of profits which would otherwise be
available for dividend or out of the proceeds of a fresh issue of shares made by the company
for the purposes of the redemption. Where a premium is payable on the redemption of any
redeemable preference shares, there shall be provided for a separate fund out of the profits of
the company or out of the company’s shares premium account, for the purposes of redemption
of such shares (Subsection 6).
Capital redemption reserve account: Subsection (7) of Section 65 has provided that in cases
where any redeemable preference shares are redeemed out of the proceeds of a fresh issue of
shares pursuant to sub-section (5), while redeeming preference shares pursuant to this Act,

a capital redemption reserve account shall be established and a sum equal to the nominal
amount of the shares redeemed shall be transferred to that account, out of profits which would
otherwise have been available for dividend. The capital redemption reserve account shall be
maintained as if it were the paid–up capital. Further, as per Subsection (13), a company may
issue new shares to its shareholders as fully paid bonus shares out of the capital redemption
reserve funds.
Cancellation and re-issue of preference shares: After the completion of the redemption of any
preference shares redeemed, such shares shall be deemed to have, ipso facto, been cancelled.
However, such redemption of preference shares shall not be taken as reducing the amount of
authorized share capital of the company. Similarly, Subsection (11) of Section 65 of the Act
has authorised the company to issue new shares up to the nominal amount of the preference
shares so redeemed or to be redeemed.
Preference shares are of the following kinds:
a) Cumulative and Non-cumulative preference shares
These are the shares on which dividend goes on accumulating till it is fully paid off.
The arrears of any year’s dividend are carried forward as a charge upon the subsequent
years’ profits or the payment of arrears in dividend is made from future profits. Thus,
dividends not paid in any year or years accumulate and are paid out whenever profits
are available. If the company goes into liquidation, the arrears of dividends are payable.
If a preference share does not carry the right to dividend in arrears, then such a preference
share is known as non-cumulative or simple. Thus, if no profits are available in a year, the
holders get nothing nor can they claim unpaid dividend in subsequent years. It should
be remembered that preference shares are always presumed to be cumulative unless
expressly described as noncumulative. Preference shares may be made non-cumulative
by express provisions in the Articles or by language which is sufficiently clear.
b) Participating and Non-participating preference shares
Participating: These shares are entitled to a share in the surplus profits which remain
after the claims of the equity shareholders have been met. The surplus profits are
distributed in a certain agreed ratio between the holders of the participating preference
shares and the holders of the equity shares. Hence, if a preference share carries either one
or both of the following rights then it is known as participating share:
 To participate further in the profits either along with, or after payment of a certain
rate of dividends on equity shares.
 To participate in the surplus assets at the time of winding up.

Non-participating: if a preference share does not carry either of these rights, then it will
be known as non-participating share. The holders of these shares do not share in the
surplus profits which go to the equity shareholders but only entitled to a fixed rate of
dividend. It should be remembered that preference shares are always presumed to be
nonparticipating unless expressly described as participating.
c) Convertible and Non-convertible preference shares
Convertible preference shares: The shares which entitle their holder a right of conversion
into equity shares within a certain period of time.
Non-convertible preference shares: The preference shares which cannot be converted

into equity shares by its holders.
d) Redeemable and irredeemable preference shares
In issuing a preference share, the company has to make it clear that whether the amount of
preference shares can be redeemed (redeemable) or cannot be redeemed (irredeemable)
after a certain period of time.
Redeemable preference shares: A company limited by shares may, if so authorized by its

Articles, issue of redeemable preference shares. The redeemable preference shares can
be redeemed by the company either at a fixed date, or after a certain period of time, or at
the option of the company. But redemption of such shares shall not be taken as reducing
the nominal capital of the company. Under Section 65 of the Companies Act, 2063, shares
can be redeemed subject to the following conditions:
 It must be fully paid-up.

 Any premium payable on redemption must have been provided for out of the profits
or out of the company’s security premium account, before the shares are redeemed.
 Where redemption is made out of profit, a sum equivalent to the nominal value of
the shares redeemed must be transferred to the capital redemption reserve account.
 Such shares can be redeemed only out of the Profit of the company and the proceeds
of a fresh issue of shares made for the purpose of redemption.
 After the completion of the redemption of any preference shares redeemed pursu-
ant to this Section, such shares shall be deemed to have, ipso facto, been cancelled.
 A company shall while redeeming any preference shares, follow such terms and
procedures as provided by the articles of association of the company, subject to this
Section; and such redemption of preference shares shall not be taken as reducing the
amount of authorized share capital of the company.

 Where a company has redeemed or is about to redeem any preference shares, it

shall have power to issue new shares up to the nominal amount of the shares so
redeemed or to be redeemed.
 A company may issue new shares to its shareholders as fully paid bonus shares, out
of the capital redemption reserve funds
Voting rights of preference shareholders

Clause (e) of Sub-section 3 of Section 65 of the Act has opened the option whether or not
the voting right is attached there to; and if voting right is attached, whether such right is
available only in the case of preference share or also in other matters. In general, the
preference shareholders will vote only on matters directly relating to preference shares. The
preferenceshareholders can vote on the following matters relate to preference shares -
 Any resolution for winding up of the company.

 Any resolution for the reduction or repayment of share capital.
2. Equity/Ordinary share
Shares other than preference are called ordinary shares. If the company has not provision for
issuing preference shares, the shares to be issued by the company are equity shares. Equity
shares are commonly issued by the company for the public subscription by public offerings.
There is no fixed rate of dividend and the dividend is decided by the board of directors and
the same is declared at the general meeting of the company.
3. Right share
Right shares are those shares which are issued to existing shareholders. This class of shares
can be issued at a fixed ratio of share holdings by the existing shareholders of a company
for price. Pursuant to Sub-section (7) of Section 56 of the Act a public company shall publish
a notice on the issue of right shares, which may be subscribed by the existing shareholders
only, in a daily newspaper of national circulation for at least three consecutive times prior to
fifteen days of the issue of such shares. In issuing shares, under Sub-section (11), a time limit
of at least thirty five days shall be given to the existing shareholders to subscribe the shares. If
such shareholders fail either to subscribe the shares or to sell or transfer the right to subscribe
shares to anyone else within the said time limit or, such shares may be sold in any other
manner as decided by the board of directors of the company.
Benefits of Issuing Right Shares
 More control on existing shareholders: Right shares are issued to existing shareholder,
so there is no risk of losing of control of existing shareholders. Existing shareholders’
share will increase in company and they can take decision without any compromise with
the principles of company. It is very helpful to achieve the missions of company.

 No loss to existing shareholder: By issuing shares to existing shareholders, value of

share will increase due to stability in controlling power of company. So, there will not be
any loss to existing shareholders with right shares.
 No cost for issuing shares to public: Company has not to give any invitation to public,
so advertising cost and other new issue cost will decrease with right shares.
 Helpful to increase the goodwill of company: It is also way to increase the goodwill and
reputation of company in industry.
 Capital formation: Company can get capital at any time without any delay because com-
pany can easily issue of shares to existing shareholders just sending right shares offer
notice.
 More scientific: Distribution technique of right shares issue is more scientific. Not all
shares will get by single shareholders but it w`ill be in the proportion of existing shares
which is in the hand of old shareholders at this time.
Benefits of Issuing Right Shares

The existing shareholders shall have the first right to subscribed the shares issued in pro-
portion to their respective shareholding. Existing shareholders does not have first right on
following shares to be issued by the company:-
a) Shares issued by the company for any consideration other than cash,
b) Shares issued to any person under any right or facility provided in accordance with the
terms of an agreement concluded with the company,
c) Shares issued under an employee share scheme,
d) Shares issued in accordance with an agreement concluded between the company and its
creditors,
e) Shares issued on converting preference shares into ordinary shares; or debentures into
shares by the company,
f) Shares issued in accordance with an agreement between the concerned parties in

the course of management of the company or restructuring of its capital or loan or
implementation of a restructuring program agreed upon between the relevant parties
in accordance with the prevailing law on insolvency or implementation of a program of
conversion of a public company into another public company.
4. Bonus shares
A company may, if the articles so provide, capitalize profits by issuing fully paid-up shares
to the members thereby transferring the sums capitalized from the profit and loss account or
Reserve Account to the Share Capital. Bonus shares are free shares issued by the company
to its existing share holders. Bonus shares are issued in a ratio of the shares an investor hold.

For example when a company offers 1:5 bonus shares, it means a share holder will get 1 free
share for 5 shares. So if an investor holds 100 shares at the time of bonus then they will become
120 shares.
Bonus shares are usually announced by the company with a record date, the date which is
considered for the bonus shares. All the investors holding the shares on the record date are
eligible for bonus shares. Company usually gives bonus shares as a substitute of dividend
payouts.
Section 179 of the Companies Act, 2063 provides that a company may, by adopting a special
resolution in the general meeting, issue bonus shares to its shareholders, out of the amount
available for the distribution as dividend. Where a company is to issue bonus shares, the
company shall give information thereof to the Office before issuing such shares.
5. Sweat Equity Shares
Company may issue its shares to its employees or other concern persons in return of their
special and expertise service and efforts, e.g., know-how or making available rights in the
nature of intellectual property provided to the company for its prosperity and promotion at
the lower price or discount rate than its face value, it is known as sweat share. However, all
the limitations, restrictions and provisions relating to equity shares shall be applicable to such
sweat equity shares.
Issue of shares at par, at premium and at discount

A company may issue shares at par, or at premium, or at a discount.
Share at par: Shares are deemed to have been issued at par when subscribers are required to pay
only the amount equivalent to the nominal or face value of the shares issued. For instance, if the
face value of a share is Rs. 100 and the buyer is required to pay thereon Rs 100 only, nothing more
nothing less, then it is said that the share issued at par.
Share at premium: Where the shares are sold at above their nominal value is called share
premiums. For instance, if the buyer is required to pay more than the face value of the share, i.e.,
Rs 125 on a share of Rs 100, then the share is said to be issued or sold at a premium. The amount
received from premiums should be deposited on a separate account. It may apply in paying up
bonus shares, writing off the company’s preliminary expenses and on redemption of debentures
of the company. In making a request for approval of the Office to issue shares at a premium, the
audited financial statements for three years shall be provided to the Office.
Section 29 (1) of the Companies Act, 2063 has provided that any public company who can make
public issue of securities under prevailing securities laws can issue share at premium as per the
conditions and provisions mentioned in the securities laws. But private company or other public
company for which there is no provision of public issue of securities in the prevailing securities

laws can issue share at premium after getting approval from the general meeting if the company’s
assets exceeds its liabilities.
Hence, any company fulfilling the following conditions may issue shares at a premium, with the
prior approval of the Office.
 The public company by fulfilling the conditions mentioned in the prevailing securities
laws.
 The private company or public company not issuing its securities by public issue can
issue its shares at premium when its net worth exceeds its total liabilities.
 The company’s general meeting has to decide to issue shares at a premium.
According to Subsection (2), a sum in excess of the face value, out of the proceeds thereof, shall be
deposited in a premium account to be opened to that effect. The company may use the moneys in
the account as referred to in Sub-section (2) in the following acts:
 Paying up un-issued share capital to be issued to the shareholders as fully paid bonus
shares,
 Providing for the premium payable on redemption of any redeemable preference shares,
 Writing off the preliminary expenses made by the company,
 Bearing or reimbursing the expenses of, or the commission paid or discount allowed on,
any issue of shares of the company.
Share at discount: lf the buyer of shares is required to pay less than the face value of the share,
e.g., Rs 80 on a share of Rs 100, then the share is said to be issued or sold at a discount. Section 64
(1) of the Companies Act, 2063 has laid down a strict prohibition on company to issue or sell its
shares at a discount.
However under Subsection (2), a company may, on the following conditions, issue or sell shares
at a discount by adopting a special resolution at the general meeting to that effect, not being less
than the percentage specified in that resolution:
 In issuing or selling shares pursuant to a capital restructuring scheme of the company,

 In issuing or selling shares pursuant to a scheme of converting loans borrowed by the
company into shares with the consent of creditors;
 In issuing or selling shares pursuant to an employee share scheme;
 In issuing shares on such other conditions as approved by the Office.

Meaning of share capital

In general, the term capital refers the total net worth or assets of a company. The concept of
capital is of fundamental importance to a proper understanding of company law in general and
in particular to an appreciation of the distinction between individual traders and partnerships on
the other hand, and incorporated limited companies on the other. Where two or more persons are
trading in partnership; the monetary valuation of their respective contributions will then become
desirable in order to quantify the shares in which they are respectively entitled. Hence, the owners
of the business start with a fund of capital and their aim is use this fund so that it increase and
provide profits. So far as concerns the business of an individual trader or partnership this concept
of capital is merely a matter of convenience and accounting.
With an incorporated company limited by shares the position is different. The creditworthiness
of the company depends on the adequacy of its capital and this being so it is essential that capital
should be more clearly defined and inviolable than is the case with an individual or partnership.
Hence, the law worked out certain principles relating to the raising and maintaining of capital.
Share capital means the capital of a company which is divided into shares of a fixed amount, or
the money raised by the issue of shares by a company. As mentioned above, a public company
and its subsidiary can issue only two kinds of shares, viz., preference and equity. Therefore, such a
company can have only two kinds of share capital by issue of preference shares and equity shares,
viz., preference share capital and equity share capital. The Share Capital of a company is classified
in to the following three headings as under.
Authorised or registered capital: In the case of a company with a share capital its memorandum
must state the amount of the share capital with which it proposes to be registered and the division
of that share capital into shares of a fixed amount This is the sum stated in the memorandum as the
share capital of a company with which it is proposed to be registered. This is the maximum amount
of capital which it is authorised to raise by issuing shares and upon which it the incorporation fee.
Authorised capital serves the different purposes; firstly, it shows the investment or financial
strength or creditworthiness of a company as the money raised by issuing shares to the extent
of authorised capital. Secondly, revenue or fee of registration of a company is fixed as per the
authorised capital, thirdly, it increases the borrowing capacity of the company and finally, to run
some business, e.g., banking or insurance etc. authorised capital must be as fixed by the concerned
laws. When the original amount of the authorised capital is exhausted by issue of shares, it can be
increased by passing an ordinary resolution.
Issued capital
It is that part of the authorised capital which the company has issued for subscription. The amount
of issued capital is either equal to or less than the authorised capital. It is established that shares
must not be issued at a discount to their nominal par value. The Act has specially provides that
if the shares should be so issued the allottee is liable to pay to the company the amount of the

discount with interest. Hence those dealing with the company have some assurance that the
company has received or will be entitled to receive from its member’s payment of the price at
which the shares are issued and that this price is not less than the nominal value.
Paid-up capital
It is that portion of the issued capital which has been subscribed for by the purchasers of the
company's shares. The amount of subscribed capital is either equal to or less than the issued
capital. Paid up capital is the amount of money paid up on the shares subscribed.
Called-up capital
The company may not call up full amount of the face value of the shares. Thus, the called up capital
represents the total amount called-up on the shares subscribed. The total amount of called-up
capital can be either equal to or less than the subscribed capital. Thus, uncalled capital represents
the total amount not called up on shares subscribed and the shareholders continue to be liable
to pay the amounts as and when called. However, the company may reserve all or part of the
uncalled capital, which can then be called in the event of the company being wound up. For this
purpose, a special resolution is required to be passed and then it is known as Reserve Capital or
Reserve Liability.
Allotment of shares
In response to the issue of the prospectus, the company receives the applications for shares along
with application money either at the register office or the company or by its bankers. Now, the
Board of Directors would like to make the allotment of shares by accepting the application filed
by the applicants. Allotment purely based on the contract law rules as the applicants offer to buy
shares of company and the company accepts it by issuing shares in their names. But before this can
be done, certain statutory restrictions are to be complied with.
Meaning of allotment
Allotment is the acceptance of application by the company. Allotment results in a binding contract
between the company and the applicant. Offer for shares are made on application forms supplied
by the company. When an application is accepted, it amounts to an allotment. The expression
allotment is not defined under the Companies Act. It means and implies a division of the share
capital into defined shares of a particular value or of different classes and assignment of such
shares to different persons. Once shares are allotted and the name of a person is entered in the
Register of members, the company shall deliver certificate of its shares to the subscribers of shares.
The special provisions relating to the allotment are as follows:
1. Registration of prospectus: Section 23

A prospectus is an invitation issued to the public to take shares or debentures of the company
or to deposit money with the company. Therefore any advertisement offering to the public
shares or debentures of the company for sale is a prospectus. A public company without

registration and publication of prospectus cannot issue its securities (shares) for the public
subscription. Such compulsion has made under section 23 (1) of the Companies Act, 2063.
Sub-section 2 states that the boards of directors with their signatures have to file an application
to the security board for approval pursuant to the prevailing security exchange law. And
without making registered the approved prospectus to the office, no one on behalf of the
company can make publication the prospectus. The Act has not mentioned the content to be
included in prospectus.
2. To be listed in on a stock exchange: Section 32
Section 32 of the Companies Act, 2063 has provided a mandatory provision that no public
company without listing its shares in one of the stock exchange company issue to the public.
Hence, while issuing its securities to the general public, a public company shall deal in the
securities only through a securities dealer recognized to do securities transactions including
all acts such as the sale, allotment and recovery of amounts of such securities. Further, a
public company shall file with the Company Registrar Office a copy of an agreement made to
that effect within seven days after the date of making of such agreement.
3. Application money– not more than 50% of the face value of per share:
According to Sub-section (3) of Section 27 of the Companies Act, 2063, in inviting an

application by a public company for the subscription of its shares, no amount exceeding fifty
per cent of the face value of each share shall be demanded with the application. However,
in raising capital by a company which has been in operation since at least three years ago by
publishing its audited fiscal statements for its last three years, at the time of publication of its
prospectus, this provision shall not be applicable.
4. Minimum subscription– at least 50% of the issued share.
In cases where at least fifty percent of the total shares issued publicly cannot be sold failing a
guarantee/underwriting agreement on the subscription of at least fifty percent of the publicly
issued shares, no shares shall be allotted.
5. Allotment of shares: Section 28
Where a public company invites the general public to apply for the subscription of its shares
it shall allot the shares and give the shareholders a notice in the format as prescribed, within
a maximum period of three months after the date of closure of share issue.
Extension of time: Subsection (2) of section 28 provides that where at least fifty percent of the
total shares issued publicly cannot be sold failing a guarantee/underwriting agreement on
the subscription of at least fifty percent of the publicly issued shares and the company makes
an application, explaining the reasons for failure to allot shares within the time-limit within
seven days after the expiration of that time-limit, the Office may extend the time limit for up
to three months for the allotment of shares.

If the shares cannot be allotted even within such extended time limit, the company may allot
such shares through negotiations or any other methods. Even after this time, if the allotment
of shares cannot be made even within the time- limit, the amount received for the subscription
of shares as well as an interest thereon, as prescribed, from the day of expiration of such time-
limit to the day of refund of such amount shall be refunded. At the time of refund the amount
if the funds are insufficient, the shortfall amount shall be borne by the promoters and directors
personally.
6. Return as to allotment: Section 31
It is a comprehensive report or details of allotment of shares submitted to the Office of

Company Registrar. A company shall file with the Office a return of allotments stating the
number of shares issued and allotted, total amount of the shares, the names and addresses of
the allotters, and the amount paid or due and payable on each share, within thirty days after
the allotment of shares.
7. Share certificate: Section 33
An allottee of shares is entitled to have from the company a document certifying that he is
the holder of the specified number of shares in the company is called share certificate. Every
company is obliged to deliver to the every shareholder a share certificate within 2 months
after the allotment of share with necessary signatory and company seal. The share certificate
states the name, address, occupation of the holder together with the number of shares and
their distinctive number and amount paid-up. It must bear the common seal of the company,
must be stamped and bear the signature of one or more directors.
Section 33 (6) speaks that a share certificate under the common seal of the company and
necessary signatory specifying the number of shares held by any shareholders, shall be prima
facie evidence of title of the member to such shares. Thus, the share certificate being prima
facie evidence of title, it gives the shareholder the facility of dealing more easily with his
shares in the market. A share certificate once issued binds the company in two ways. Firstly,
estoppel as to title; i.e., the company is stopped from denying his title to the share. Therefore,
it is a declaration by the company to the entire world that the person in whose name the
certificate is made out, and to whom it is given, is a shareholder in the company. Secondly,
estoppel as to payment; i.e., if the certificate states that on each of the shares full amount
has been paid, the company is stopped, as against a bone fide purchaser of the shares, from
alleging that they are not fully paid.
8. Effect of irregular allotment. – Allotment voidable; compensation.
If the allotment of shares is irregular because of some error or mistake or omission intentionally
or innocently, the applicant has right to disown or reject of allotment within a reasonable
period of time. In such a case, the allotment becomes invalid and the injured party can claim
compensation for loss caused to him.

Subsection (5) of section 28 states that where the allotment of shares is made discriminatorily
or with intent to cause any loss or damage to any investor may file a petition, setting out
the reasons for the same, in the court on that matter. And where any investor has sustained
any loss or damage by reason of the deliberate violation of this Section by any officer of the
company or permission given by such officer to anyone to commit such violation, the court
may issue an order for realization from such officer personally of compensation for such loss
or damage as well as reasonable expenses incurred in the legal action.
Calls on shares
A member of a company is bound to pay the nominal amount of shares which he has purchased.
As noted earlier, according to Sub-section (3) of Section 27 of the Companies Act, 2063, in inviting
an application by a public company for the subscription of its shares, no amount exceeding fifty per
cent of the face value of each share shall be demanded with the application. The company under
Section 53 (1) of the Companies Act, 2063 may ask for some payment at the time of application
for shares and another sum at allotment. The balance may be payable as and when called for. An
amount for a share shall be paid up within the period of a call made in accordance with the articles
of association.
In making a call pursuant to Sub-section (1), a company shall send every shareholder a written
notice, in the prescribed format, specifying a time limit of at least thirty days and the installment
payable by him/her, the place and time for payment. A public company shall also publish such
notice, for at least two times, in a daily newspaper with national circulation.
For example: A company issues shares of Rs. 100 each on such terms as Rs. 50 payable on
application, and the remaining Rs. 50 as and when required. This balance of Rs. 50 may called
from the members in one or more installments. The installments so demanded are called calls.
Thus, a call may be defined as a demand by a company, in pursuance of resolution of the Board of
directors and in accordance with the regulations of its Articles and the provisions of the Companies
Act, upon its members to pay the whole or part of the balance still due on each share. The call can
be made at any time by the directors of the company during the life-time of the company but once
its winding up commences then it is only the liquidator who can call up the amount remaining
unpaid, if it is necessary to do so.
Forfeiture of shares
Forfeiture of shares means taking them away from the member. This is a serious step for not only
does it deprive the shareholder of his property but also, unless the shares are re-issued, it involves
a reduction of capital. Shares cannot be forfeited unless authorised by the Articles: The following
rules should be noted in connection with forfeiture of shares:
 In accordance with the articles: The forfeiture to be valid must be in accordance with the
provisions contained in the articles.

 Proper notice: Articles of a company normally provides the provisions as to the forfei-
ture of shares. The notice must mention a further day on or before which the payment
is to be made. The notice must also mention that in the event of non-payment the shares
will be liable to forfeiture. Any irregularity either in contents or in service of notice would
invalidate forfeiture of shares.
Sub-section (3) of Section 53 provides that if a shareholder fails to pay the sum called and payable
in respect of the share within 30 days, a notice shall be sent to the concerned shareholder, giving
an additional period of three months after the date of expiration of that period, and specifying
clearly that if payment is made within that period, it shall be accepted, along with interest at
the prescribed rate and if that shareholder fails to make payment even within that period, his/
her share shall be liable to be forfeited. In the case of a public company, such notice shall also be
published in a daily newspaper with national circulation for at least three times.
In the installment called is not paid even within the time-limit as mentioned in that notice, the
company may forfeit all or the remaining shares after retaining the number of shares as fully
paid up to the extent of the amount paid up on the shares in respect of which the company has
given such notice or also to the extent of the amount of dividends, if any, attached in respect of
such shares. However, where the company has already undergone into liquidation or insolvency
prior to the forfeiture of shares, any amount due and payable in respect of the shares is liable in
accordance with the prevailing law.
Where any share is forfeited under Sub-section (3), the board of directors may refund the amount
already paid up in respect of the share so forfeited and the amount equal to the dividends, if any
attached in respect of such share, or issue the share to the extent covered by such amount; and
where the amount is to be refunded, it has to be refunded within three months after the forfeiture
of share. In the event of failure to make refund within three months, interest chargeable on such
amount after the expiration of that period shall also be paid. The shares forfeited under Sub-
section (3) may be sold or otherwise disposed of in such manner as the board of directors may,
subject to the articles of association, thinks fit.
Nature of debenture
The legal relationship between a company and its debenture-holders is simply the contractual
relationship of debtor and its creditor, coupled, if the debt is secured on some or all the company’s
assets, with that of mortgagor and mortgagee. In contrast with the shareholder, the debenture-
holder is in law not the member of the company having rights in it, but a creditor having rights
against it. In reality, however, the difference between him and a shareholder may not be anything
like as clear-cut, for the debenture may give the holder a contractual rights akin to those of
shareholders, for example, to appoint directors, to a share of profits, to repayment at a premium,
to attained and vote at general meetings and even to convert his debentures into equity shares.
Covenants in the loan instrument may also give the debenture-holders considerable influence
over the way in which the company is managed. Moreover, where the debenture is secured by a

floating charge on all the undertaking and assets of the company, the holder will have a legal or
equitable interest in the company’s business different than the shareholders.
Meaning
The term debenture is not defined in the clear words. The difficulty, however, is to determine
whether or not the transaction between the debtor company and the creditor is such as to make
the latter a debenture-holder, for no one has yet succeeded in defining debenture. The statutory
definition also not clear as it has referred the other terms to denote the term debenture which
includes the debenture stock, bonds, and other securities of a company. In simple words,
debentures are a type of transferable security whereby a company can raise finance in the form of
loan capital instead of a share capital. Normally, a debenture is different than mortgage.
The definition of debenture as contained in Clause (s) of Section 2 does not explain the term. It
reads, “Debenture” means any bond issued by accompany whether putting its assets as collateral
or not. The nature of debenture is thus not clear by this definition. The term 'debenture' simply
means a document acknowledging a loan made to the company and providing for the payment of
interest on the sum borrowed until the debenture is redeemed, i.e., the repayment of the principal
sum. It may or may not be under seal and so does not necessarily imply that any charge is given
on the company's assets, though such a charge usually exists.
Features of debenture: The features of a debenture are as follows-
 It is issued by the company and is in the form of a certificate of indebtedness.

 It usually specifies the date of redemption. It also provides for the repayment of principal
and interest at specified date or dates.
 It generally creates a charge on the undertaking or undertakings of the company.
Usually the words 'pari passu' appear in the terms and conditions of debentures. This means all
the debentures of a particular class will receive the money proportionately in case the company
is unable to discharge the whole obligation. In the absence of this clause the debenture holders
would rank in accordance with the rank of the issue and if issued on the same date then in the
order of time when they were issued which is known by the serial number of the debenture.
Debenture stock
The difference between debenture and debenture stock is meaningless but it has considerable
practical advantages. If a public company wishes to raise Rs. 1 million it could seek to do so by
an issue of a series of, say Rs. 10, Rs. 100, Rs. 1000 debentures, each representing a separate debt
totaling in aggregate Rs. 1 million. Where a subscriber for a single debenture wanted to sell half of
it, he would not be able to make a legal transfer of that half. If, however, the company creates Rs.
1 million of debenture stock, it can issue it to subscribers in such amounts as each wants, giving
each a single certificate and he can sell and transfer any fraction of it. A further advantage is that,
whereas with a series of debentures with a charge on the company’s assets it will be necessary to

say expressly in each debenture that it is one of a series each ranking pari passu in respect of the
charge, debenture stock achieves that result without express provision.
Kinds of debentures
Debentures may be of the following kinds:
 Bearer debentures: Bearer debentures are similar to share warrants in that they too are
negotiable instruments, transferable by delivery. By making debentures payable to bear-
er they are invested with the character of a negotiable instrument, so as to -
 make them transferable free from equities;
 render the delivery of a debenture and any interest coupon a good discharge to the com-
pany;
 enable the bearer to sue the company in his own name, if necessary;
 ensure a good title to any Person who acquires the debenture bona fide for valuable con-
sideration, notwithstanding any defect in the title of the person from whom he acquires
it".
The interest on 'bearer debentures' is paid by means of attached coupons. On maturity, the
principal sum is paid to the bearers.
 Registered debentures: These are debentures which are payable to the registered holders,
i.e., persons whose names appear in the Register of debenture holders. Such debentures are
transferable in the same way as shares or in accordance with the conditions endorsed on their
back. The debenture itself consists of two parts: (a) the covenants by the company to pay the
principal and interest; and (b) the endorsed conditions, e.g., the term of the loan.
The endorsed conditions vary, but they normally contain a provision that the debenture is
one of a series all ranking pari passu. Where debentures ranked passu, they will be discharged
in Proportion to the amount due in respect both of capital and interest, i.e., in the event of a
deficiency of assets, if the interest on some debentures is paid down to a later date than others,
the interest due on each is added to the capital thereof and a proportionate distribution of the
assets made. If there were no such provision, the debentures would rank in the order of issue
regarding the assets charged by the company. Another usual endorsed condition is that no
'notice of trust' shall be recorded in the Register of debenture holders.
Perpetual or Irredeemable debentures: A debenture which contains no clause as to payment

or which contains a clause that it shall not be paid back is called a perpetual or irredeemable
debenture. However, a condition contained in any debenture is not invalid by reason only
that thereby, the debentures are made irredeemable or redeemable only on the happenings of
contingency, however remote, or on the expiration of a period, however long. It follows that
debentures can be made perpetual, i.e., the loan is repayable only on winding up, or after a
long period of time.

 Redeemable debentures: Redeemable debentures are issued for a specified period of time on
the expiry of that specified time the company has the right to pay back the debenture-hold-
ers and have its properties released from the mortgage or charge. Generally, debentures are
redeemable. However, redeemed debentures can be re-issued. If there is no provision to the
contrary in the articles, or in the conditions of the issue, or if there is no resolution showing
an intention to cancel the redeemed debentures, the company shall have power to keep the
debentures alive for the purpose of reissue. The company may reissue either the same deben-
tures or other debentures in their place. Upon such re-issue the person entitled to the deben-
tures shall have the same rights and priorities as if the debentures had never been redeemed.
Further, where with the object of keeping debentures alive for the purpose of re-issue, they
have been transferred to a nominee of the company, a transfer from that nominee shall be
deemed to be a reissue.
 Naked debentures: Normally, debentures are secured by a mortgage or a charge on the com-
pany's assets. However, debentures may be issued without any charge on the assets of the
company. Such debentures are called 'Naked or Unsecured debentures'. They are mere ac-
knowledgements of a debt due from the company, creating no rights beyond those of ordi-
nary unsecured creditors.
 Convertible debentures: A company may also issue convertible debentures, in which case an
option is given to the debenture-holders to convert them into equity or preference shares at
stated rates of exchange, after a certain period. Such debentures once converted into shares
cannot be reconverted into debentures. According to convertibility, debentures are further
classified into three categories:
 Fully Convertible Debentures (FCDs).
 Non Convertible Debentures (NCDs).
 Partly Convertible Debentures (PCDs).
 Fully convertible debentures: Fully convertible debentures are those debentures that are
converted into equity shares of the company on the expiry of a specified period or periods.
If the memorandum of association or the articles of association shall provide that debentures
can be converted into shares or such term has been specified prior to the issuance of deben-
tures, pursuant to Sub-section (3) of Section 35 of the Act a debentures may be converted into
shares, subject to the share capital related provisions of this Act. If any debentures are to be
converted into shares, this matter has to be clearly mentioned in the prospectus.
 Non-convertible debentures: Non convertible debentures are those debentures that do not
confer any option on the holder to convert the debentures into equity shares and are re-
deemed at the expiry of a specified period/(s).

 Partly convertible debentures: Partly convertible debenture consists of two parts, viz., con-
vertible and non-convertible. The convertible Portion is convertible into equity shares at the
expiry of the specified period(s). Non-convertible portion, on the other hand, is redeemed at
the expiry of a certain period/(s).
Issue of debenture
Debentures are commonly issued in a similar manner as shares by means of a prospectus inviting
applications, the money being usually payable by installments on application, allotment and on
specified dates. The Power to issue debentures rests with the Board of Directors. Debentures may
be issued at par, at a premium or at a discount, unless the Articles specifically forbids issue of
debentures at a discount. The company must complete and keep ready for delivery the debenture
certificates within 3 months of allotment, unless the terms of the issue provide a longer period.
If the memorandum of association or the articles of association shall provide that debentures can
be converted into shares or such term has been specified prior to the issuance of debentures, a
debentures may be converted into shares, subject to the share capital related provisions of this Act.
Pursuant to Sub-section (1) of Section 34 of the Act, if a public company deems necessary to issue
debentures, it may, specifying the reason therefore, a work plan to be executed from proceeds
and budget necessary for that propose issue debentures with or without pledging or mortgaging
its immovable assets. However, no debentures may be issued unless and until an approval to
commence its business is obtained and its issued capital is fully paid up.
Further, as per Sub-section (2) any company may, subject to Sub- section (1), issue additional
debentures against the security already furnished by that company with the already furnished by
that company with the previous creditors as a security from such creditors, within the limit of such
security, by clearly indicating the previous creditors as well as amount of loan (amount) already
obtained. If a company is to raise loans or issue debentures pursuant to Subsection (1) or (2), the
company shall give its information, along with the reasons for the same, to the office.
Procedure of issuing debenture: According to Section 35 (1) of the Companies Act, 2063, a
public company shall, in issuing debentures pursuant to this Act, issue debentures after making
provision of a debenture trustee. Such debenture trustee has to be a debenture trustee licensed by
the Securities Board. The matters relating to the creditor and the borrower, in issuing debentures
with a debenture trustee, shall be as mentioned in an agreement to be concluded between such
trustee and the company. If any debentures are to be converted into shares pursuant to Subsection
(3), this matter has to be clearly mentioned in the prospectus.
Debenture Trustee
Trustee, normally a trust corporation, is interposed between the company and the debenture-
holder. Any charge can then be in favour of the trustees who hold it on trust for debenture- holders.
No public company can issue debenture under Section 35(1) without appointing a debenture
trustee and such must be a debenture trustee approved from the Security Exchange Board. For that

there must be an agreement between the debenture trustee and the company with the details as
prescribed by the Act. The debenture trustee, at the time of agreement can demand the particulars
and make necessary investigation to the company. The provision of debenture trustee provides
a single corporation or small body of persons charged with the duty of watching the debenture-
holders interests and of intervening if they are in jeopardy. This is obviously far more satisfactory
than leaving it to a widely dispersed class of persons each of whom may lack the skill, interest and
financial resources required if he is to take action on his own.
Agreement between debenture trustee and company: Before issuing debenture, there must be
an agreement between the company and debenture trustee as appointed under Section 35 of the
Act and the debenture trustee has to act as a trustee for the protection of the interest of debenture-
holders, in respect of the debentures to be raised by such company.
Under Sub-section (2) of Section 36 of the Act, an agreement between the company and debenture
trustee shall set out the following matters:
 Right of debenture trustee to carry out, or cause to be carried out, valuation of the com-
pany’s assets, project analysis or management analysis,
 The period of repayment of the principal and interest of debentures subscribed by the
debenture-holder, interest rate, mode of repayment of the principal and interest, mode
of repayment of the principal and interest, and matter of conversion of debentures into
shares, if there is such provision,
 Matters, relating to a provision made on the lights of other creditors over the assets of the
company and liabilities that may arise there from in the future.
 A provision that, in the case of violation or non-fulfillment of the terms mentioned in the
agreement or for any other reasonable reason, if it is required to take the control of finan-
cial transactions of the company or to take possession if the security as referred to in the
agreement, the debenture trustee may take in his/her possession the assets or properties
of such company to the property that he has taken as the security of guarantee or hold
the security of guarantee with himself/herself or sell the same by auction or in any other
appropriate manner,
 Procedures for payment by the company of the service charges and other direct expenses
of the debenture trustee,
 That the debenture trustee shall not be liable to any loss or damage caused to the compa-
ny or the debenture-holder from any act done by the trustee in that capacity,
 That, in the event of occurrence of any circumstances necessitating the liquidation of the
company, the debenture trustee is entitled to take such legal action as may be taken in
behalf of the debenture- holder and exercise the powers of the debenture holder.
 Other necessary matters on the protection of interest of the debenture-holder.

As per Sub-section (3) of Section 36 of the Act The debenture trustee may, for the protection of
interest of the debenture-holder, take security of the assets of the company and get such security
registered in his/her name pursuant to the prevailing law. And prior to the taking of security
pursuant to Sub-section (3), the debenture trustee may, if he/she deems necessary, also carry out,
or cause to be carried out, the calculation of property or assets to taken as security and the project
analysis of management analysis of the company.
Further, pursuant to Sub-section (1) of Section 38 of the Act, after an agreement has been concluded
between a company and a debenture trustee, the company has to submit its statements in
financial transactions to the debenture trustee in every six months. In the event of a change in the
management or any kind of change in the ownership of the company after rising of debentures,
the company has to give information thereof to the debenture trustee within seven days after such
change.
Similarly, under Sub-section (3) In the event of necessity of any additional statement, the debenture
trustee may demand such statement, notice or information from the company; and it shall be
the duty of the company to provide the statement, notice or information so demanded to the
debenture trustee.
Inquiry and demand of statements by debenture trustee: Prior to concluding an agreement with
a company to act as a debenture trustee, the debenture trustee as per Section 37 of the Act may hold
necessary inquiry into, and obtain or demand statements, notice or information on, the following
matters and the concerned company has to provide the same if so demanded:
 Whether the memorandum of association or article of association of the company has a

provision that it may raise loans or debentures: and if so, whether the board of directors
of the company has powers to make decision to so raise debentures.
 Whether the memorandum of association or articles of association of the company has a
provision that debentures may be raised through a debentures trustee.
 Whether the existing assets of company can cover the value of debentures rose.
 Matters relating to other creditors and liabilities of the company.
 The company’s balance sheet and auditor’s report.
 Such other necessary matters as the debenture trustee may consider being appropriate.
Rights and liabilities of the Debenture Trustees: Section 39

Section 39 of the Companies Act, 2063 has stated the various rights and duties of the debenture
trustee. These rights and duties are important to discharge his functions as authorised by the Act.
They are as under.
 If the company violates any of the terms mentioned in the agreement concluded under
Section 36, the debenture trustee may instruct such company to fulfill such terms as soon

as possible or to make repayment of the principals and interest of the debenture holder
within a time limit as specified by him/her.
 If it is required to take the financial transaction of the company under control or to pos-
sess the security as referred to in the agreement by reason of the repayment or for any
other reason, the debenture trustee may, subject to the prevailing law, take the assets,
properties or securities of such company under his/her control and hold the assets or
properties so possessed in his/her own or sell such assets or properties by auction or
otherwise or deal with the same in other manner.
 The amount of a debenture-holder shall be repaid out of the proceeds of sale of the as-
sets. If any amount remains surplus after repayment of the amount payable to the deben-
ture-holder, the debenture trustee shall return that amount to the concerned company.
 Notwithstanding anything contained elsewhere in this Act, except in cases where the
debenture trustee him/herself buys the assets taken by the debenture trustee as the se-
curity, if the proceeds of sale of the property which the debenture trustee has taken as
security or possessed be not sufficient to repay all the amounts to debenture holders,
the debenture trustee shall pay the amounts to debenture-holders on pro rata; and such
shortfall amounts shall not be recovered from the debenture trustee’s property.
 Any debenture-holder holding more than fifty percent debentures may, showing the
ground of failure of a debenture trustee to act in the interest of debenture-holder, make
an application to the Securities Board to remove such debenture trustee.
 If, on examining the application, the contents appear to be reasonable, the Securities
Board may remove such debenture trustee and arrange for another debenture trustee.
Transfer and transmission of shares and debentures

One of the great feature and benefit of incorporation is that the shares of a company are freely
transferable and, therefore, the shares of a member in a company shall be moveable property
capable of being transferred in the manner provided by the articles of the company. The fact is
that the regulation of the company may impose some restrictions upon the right of transfer for the
benefit of the company. Otherwise a shareholder can transfer his shares to anybody to whom his
likes to transfer without the consent of anybody to any transferee.
The right to transfer may be subjected to restrictions contained in the articles and there cannot
be total prohibition or ban on transferability of shares. However, only permissible restriction on
transferability may be contained in the Articles of association. Restrictions upon transfer of shares
in private companies are not applicable in following cases:-
 On the right of a member to transfer his/her shares in a case where the shares are to be
transferred to his/her representative(s).
 In the event of death of a shareholder, legal representatives may require the registration
of shares in the names of heirs, on whom the shares have been devolved.

 In respect of shares which are proposed to be issued on a right basis, existing members
would have a right to renounce shares likely to be allotted to them. If the existing share-
holders renounce their shares then these shares will be allotted to the renounces for the
first time and therefore no transfer of shares will take place.
Restriction on right to transfer shares is generally placed by using following two methods:
 Right of pre-emption: If a member wishes to sell some or all of his shares, such shares
shall first be offered to other existing members of the company at a price determined
by the directors or by the auditor of the company or by the use of formula set out in the
articles. If no existing member is determined to acquire shares, then shares can be trans-
ferred by the transferor to the proposed transferee. A member is not bound to sell his
shares to other members under pre-emption clause unless any other member or mem-
bers agree to buy all the shares proposed to be sold. The transfer between the members
is outside the purview of pre-emption clause. The pre-emption clause cannot place a
complete ban on right to transfer; they cannot completely prohibit the transfer.
Valuation of Shares under Preemption clause: Articles of Association of private company provide
that the shares are to be sold under pre-emption clause at a fair price determined by the directors
or the auditor of the company. It may also be provided that the fair price would be certified by
the auditor of the company. If the pre-emption clause requires that the shares are required to be
offered to other members at a price certified by the directors or auditor(s), the court are not in a
position to enquire into the correctness of valuation, unless there is evidence that valuation was
not correctly made. If the person who made the valuation has acted negligently and failed to take
into account all the necessary factors for arriving at the value of share, in such case the transferor
may sue for damages to the person who made the valuation for difference between the value of
the share, as computed by the valuator, and the real value of shares
 Powers of directors to refuse registration of transfer of shares: The Powers of directors to

refuse registration of transfer of shares are specified in the articles of association of the
company. This power is to be exercised by the Board of directors in good faith.
Section 43 of the Companies Act, 2063 has laid down the procedures of the transfer of shares and
debentures for which an application it the prescribed form with prescribed fee to the registered office
of the company. This application be accompanied with the certificate of the shares or debentures
and shares sale purchase deed. The company within 15 days from the date of application must
register the name of purchaser in the share register book. The application either can be file the
transferor or transferee.
Therefore, the following conditions must be fulfilled before a company can lawfully register a
transfer: -
 The instrument of transfer must be executed both by the transferor and the transferee.

 The instrument of transfer should be delivered to the company along with the certificate
relating to the shares transferred.
 The instrument of transfer should be in the prescribed form with the requirements of the
company’s articles.
 Necessary fees must be deposited along with application for transfer.
Other means of transmission of share and debenture: On the death of a member his executor or
the person who is entitled under the law to succeed to his estate gets the right to have the shares
transferred to his name in the company’s register of member is called the transmission of shares.
It is different than the transfer of shares.
Where any person acquires any right to securities by operation of any law, the company may
register the transmission of shares in favour of such person if the company receives intimation of
transmission from such person, and in such a case no transfer deed shall be necessary. A company
shall have power to register on receipt of an intimation of transmission of any right to securities by
operation of law from any person to whom such right has been transmitted.
DISTINCTION BETWEEN TRANSFER AND TRANSMISSION
S. No. Transfer of Securities Transmission of securities

1. Transfer takes place by a voluntary or Transmission is the result of the operation
deliberate act of the parties by way of of law. For example, due to death,
a contract. insolvency or lunacy of a member.
2. An instrument of transfer is required in No instrument of transfer is required in
case of transfer. case of transmission.
3. Transfer is a normal course of Transmission takes place on death or
transferring property. insolvency of a holder of securities.
4. Transfer of securities is generally made Transmission of securities is generally
for some consideration. made without any consideration.
5. Stamp duty is payable on transfer of No stamp duty is payable on transmission
securities by a holder of securities. of securities.
6. As soon as transfer is complete, the Shares continue to be subject to the
liability of the transferor ceases. original liabilities.
The Board of Directors of a company or the concerned depository has no discretion to refuse or
withhold transfer of any security.
Restriction on transfer
Under Section 44 of the Companies Act, 2063, a company can refuse to registered the transfer of
share if the share is not fully paid or, it is against the Articles or agreement between the shareholders
or, if the fee of transfer has not paid. However, a company is open to make the provisions for
the restriction on the transfer of share in different manner. The company law has imposed some

important restrictions on the right of transfer. A private company cannot allot its shares by public
subscription. Similarly, the shares can be transferred to outsiders only if no existing members
accept them at face value. Where no existing member accepts the proposal, transfer in favour of
an outsider should be allowed. The question is in what manner the directors shall exercise this
power and to what extent the court can interfere in its exercise. Thus in Smith and Fawcett Ltd,
Re: [1942] Ch 304:
A clause in the articles of a private company provided: “The directors may at any time in their
absolute and uncontrolled discretion refuse to register any transfer of shares.” The issued capital
of the company consisted of 8002 shares of which the two directors of the company S and F held
4001 each. F died and his son applied to have the shares registered in his name. But S, in the
exercise of the above power, refused to consent to the registration. He, however, offered to accept
the applicant up to 2001 shares, provided the remaining was sold to him at a fixed price. The
plaintiff brought an action contending that S’s refusal to register the transfer was on a wrong
principle since it was not made for the benefit of the company but was rather to preserve his own
dominating position.
It was held that the court would not be justified in interfering in the discretion of the directors.
The directors must exercise their discretion bona fide in what they consider- not what a court may
consider – is in the interest of the company. And if they have done that, the court cannot substitute
its judgment for theirs. It was observed by the Supreme Court of India in Bajaj Auto Limited v.
N.K. Firodia, AIR 1971, S.C. 321, thus:
Discretion implies just and proper consideration of the proposal under the facts and circumstances
of the case. In the exercise of that discretion, the directors will act in the paramount interest of the
company and in the general interest of the shareholders because the directors are in a fiduciary
position both towards the company and towards every shareholder. The directors are, therefore,
required to act bona fide and not arbitrarily and not for any collateral motive.
It was observed further that where the articles permitted the directors to decline to register transfer
of shares without stating reasons, the Court would not draw unfavourable inferences against the
directors because they did not give reasons. The Court would assume that the directors acted
reasonably and bona fide and those who allege to the contrary would have to prove and establish
the same by evidence.
However, if the directors gave reasons, the Court would consider whether they were legitimate
and whether the directors proceeded on right or wrong principle. The Court has also laid down
three tests to determine the proper exercise of power by the Board of directors. The tests are:
 Whether the directors acted in the interest of the company.

 Whether they acted on a wrong principle.
 Whether they acted on oblique motive or for a collateral purpose.

If the directors have uncontrolled and absolute discretion in regard to declining registration of
transfer of shares, the Court would consider whether the reasons were legitimate or the directors
acted on a wrong principle, or from corrupt motive. If the reasons for refusal given by the directors
were legitimate, the Court would not over-rule that decision merely on the ground that the court
would not have come to the same conclusion. The discretion of the directors was to be tested as the
opinion of any fair and sensible man in the interest of the company.
In the following circumstances, however, there can be judicial or quasi-judicial intervention:
 Mala fide: Capriciously, oppressively or corruptly, or in some way mala fide.

 Inadequacy of reasons: Without reasonable or sufficient and meaningful cause.
 Irrelevant considerations: A refusal based on extraneous considerations will be wrong.
Effects of forged document: It may happen that a forged instrument of transfer is presented to the
company for registration. In order to avoid the consequences which will follow a forged transfer,
companies normally write to the transferor about the lodgment of the transfer instrument so that
he can object if he wishes. The company informs him that if no objection is made by him before
a day specified in the notice, it would register the transfer. The consequences of a forged transfer
are detailed hereunder:
A forged transfer is a nullity and, therefore, the original owner of the shares continues to be the
shareholder and the company is bound to restore his name on the register of members. Thus, in
People’s Ins. Co. v. Wood and Co., 1961 (31) Com Cases 61:
A forged document never has any legal effect. It can never move ownership from one person
to another, however, genuine it may appear. Thus, a forged instrument of transfer leaves the
ownership of the shares exactly where it always was in the so-called transferor. It follows that if a
company registers a forged transfer, the true owner can apply so as to be replaced on the register
and his name will be restored. But the company does not incur any liability in damages by putting
the name on the register.
However, if the company issues a share certificate to the transferee and he sells the shares to an
innocent purchaser, the company is liable to compensate such a purchaser, if it refuses to register
him as a member, or if his name has to be removed on the application of the true owner. If the
company is put to loss by reason of the forged transfer, as it may have paid damages to an innocent
purchaser, it may recover the same independently from the person who lodged the forged transfer.
Example:
Let us take an example to illustrate the consequences of forged transfer. Suppose, ‘A’ is a registered
shareholder and his name is entered on the register of members in respect of certain number of
shares. By fraud or theft, B obtains possession of ‘A’ share certificate and having forged a document
purporting to be a transfer of shares to himself from A, succeeds in getting himself registered

as a member and obtains from the company a new shares certificate made out in his name. In
spite of this, A does not cease to be the owner of the shares and a member of the company, as a
forged document, being a nullity, does not move ownership from him to B or any other person.
Producing the new certificate as evidence of his title, B purports to sell the shares to C, an innocent
purchaser, who in reliance upon B’s certificate, buys the shares in good faith and without notice
of B’s fraud. The company then registers C as a member and issues the share certificate to him in
respect of the shares purchased by him.
When A discovers the fraud, he being entitled for the rectification of register, has right to C’s name
struck off the register of members and has his own name restored as the registered holder of the
shares. A never ceased to be the owner of the shares, although the company issued successive
certificates to B and C. The company will be liable in damages to C and for other incidental loss.
But it would be entitled to indemnity as against B, and if the forged transfer were lodged by a
broker acting for B, against the broker also, even though the broker was innocent to the fraud for a
person who brings a transfer to the registering authority and requests him to register it, impliedly
warrants that it is a genuine document. The fact that the transferee was a bona fide purchaser for
value did not make any difference and the transferee was bound to return the scrip to the person
to whom the same rightfully belong.
Refusal to register share or debenture: A company may, under Section 44, in the following
circumstances, refuse to record any pledge of a share in the register or to effect transmission of a
share or debenture where it has been disposed of:
 If a call on the share has not been paid up.

 If such transmission will be contrary to the articles of association of the company or the
agreement concluded between the shareholders.
 If the transfer fee is not furnished along with the application.
In refusing to record the pledge of a share or debenture in the register or to effect transmission of
a share of debenture, the company shall give information thereof to both the transferor and the
transferee or the ledger and pledge of the share or debenture within fifteen days from the date of
making application.
Shareholder and debenture-holder register

Each company shall establish a shareholder register and debenture-holder register in the prescribed
format and maintain the same at its registered office. Under Sub-section (2) of Section 46 of the
Companies Act, 2063 the following matters concerning each shareholder shall be mentioned in the
shareholder register-
 Full name and address of the shareholder,

 Number of shares subscribed by the shareholder,

 Total amount paid by the shareholder and outstanding amount payable by him/her for
the share,
 Date of registration of his/her name as the shareholder,
 Date when his/her name was struck off,
 Name and address of the nominee after the death of the shareholder, if such nominee is
appointed.
Further, pursuant to Sub-section (3) the following matters concerning each debenture-holder shall
be mentioned in the debenture- holder register according to the serial number of debentures:
 Full name and address of the debenture-holder,

 Number of debentures subscribed by the debenture-holder,
 Total amount paid by the debenture-holder and outstanding amount payable by him/
her for the debenture,
 Date of registration of his/her name as the debenture holder,
 Date when the name of the debenture-holder was struck off,
 Name and address of the nominee after the death of the debenture-holder, if such nom-
inee appointed.
Inspection of register: If a shareholder or debenture-holder of a company desires to inspect the

register, the company shall allow him/her for the same. However, in the case of a public company,
the company may, by publishing a seven-day advance notice in a newspaper with national
circulation, and in the case of a private company, the company may, as provided in the articles
of association or consensus agreement, close inspection of the register for a maximum period of
thirty days at one time, not exceeding in the aggregate forty-five days in a year.
As per Sub-section (5) of Section 46 of the Act if any person desires to have a duplicate copy of the
shareholder register, such duplicate copy shall be issued to that person by collecting the fees as
prescribed except in case where inspection is closed.
Further, under Sub-section (6) a listed company may cause the securities registrar recognized
under the prevailing law to provide securities deposits service to establish and maintain a register.
A copy of the register so maintained shall be kept at the registered office of the company, prior to
giving a notice of the general meeting each year. The register shall set out the matters mentioned
in Sub-sections (2) and (3) mentioned above. If a register maintained under Sub-section (6) is
found to have recorded a false matter in a manner to affect the right and interest of a person,
such securities registrar, his/her director, officer and employee shall be liable to punishment as
mentioned in Section 160, and the concerned person shall also be entitled to have recovered the
loss and damage caused to him/her because of such false record.

Substantial Shareholder: Section 50

Substantial shareholder means a shareholder holding 5% or more of paid-up capital of public
company in his name or through his agent. For the purpose of this section, shareholder means
person subscribing ordinary shares with full voting rights.
However, shareholder holding 1% or more of paid-up capital in case the company had paid-up
capital of more than 250 million. Such shareholder shall give information to the company, within
30 days of knowing of being or ceasing as substantial shareholder of public company. Such notice
shall contain his name, address and full particulars of shares registered in his or his agent’s name.
Every public company shall maintain a separate register for the purpose of this section.
Inventory of shares, debentures and loans

Every company according to Sub-section (1) of Section 51 shall have to prepare and maintain prior
to 21 days before the holding of annual general meeting an inventory of the existing shareholders
and debenture holders and persons who ceased to be shareholders or debenture-holders as at
thirty days prior to the holding of the annual general meeting. The inventory as referred to in Sub-
section (1) spells out, inter alia, the following particulars.
 Authorized capital and number of shares of the company.

 Issued share capital of the company.
 Paid-up capital of the company.
 Calls made on every share.
 Total amount of installments paid.
 Total amount due and recoverable.
 Total amount paid on share and debentures as brokerage.
 In the event of forfeiture of any shares, total number of such shares, reasons for forfeiture
and date thereof.
 Loans borrowed from any bank, financial institution or any other person or guarantee
furnished by the company.
 In the event of investment in share or debenture of other company, the name and reg-
istration number of such company and amount of investment in shares or debenture.
 Name & registration number of another company where investment has been made in
such company shares or debentures along with invested amount;
 Names and addresses of the existing directors.

(3) The inventory of shares shall be signed by at least one director and be submitted to the Office
within 30 days after the date at which the annual general meeting of the company is held and, in
the case of a company not holding the annual general meeting within one year after the date at
which the company has obtained permission to carry on such business as to require permission
of the concerned body pursuant to the prevailing law, if the company carries on such business,
and after the date of registration where such permission is not required. A company not holding
the general meeting shall send the details as referred to in subsection (1) to the Office within six
months of the end of financial year.
According to Sub-section (5) if any company mentions the details as referred to in Sub-section (1),
as well, in the report required to be submitted pursuant to Section 78, such company shall not be
required to send a separate inventory to this Office under this Section.
8. Reduction of Share Capital
General notes
The share capital of company already raised cannot be reduced in general for the various reasons.
On one hand, this may cause loss to the investors because the directors of company may in arbitrary
manner reduce the face value of share to reduce the share capital of company. The common investors
may lose their huge money invested in the company by subscribing its shares. On the other hand,
reduction of share capital affects negatively the interest of the banks and financial institutions. The
sanction and disbursement of loan to a company is based on the share capital of company and after
obtaining loan if company reduces its share capital, it makes impossible to recover the loan from
the company as the shareholders liability is limited to the face value of their share amount. But it is
required for the benefit of the company, reduction of share capital is permitted by complying with
some strict legal provisions. Hence, the Companies Act, 2063, under section 57 (1) has laid down
that if a company intends to reduce its share capital , it may, by adopting a special resolution to
that effect at its general meeting, reduce its share capital by obtaining approval of the Court and
making necessary amendment to or alteration in the memorandum of association and articles of
association, accordingly. Further, a company which has already become insolvent in accordance
with the prevailing law shall not reduce its capital.
Modes of reduction: A company may reduce its share capital only after receipt of approval of the
Court as follows:
 By reducing the capital to such amount as has been paid up where calls for payment of
amount on shares are not fully paid up,
 By paying back any paid-up share capital,
 By devaluating the face value of shares where the company has sustained a big loss or
suffered a natural calamity.

Procedures for obtaining approval of Court to reduce share capital

The procedures provided under the Companies Act for obtaining approval of the Court to reduce
share capital which begins with the application by the concerned company to the competent Court
can be summed up as under.
 Under Section 58 (1) of the Companies Act, 2063, a company shall make a petition to the
Court for an order confirming the reduction adopting a special resolution for reducing
its share capital pursuant to Section 57 of the Act.
 Where a petition is made, the concerned company shall, prior to the hearing of such
petition, publish a public notice in a daily newspaper of national circulation for at least
three times, setting out the venue and date of hearing on the reduction of share capital
of the company.
 Every person who is entitled to any debt or claim under the prevailing law at the time of
commencement of the winding up or insolvency of a company shall be entitled to submit
his/her claim and objection to the reduction of share capital of the company.
 The director or company secretary of a company shall, as ordered by the Court, submit
to the Court a real and true list of creditors of the company, if any, setting out, inter
alias, their names, addresses and amount of debt repayable to each of them, at the
commencement of hearing of the petition for reducing the capital of the company.
 Irrespective of whether the creditors whose debts are yet to be discharged or determined,
out of the creditors whose names are entered on the list submitted pursuant to Sub-section
(4), do or do not consent to the reduction of capital in the case where the company admits
the full amount of the debts or claims made by the creditors, or though not admitting it,
agrees to make provision of moneys required to pay such amount and makes required
provision for the same by executing a bond undertaking to pay the full amount within a
certain date, then the Court may issue order confirming the reduction of the share capital
.
 In taking action for approval on a proposed reduction of share capital which involves
either the diminution of any liability in respect of unpaid share capital or the paying back
to an shareholder of any amount paid for shares, the Court may, if, having regard to the
circumstances and available evidence, it thinks proper so to do, direct that the provisions
of Sub-section (3) or (4) shall not apply to any specific creditor.
 If the list of creditors submitted pursuant to subsection (4) is found to contain any false
statement or omission, the director of the company who submits such list and the officer
who signs such list shall be liable to punishment under this Act.
 Provided, however, that if the officer who signs such list proves that any omission or
mistake was made without his/her knowledge or immediately when he/she knew
such omission or mistake, he gave information to the Court for the rectification of such
omission or mistake, prior to the making of an order by the Court under this Section or

he exercised all reasonable care to avoid such omission or mistake, he shall not be liable
to that punishment.
 If the Court is satisfied, with respect to the creditors who under Subsection (1) are
entitled to object to the resolution on reduction of capital, that either their consent to the
reduction has been obtained or their debts or claim have been discharged or have been
determined and are at the state of discharge, or have been secured, it may make an order
confirming the reduction, specifying appropriate alters and conditions.
 Where the Court makes an order pursuant to Sub-section (8), it may, if it thinks proper so
to do, order directing that the concerned company, of which resolution to reduce capital
has been co confirmed, shall, for a specified periods, add to its names the last words
thereof the words “capital reduced” and publish necessary notice with a view to giving
information to the general public about the reasons and causes for such reduction and
other important information in regard thereto.
 Where, pursuant to Sub-section (9) , a company is ordered to add to its name the words
“capital reduced”, those words shall, until the expiration of the period specified by the
Court, be deemed to be an integral part of the name of the company.
 The contents of the terms contained in an order issued by the Court, pursuant to this
Section, in the course of confirming a resolution for the reduction of capital shall be
deemed to have ipso facto been incorporated in the memorandum of association and
articles of association of the company; and the memorandum of association and articles
of association shall be deemed to have been amended to that extent.
 Any director who knowingly conceals, hides or holds back the name of any creditor
who, under this Section, is entitled to object to the resolution for reducing capital or
knowingly prepares or submits a false statement on the amount of loan or clam or
liability or conceals, hides or holds back such loan or liability or prepares or causes to
prepare a false statement or any officer or employee of the company who abets to such
act shall be liable to punishment under this Act.
 Where the share capital of a company is reduced pursuant to this Section, the director or
company secretary of that company shall mention and authenticate that matter in each
share certificate issued by such company.
Liability of shareholders in respect of reduced share capital

According to Section 59 (1), except as otherwise provided for in this Section, a shareholder of the
company, past or present, shall not be liable, in respect of any share mentioned in the order issue
by the Court confirming the reduction of share capital, to pay any amount exceeding the difference
between the amount actually paid on the share or the reduced amount, if any, which is deemed
to have been paid thereon, as the case may be, and the fixed amount of such share. Similarly, no
share holder shall be liable to pay an amount in excess of the face value of a share at the time of the
subscription of such share by him/her.

Provided, however, that where the list of creditors entitled to object to the reduction of share
capital submitted to the Court omits any such creditor and, after an order confirming the reduction
of capital of the company has been made, the company is unable to pay the amount of debt of
such creditor, the shareholder of the company shall be bound to pay the amount as mentioned in
Sub-section (3) or (4) of Section 59 of the Act but the omission the name or any claim of a creditor
because of a fault or negligence of the creditor, the shareholders shall not be bound to pay such
amount.
Shareholders may be liable: Subsection (3) has provided that a person who was a shareholder of
a company at the date of issue by the Court of an order confirming the resolution for reducing
the capital of the company shall be liable to pay an amount not exceeding the amount which
he would have been liable to pay if the company had undergone insolvency and commenced
insolvency proceedings on the day immediately before the said date. Further, under subsection
(4), if a company is insolvent, and where an application is made by a creditor whose name is said
to be omitted from the list of creditors submitted to the Court , along with the proof of omission
of his/her name, the Court may, if it thinks fit, settle a list of shareholders who are liable to pay to
the company the amount required for the repayment of loan of such creditor and issue an order
to make calls on shares held by the shareholders settled on such list as if they were ordinary
contributors in an insolvency process of the company.
9. Buyback of Shares
General notes
Buyback of shares means an act of buying or purchasing the company's own shares, i.e., the
company buys its own shares already issued to the public. The general principle or rule is
that no company shall buyback its own shares. The prohibition has numbers of importance.
Firstly, the objective of a company is to carry on its business as fixed in the memorandum of
association. If the company is allowed to purchase and sell its own shares, the company and its
directors may involve only on buying and selling the company's securities, hence, the company
details from its fundamental objectives. Secondly, the company's involvement in dealing on
its own shares may cause negative effects on the fair dealings of shares in the security market.
The price of security may fall or rise at the interest of company where the interest of common
shareholders or investors always at risk, hence, to protect the economic interest of investors and
to maintain trustworthiness of the share market, buyback of shares is prohibited. This restriction
is not absolute and under the strict restrictions, the company can purchase its own shares as the
exceptional cases.

Buyback of shares
Section 61 (1) of the Companies Act, 2063 states that no company shall purchase its own shares
(buy-back) or lend money against security of its own shares. It reads, thus, no company shall
provide any loan or financial assistance of any kind to any person for purchasing its own shares
or the shares of its holding company or subsidiary company or getting entitlement too such shares
in any manner.
Conditions for buyback of shares
Section 61 (2) of the Act has mentioned the following circumstances where a company may buy
back its shares out of its free reserves available for being distributed as dividends, by giving
information to the Company Registrar Office:
 Where the shares issued by the company are fully paid up;
 Where the shares issued by a public company have been registered in the Securities
Board;
 Where the buy-back of shares is authorized by the articles of association of the concerned
company;
 Where a special resolution has been adopted at the general meeting of the concerned
company authorizing the buyback;
 Where the ratio of the debt owed by the company is not more than twice the capital and
general reserve fund after buy-back of shares;
 where the value of shares to be bought back by a company is not more than twenty per-
cent of the total paid up capital and general reserve fund of that company;
 Where the buy-back of shares is not in contravention of the directives issued by the Of-
fice in this respect.
Contents of resolution: As per Sub-section (3) of Section 61 of the Act the resolution to be presented
at the general meeting shall state the following matters:
 The reason and necessity for the buy-back of shares;

 A statement of the evaluation of possible impacts of the financial situation of the con-
cerned as a result of the buyback of shares,
 The class and number of shares intended to be bought back;
 The maximum or minimum amount required to buy back shares as referred to in Clause
(c) and financial source of such amount;
 The time limit for the buy-back of shares;
 The mode of the buy-back of shares;

 Such other necessary matters as specified by the Office and as required to be disclosed
under the prevailing law, in respect of the buy-back of shares.
Modes of buyback of shares

Section 61 (4) of the Act states that where a special resolution is adopted by the general meeting,
the concerned company may buy back its shares in any of the following manners within a period
of twelve months of the adoption of that resolution:
 Purchasing from the stock exchange;

 Purchasing from the concerned employee of the company the shares allotted to him/her,
 Purchasing from the existing shareholders on a proportionate basis.
Procedures of buyback of shares

The following procedures are to be followed by the company buying back its own shares.
 Where a company buys back its own shares, it shall file with the Office a return contain-
ing the number of shares bought back, amount paid for the same and other necessary
details within thirty days of the date of such buy-back.
 There shall be established a separate capital redemption reserve fund, to which a sum
equal to the nominal value of the shares bought back shall be transferred; and the amount
of such fund shall be maintained as if it were the paid-up capital .
 Where a company buys back its shares, it shall cancel the shares so bought back within
one hundreds twenty days of the date of such buy-back.
 Once a company buys back any class of shares pursuant to this Section, the company
shall not re-issue the shares of that class, except for the issue of bonus shares or payment
of its liability, prior to the expiration of two years after such buy-back.
 No public company shall buy back its shares in a manner that such minimum number of
shareholders or minimum paid–up capital as required to be maintained by that company
becomes less or lower.
 Other conditions where a company cannot buy back its shares and other terms required
to be complied with in the buying back of its shares shall be as prescribed.
Prohibition on providing loan for purchase of shares

Section 62 of the act prescribes that, no loans or financial assistance of any kind shall be provided by
the company to any person for purchasing its own shares or its holding company or its subsidiary
company.

Provided, however, that nothing contained in this section shall prevent a company from providing
loans to its employees under employee share scheme to purchase fully paid up shares of that
company or its holding company.
Shares with different right

As per section 30(1), the company may issue various classes of shares with different rights attached
thereto, by making provisions to that effect in its MOA & AOA. Sub section 2 of section 30 states
that, except as otherwise provided in the AOA of a company, approval of the shareholders of any
particular class shall be required to make any alteration in the rights of those shareholders of that
class.
Provided, however, that no alteration may be made in the rights of the shareholders of any
particular class in a manner to adversely affect the rights of the shareholders of any other class. The
board of directors shall submit a proposed resolution to the general meeting of the shareholders of
the concerned class for alteration in the rights of the shareholders of any particular class pursuant
to Sub-section (2) and general meeting of such class shareholders shall adopt special resolution.
Sub section 3 of section 30 further states that, shareholders representing at least 10% shares of any
particular class who are not satisfied with a decision to make alteration in the rights attached to the
shares of that class pursuant to Sub- section (2), may file a petition in the court to have the decision
to make such alteration void,
The decision made to make alteration in the rights of the shareholders of such class shall not be
enforced unless and until otherwise decided or ordered by the court.
A petition pursuant to Sub-section (3), shall be made within 30 days after the decision made to
make alteration in the rights attached to the shares of any particular class and any decision as
referred to in Sub-section (2) shall not be enforced pending the expiration of that time limit.
If it appears that alteration in the rights conferred to the shareholders of the class concerned is
prejudicial to the rights of the petitioner shareholders, the court may quash the decision made on
the alteration in the rights of the shareholders of that class.

10. Meetings of Company
General notes
A company is itself a legal person with an existence independent of that of its members. Yet it
remains an artificial person; its policy can be formulated and decided upon only by individual
human beings, and can be put into effect and carried out only by human agencies. The major
organs through which these human agencies act in a company are the meetings of the company.
In fact, there are basically two meetings in a company- Meetings of the shareholders/General
Meeting and Meetings of the Board of Directors. The other meetings are the meetings of creditors
and the meetings of debenture holders which are held in such extraordinary situations where
the company is in a state of the financial difficulties, therefore, the company either should be
reconstructed or amalgamated or liquidated.
The meetings find an important place in the company legislation as well as in the life of a company
because of the different objectives. Firstly, meetings being organs of company all the authorities
or business or affairs of the company are to be carried out through the meeting as the power of
company is not vested to a particular member but the meeting of members. Secondly, through the
meetings, the member can get the real picture of the company, its affairs, strength and weaknesses
and they can make necessary arrangements for the benefit of the company.
A company is an artificial person and therefore, cannot act itself. It must act through some human
intermediary. The various provisions of law empower shareholders to do certain things. They are
specifically reserved for them to be done in company's general meetings. The Companies Act, 2063
empowers the Board of Directors to manage the affairs of the company. In this context meetings
of shareholders and of directors becomes necessary. In this Part meetings of shareholders are
taken up and later in Part 14 meetings of directors are discussed. The Act has made provisions for
following different types of meetings of shareholders- First or primary General Meeting; Annual
General Meeting and Extraordinary General Meeting.
General Meetings
The meetings of the shareholder is the supreme organ of a company in which the shareholders
can decide any matter regarding the affairs of the company which is binding to all the officers or
directors or shareholders themselves through their meetings. The company law, under Section
67, has designed two types of meetings, namely, Annual General Meeting (AGM) and Special
Meeting which is also called as Extra-Ordinary General Meeting (EGM).

General Meetings
Annual General Meeting Extra-Ordinary General Meeting

(AGM) (EGM)
First or primary annual general meeting: The meeting of shareholders after incorporation of a
company is called as the first, primary annual general meeting. Pursuant to Section 76 (1) every
public limited company within one year from the date of getting certificate of commencement of
business has to conduct its first annual general meeting.
The formal relationship between the shareholders and the board of directors is that the
shareholders elect the directors, the directors’ report on their stewardship to the shareholders
and the shareholders appoint the auditors to provide the external check on the directors’ financial
statements. Indeed the both shareholders and boards of directors should consider how the
effectiveness of general meetings could be increased and as a result the accountability of boards to
all their shareholders strengthened.
Purposes of holding of general meetings

The company legislation, in fact, concerned with three fundamental issues;
 How the business or management of the company can be entrusted to a body comprising
of few numbers of people.
 How the accountability of these persons can be increased towards the members of the
company.
 The law has intended to protect the interest of the shareholders who are the real owners
of the company. Indeed, the interest of the shareholders can be saved through the gener-
al meetings (specifically through the Annual General Meetings).
In short, the important of meeting are given herein below:
 Formulation and implementation of the policies.

 Discussion and direction to the officers.
 Knowledge of the true facts.
 Appointment and removal of the directors and auditor.
 Ratification of transactions.
 Decision over major issues affecting the business of the company.
 Accountability of the directors about their acts.

Annual General Meeting

The Act provides that a company shall in each year hold an annual general meeting specified as
such in the notices convening it and thereafter, the company shall hold its AGM every year within
the period of six months from the date of expiry of the fiscal year of the company. The AGM is
the one occasion when members usually have an opportunity of meeting the directors and of
questioning them on the accounts, on their report, and on the company’s financial position and
prospects. It is the meeting at which the members may be able to try to exercise their only real
power over the board- that of dismissal.
Directors to be presented: Under Sub-section (1) of Section 68 of the Companies Act, 2063
it is the duty of every director of a company that he shall be present by himself in the general
meeting. A new provision has been added under Sub-section (2) of Section 68 that whatsoever has
been mentioned in subsection (1), if any director could not be present by himself in the general
meeting due to circumstances out of control, he may present in the general meeting through video
conference or any other similar technology and use his vote.
The provisions as referred to Sub-section (1), (2), (3) and (4) of Section 76 of the Act shall also be
applied to the private company which has made the provision of annual general meeting in its
article of association.
Procedures of holding the AGM

Proper authority: Section 76
A formal and valid annual general meeting is called by the company itself, i.e., board of directors
within one year after it is permitted to commence its business, and thereafter it shall hold the
annual general meeting every year within six months after the expiry if its financial year.
Subsection (2) provides that if any public company fails to call the annual general meeting even
within three months after the expiry of the time-limit as stated above, the Office may give direction
to call the annual general meeting of such company.
Further, if the company fails to call the annual general meeting even within three months after
the receipt of the direction as referred to on Sub-section (2), any shareholder may make a petition,
setting out the matter, to the court. Where such petition is made, the Court may either cause to
hold the annual general meeting or issue any other appropriate order according to Subsection (3).
Notice: Section 67(2)

A public company shall send a notice specifying the place, date and agenda of meeting to every
shareholder at the address supplied by that shareholder to the company, in advance of at least
twenty one days to hold the annual general meeting, and in advance of at least fifteen days to hold
the extraordinary general meeting. A notice thereof shall also be published at least twice in a
national daily newspaper. However, while calling any general meeting which has been adjourned,

if such meeting is not transacting any new agenda, a notice of that meeting published in a national
daily newspaper in advance of at least seven days shall be deemed to have been duly given.
Need for the notice: No decision shall be taken in any general meeting on any matter which
has not been notified in advance pursuant to Sub-section (2) of section 67 of the Act, except the
shareholders representing sixty seven per cent of the total shares of the company who are entitled
to vote at the general meeting, attend in person or by proxy and vote in favor of taking a decision
on any matter. The matters included in the agenda sent along with a notice of the general meeting
shall be discussed and decided first at that meeting. On the other hand, Subsection (10) provides
that the proceedings at any general meeting shall not be void or invalid merely for reason of the
accidental omission to give notice to any shareholders of any listed company or the non-receipt by
any shareholder of notice sent at the address which he has supplied to such company.
Place and venue of meetings: Section 67 (4)

Except in cases where the Office gives prior approval to hold the general meeting elsewhere, the
general meeting of a public company shall be held either at the district where the registered office
of such company is situated or at such place adjoining to the district of registered office as is
convenient to most shareholders. A list indicating the name, address of the existing shareholders
of the company and the number of shares held by them shall be kept at the meeting venue for
inspection by the shareholders.
Quorum: Section 73
As per Subsection (2) of Section 73, no proceedings of the meeting of the public company shall be
conducted unless at least three shareholders of the total shareholders, representing more than fifty
per cent of the total number of allotted shares of that company, are present either in person or by
proxy unless the articles of association of a public company provides for a larger number for the
quorum.
Exceptions to quorum: Subsection (4) of Section 73 has removed the quorum requirement as
mentioned in Sub-section (2) or (3) in the case of a company incorporated under the proviso to
Sub-section (2) of Section 3 or a company incorporated under Sub-section(1) of Section 173, the
presence of three shareholders shall not be mandatory. Similarly, the shareholders present in the
general meeting called pursuant to the order of the court under Sub-section (3) of Section 76 of the
Act shall be deemed to be a quorum.
Adjournment of meetings: Section 73

Under Section 73 (2) of the Act, where a meeting cannot be held because of quorum as referred
to in Sub-section (2), and the meeting is called next time by giving a notice of at least seven days,
nothing shall prevent the holding of such a meeting if at least three shareholders, representing
twenty five percent of the total number of allotted shares of the company, are present either in
person or by proxy.

Subsection (7) of Section 67 of the Act authorises the chairperson of the general meeting to adjourn
the meeting as required. Any matter which is notified, pursuant to this Act, before or after the
day of holding the adjourned general meeting may be discussed and decided in such adjourned
meeting. The original meeting and the adjourned meeting shall have the same powers. A resolution
adopted at the adjourned meeting shall be deemed to be adopted on the date of holding that
adjourned meeting.
Chairman: Section 74(1)

A general meeting shall be chaired by the Chairperson of board of directors and, in his/her
absence, by the person nominated by the directors from amongst themselves.
Resolutions: General / Special

Every matter to be discussed in a general meeting shall be presented in the form of resolution. The
chairperson of the meeting shall declare whether a resolution has been adopted or not. Resolution
may be either general if it requires simple majority votes in the general meeting or special if it has
to be adopted with 75% votes in the meeting. As per Section 83 of the Act the following matters
shall be presented to the meeting as special resolutions-
 Increasing the authorized capital of the company.

 Decreasing or altering the share capital of the company.
 Altering the name or main objectives of the company.
 Amalgamating one company into another company.
 Issuing bonus share.
 Buying back of own shares by the company.
 Selling shares at a discount.
 Such other matter in respect of which the company is required by this Act or the articles
of association to adopt a special resolution.
Matters to be discussed in AGM: Section 77

The following matters are to be presented by the board of directors in the annual general
meeting for discussion.
 The audited books of accounts of the previous year with profit and loss account and
balance-sheet.
 Audit report.
 Board’s report.
 Dividend to be divided to the shareholders.

 Appointment of Auditor and his remuneration Directors.

 Appointment of Directors and their remuneration.
Proxy: Section 71
Generally, the person whose name is registered as a shareholder in the shareholder register shall,
subject to Section 70, be entitled to attend the general meeting and cast votes at the rate of one vote
for each share held by him/her.
Under Subsection (2) of Section 71, any shareholder may, subject to this Section , appoint another
person as his/her proxy to attend the general meeting and vote instead of him/herself except
in cases where the articles of association of a company prohibit the proxy of a shareholder from
exercising the right to vote.
Subject to Sub-section (1) or (2) of Section 71 of the Act, where a shareholder who is entitled to
vote is not able to personally attend the meeting, he/she may appoint a proxy to vote in his/her
stead, by an instrument of proxy executed in the prescribed format and signed by him/her and
the proxy so appointed shall be entitled to attend or vote in the meeting , subject to the provisions
contained in Section 72.
Voting: Section 74
Subsection (3) of Section 74 of the Act provides that the opinion of majority of the shareholders
present in the meeting shall be deemed to be the decision of that meeting on every matter put
to the vote. Such voting may be taken in such manner including a show of hands, voice voting,
division of shareholders in groups or poll (use of ballet paper) as well as other appropriate method
as prescribed by the Chairperson. If the votes are equally divided for and against, the Chairperson
of the meeting may exercise his casting vote. However, the Chairperson shall not be deprived of
the right to vote in the capacity of shareholder.
Restriction on voting in meetings: Section 70 of the Companies Act has listed the various persons
who are prohibited to attend and cast vote in the meetings. They are as under-
 Person, as a shareholder, either in person or by proxy on any discussion to be held in

respect of any terms and conditions entered into or to be entered into between him/
herself and the company.
 Director or his/her partner or his/her proxy in respect of the responsibility for any act
done or omitted to be done or done wrongfully by him/her or in respect of his/her own
appointment, dismissal, transfer or confirmation, with respect to the provision of , or
reduction or increment in remuneration, allowance or bonus or in respect of any agree-
ment, contract or arrangement regarding his/her employment or anything in which his/
her interest or concern is involved.

 Any shareholder who has not paid calls on the shares.

 Shareholder against whom a bank or financial institution has filed a legal action for his/
her default in repaying the loan, writes to the concerned company to prevent him/her
from exercising voting right in respect of shares, then the company shall prevent such
shareholder from exercising voting right in respect of the shares held by him/her for a
period until he/she repays the loan.
Minute: Section 75
Under section, 75 of the Companies Act, 2063, every company shall maintain the minute and it
should be signed by the chairman of the meeting and the company secretary or the one of the
shareholder stating all the matter relating to the special meeting of the company. In the case of
a company which has no company secretary, the minutes shall be signed by the Chairperson of
the meeting concerned and by a representative of shareholders appointed by a majority of the
general meeting. While keeping the minutes, matters such as the manner in which the notice of the
meeting was issued, the number of shareholders present, number of board of directors presented
through video conference or like other technology, the percentage of representation of the total
shares , the result of voting, if any, shall all be set out in the minutes. The minute shall be provided
to all the shareholders within 30 days from the date of the meeting.
Extra-ordinary General Meeting

Any meeting other than the AGM shall be called an extraordinary general meeting. As per the
Subsection (1) of Section 82 of the Companies Act, it may be convened by the directors whenever
they think fit. If there is need to call extra ordinary general meeting and the directors are reluctant
the same, under Subsection (3) the shareholders holding at least ten percent shares of the paid–
up capital of a company or at least twenty five per cent shareholders of the total number of
shareholders can make an application, setting out the reasons therefore, to the registered office of
the company for calling an extra-ordinary general meeting of the company within 30 days from
the date of such application. Even after such application, if the board of directors does not call
the extra-ordinary general meeting within 30 days from the date on which an application is made
pursuant to Sub-section (3), the concerned shareholders may make a petition to the Company
Registrar Office setting out the matter; and if such petition is made. In such a case pursuant to
Subsection (4), the Office may cause to call such meeting.
Under Sub-section (2) if, in the course of examining the account of a company, it is deemed necessary
to call an extra ordinary general meeting for any reason, the auditor may request the board of
directors to call such meeting and if the board of directors fails to call the meeting accordingly, the
auditor may make an application to the Office setting out the matter and the Office may call the
extra-ordinary general meeting of the company.

Similarly, as per Subsection (5), the Office itself call or cause there board of directors to call such
meeting if it deems necessary to call an extra-ordinary general meeting in view of the findings of
any inspection or investigation or for any others reason, if any.
Therefore, an extra-ordinary meeting may be called by the -
 Company itself.
 Office of the Companies Registrar at the request of shareholders.
 Office of the Companies Registrar at the request of Auditor.
 Office of the Companies Registrar itself
Importance of the EGM

Extraordinary general meeting being a special meeting of the shareholders the other matters
than the matters stated for calling of the special meeting cannot be discussed and decided in the
meeting. The basic purpose and importance of this type of meeting is to make enable a company to
have an opportunity to the shareholders to discuss and take a proper decision on the issues which
were raised in the company after the annual general meeting and there is a need to address such
issues immediately by the shareholders.
Report to be submitted to Office

Section 78 of the Companies Act, 2063 has made a mandatory provision that every public company
shall prepare a report indicating the following matters and submit the same to the Office in advance
of at least twenty one days before the holding of the annual general meeting. Such report has to be
approved by the board of directors and certified by the auditor of the company.
 The total number of the shares allotted,

 Number of fully paid up and unpaid shared out of the allotted shares out of the allotted
shares,
 Particulars of director, managing director, auditor, chief executive and manager of the
company, and amount of remuneration, allowance and facility paid to them,
 The names of individuals or corporate bodies subscribing five percent of more of the
paid up capital of the company, and details of shares or debentures held in their names,
 The total proceeds of the sale of shares, and particulars of the new shares and debentures
issued and raised by the company in the financial year concerned,
 The amount due and payable by the director or substantial shareholder to his/her close
relative to the company,
 The details of payment made or to be made against the sale of shares or for any other
matters,

 The amount of loans borrowed from banks and financial institutions and of principal
and interest due and payable,
 The amount claimed to be receivable by the company or payable by the company to any
other person to details of, lawsuits, if any , ongoing in this respect,
 The number of expatriate employees engaged in the management of the company and at
other levels, and remuneration, allowances and facilities paid to them,
 The number of expatriate employees engaged in the management of the company and at
other levels, and remuneration, allowances and facilities paid to them,
 Where any agreement has been entered into between the company and any foreign body
or person on investment, management or technical services or other matter for a period
of more than one year, particulars thereof and the particulars of the dividend, commis-
sion, fee, charge and royalty, as well paid under such agreement in the financial year
concerned,
 A statement of the management expenditures of the company in a financial year,
 The amount of dividends yet to be claimed buy the shareholders,
 A declaration that the company has fully observed this Act and the prevailing law,
Returns of annual general meeting

Sub-section (1) of Section 80 of the Companies Act, 2063 has made it compulsory that every
company conducting annual general meeting shall, within thirty days of the holding of the annual
general meeting, forward to the Office a return indicating the number of shareholders present in
the meeting, number of director present in the meeting through video conference or any other
similar technology, a copy of the annual financial statement, director’s report and auditor’s report
and resolution adopted by the meeting.
Under Sub-section (2) except as otherwise provided in this Act, every company shall submit a
copy of annual financial statement certified by the auditor along with audit report to the Office
within six months of the completion of its financial year.
A new provision has been provided by Sub-section (3) that the company may submit the return
and documents to be submitted to the Office as per this act by uploading them in the computer
system through electronic medium. The Office shall keep such returns safely in the electronic
records of the concerned company.
Fine to be imposed in case of failure to submit returns: It is the duty of director or officer or
shareholder of the company to submit the returns of the general meeting within the time fixed.
Sub-section (1) of Section 81 has provided that any return, notice or information required to be
provided by the company to this Office or information required to be provided by the officer or

shareholder to the company pursuant to this Act shall be provided by the director of the company
or the officer or shareholder who has the duty to provide such return, notice or information to
the Officer or the company, as the case may be, within the time limit, if any, prescribed by this
Act for the provision of such return, notice or information. As per Sub-section (2), the director of
a company or its officer who is in default in providing the return, notice, information or reply as
referred to in Section 51, 78, 80, 120, 131 or 156 within the time limit as referred to in Sub-section
(1) shall be punished by the Registrar with fine, as follows:
a. A fine of one thousand rupees if the paid up capital of the company is up to two million five
hundred thousand rupees, a fine of two thousand rupees if the paid up capital of the capital
is up to often million rupees, and a fine of five thousand rupees if the paid up capital of the
company is more than ten million rupees, for a period not exceeding three months after the
expiry of the time limit;
b. A fine of one thousand five hundred rupees if the paid up capital of the company is up to
two million five hundred rupees, a fine of three thousand rupees if the paid up capital of the
capital is up to ten million rupees, and a fine of seen thousand rupees if the paid up capital of
the company is more than ten million rupees, for and additional period not exceeding three
months after the expiry of the time limit as referred to in Clause (a);
c. A fine of two thousand five hundred rupees if the paid up capital of the company is up to two
million five hundred thousand rupees, a fine of five thousand rupees if the paid up capital of
the capital is up to ten million rupees, and a fine of ten thousand rupees if the paid up capital
of the company is more than ten million rupees, for an additional period not exceeding six
months after the expiry of the time limit as referred to in Clause(b);
d. A fine of five thousand rupees, for each year, if the paid up capital of the company is up to two
million five hundred thousand rupees, a fine of ten thousand rupees , for each year, if the paid
up capital of the capital is up to ten million rupees, and a fine of twenty thousand rupees, for
each year, if the paid up capital of the company is more than ten million rupees, in cases where
even the time limit as referred to in Clause (c) has also expired.
Under Sub-section (3) of the Act, In the case of a company not distributing profits which is in
default in providing such statement, information or notice within the time limit as referred to
in Sub-section (1), the director or officer of such company shall be liable to the same fine as is
imposable on a company of which paid up capital is up to ten million rupees.
Any director, office or shareholder who is liable to pay the fine as referred to in Sub-section (2) shall
pay it to the Office and submit to the Office or the concerned company such returns as required
to be forwarded.
In calculating the period of expiration of the time limit pursuant to Sub-section (2), it shall be
calculated from the date of commencement of this Act.

Any director, officer or shareholder of a company who is in default in providing such other
statement, notice or information as is required to be forwarded to the Office pursuant to this Act
shall be punished with a fine of two hundred rupees for every month, after the expiration of one
month of the date of expiry of the time limit within which such statement, notice or information is
required to be provided.
11. Board of Directors
General notes
A company is itself a legal person with an existence independent of that of its members. Yet it
remains an artificial person; its policy can be formulated and decided upon only by individual
human beings, and can be put into effect and carried out only by human agencies. So the question
becomes: who is to be regarded as acting as or on behalf of the company and in which circumstances
may they so act? The law of agency is at the root of company law but agency principles have
undergone a number of modifications in their application to companies. Between the company
and the directors there is a relationship akin to agency but they are the professional men hired by
the company to direct its affairs. Directors are not the servants of the company rather the officer of
the company. The company legislation, in fact, concerned with three fundamental issues, firstly,
how the business or management of the company can be entrusted to a body comprising of few
numbers of people. Secondly, how accountability of these persons can be increased towards
the members of the company. And finally, the law has intended to protect the interest of the
shareholders who are the real owners of the company.
The Boards directs the company, by formulating and reviewing company’s policies, strategies,
major plans of action, risk policy, annual budgets and business plans, setting performance
objectives, monitoring implementation and corporate performance, and overseeing major
capital expenditures, acquisitions and divestitures, change in financial control and compliance
with applicable laws, taking into account the interests of stakeholders. It controls the company
and its management by laying down the code of conduct, overseeing the process of disclosure
and communications, ensuring that appropriate systems for financial control and reporting and
monitoring risk are in place, evaluating the performance management, chief executive directors
and providing checks and balances to reduce potential conflict between the specific interests
of management and the wider interest of the company and shareholders including misuse of
corporate assets and abuse in related party transactions. It is accountable to the shareholders for
creating, protecting and enhancing wealth and resources for the company, and reporting to them
on the performance in a timely and transparent manner. However, it is not involved in day-to-day
management of the company.

Division of powers
A company is an entity distinct alike from its shareholders and its directors. Some of its powers
may, according to its articles, be exercise by directors; certain powers may be reserved for the
shareholders in general meeting. If powers of management are vested in the directors, they and
they alone can exercise these powers. The only way in which the general body of the shareholders
can control the exercise of the powers vested by the articles in the directors is by altering their
articles, or by refusing to re-elect the directors of whose actions they disapprove. They cannot
themselves usurp the powers which by the articles are vested in the directors any more than the
directors can usurp the powers vested by the articles in the general body of shareholders.
In fact, subject to the Act and the articles, the business of the company should be managed by
the directors who might exercise all such powers as were not required to be exercised in the
general meeting. In practice, the board of directors is the brain of the company and the company
which is the body can and does acts only through them, therefore, when the brains functions the
corporation is said to function.
Therefore, it is generally accepted that the general meeting cannot interfere with a decision of the
directors unless they are acting contrary to the provisions of the acts or articles. The basic principle
that subject to the provisions of the Act, the memorandum and the articles and to any directions
given by special resolution, the business of the company shall be managed by the directors who
may exercise all the powers of the company. No alteration of the memorandum or articles and no
such direction shall invalidate any prior act of the directors which would have been valid if that
alteration had not been made or that direction had not been given.
Appointment of directors
According to Sub-section (1) of Section 87 of the Companies Act, 2063, the persons having
qualifications and eligible pursuant to Section 89 of the Act and the articles of association shall be
appointed as directors of a company by the general meeting of the company.
Provided however, that:
 The directors shall be appointed by the promoters pending the holding of the first annual
general meeting of the company.
 If the office of any director appointed by the annual general meeting is vacated for any
reason, the board of directors shall appoint another director in that vacancy.
Nominee and alternate directors: Sub-section (2) has provided the provision for the appointment
of nominee and alternate directors where a company's shares have subscribed by a corporate
body, the corporate body may appoint a director (nominee) in proportion of the total number of
directors of the company and the number of shares subscribed by such body and also an alternate
director to attend and vote in a meeting of the board in cases where such director will not be in

a position to attend the meeting of the board for any reason. In such a case, such director shall
give information thereof to his/her alternate director and the board of directors then the alternate
director shall be entitled to attend, and vote in, the meeting of the board of directors.
Number of directors
Section 86 (1) of the Act has fixed the number of directors in a private company. The appointment
and number of directors of a private company shall be as provided in its articles of association and
the maximum number of directors shall not be more than eleven in numbers. As per Sub-section
(2), there shall have a board of directors consisting of a minimum of three and a maximum of
eleven directors in a public company and there shall be at least one female director in the board of
directors of public company having female shareholder.
The board of directors of a public company shall be formed with minimum one to maximum two
independent directors. Sub-section (3) has provided that at least one independent director, in the
case of the number of directors not exceeding seven, and at least two independent directors, in
the case of the number of directors exceeding seven, shall be appointed from amongst the persons
who have the knowledge as prescribed in the articles of association of the company and gained
knowledge and experience in the subject related with the business of the company concerned.
Chairperson: Any one director selected by the directors from amongst themselves shall be the
Chairperson of the board of directors.
Meeting of board of directors

Meeting is the formal gathering of directors to take the formal decisions as per the need of the
company through which only the board of directors can exercise their authority. Meetings of the
board of directors of a private company shall be held as mentioned in the articles of association.
However, Sub-section (2) of Section 97 of the Act has stated that the meetings of the board of
directors of a public company shall be held at least six times in a year. However, the interval
between any two meetings shall not exceed three months. Further, Sub-section (3) provides that
the directors shall be present in person in the meetings of the board of directors of a company. The
presence of the proxy of a director in his/her stead shall not be held valid.
Quorum: Under Sub-section (4), no meeting of the board of directors shall be held unless it is
attended by at least fifty one per cent of the total number of directors of the company. However,
any director who is not entitled to take parting any matter to be discussed in a meeting of the
board of directors under this Act shall not be counted for the purposes of this subsection. Further,
if a meeting of the board of directors cannot be held because of the lack of presence of directors in
the number mentioned in Sub-section (4), another meeting may be called by giving a notice of at
least three days. Even if such meeting is not attended by the directors in the number mentioned
in Sub-section (4), the proceedings and decisions conducted and made by the attending directors
shall be valid.

Voting and decision: Pursuant to Sub-section (6), the decision of a majority in a meeting of the
board of directors shall be binding, and in the event of a tie, the Chairperson may exercise the
casting vote, in addition to a vote cast by him/her as a director.
Provided, however, that any director who has any personal concern or interest in any matter to be
discussed in a meeting of the board of directors shall not be entitled to take part in such discussion
and vote on the matter.
Minutes: Under Sub-section (7), the minutes regarding the names of directors present in the
meeting of board of directors, the subjects discussed and the decisions taken thereon shall be
recorded in a separate book, and such minute book shall be signed by at least fifty one per cent
of the total directors present in the meeting. Further, if any director puts forward any opinion
opposed too or differing from the decision in the course of discussions on any subject in a meeting,
he/she may mention the same in the minute book. The decision reached in the board meetings
shall not be deemed invalid merely for the reason that there is no signature of any member.
Meeting-in-lieu: According to Sub-section (9), except in the cases that are so expressly prohibited
by them memorandum of association or articles of association, if all the members of the board of
directors or a sub-committee of directors so consent in writing in regard to any act or resolution
permitted to be done or adopted by the board of directors or such sub-committee, such act may
be done even without holding a meeting by recording such consent in the minute book and the
consent of the directors shall be deemed to be a decision of a meeting of board of directors.
Authority to call the meeting of BOD

Except otherwise provided in the articles of association of a company; the company secretary or
chairperson of the board or chief executive of the company shall call a meeting of the board of
directors of the company.
Requisition: By contrast with the above provision under Sub-section (1) Section 98, Sub-section
(2) provides that if at least twenty five per cent directors of the total number of directors make
written requisition, setting out the subject to be discussed in the meeting, for calling the meeting
of the board of directors, the Chairperson shall call the meeting of the board no later than fifteen
days of the receipt of such requisition. If the meeting of the board of directors is not called within
that period, such requisition making directors themselves may call the meeting of the board of
directors.
Disqualification of directors
Sub-section (1) of Section 89 of the Companies Act, 2063 has stated the different grounds where
one is disqualified to be appointed as a director of a company. Any of the following persons shall
not be eligible to be appointed to the office of director as they are disqualified to be a board of
director.

 Person below Twenty one years of age, in the case of a public company.
 Person of unsound mind or is insane.
 Person declared insolvent and a period of five years has not lapsed.
 Who is convicted of an offense of corruption or of an offense involving moral turpitude.
 Provided, that in the case of a private company, a period of three years has not lapsed
from the date of such sentence.
 Person convicted of an offense of theft, fraud, forgery or embezzlement or misuse of
goods or funds entrust to him/her, in an authorized manner, and sentenced in respect
thereof, a period of three year has not elapsed from the expiry of the sentence.
 Person with personal interest of any kind in the business or any contract or transaction
of the concerned company.
 Person who is already a director, substantial shareholder, employee, auditor or adviser
of another company having similar objectives or has personal interest of any kind in such
company.
 Provided, however, that such person of a private company may become a director of
another private company having similar objectives.
 Person who is a shareholder that is held to have failed to pay any amount due and pay-
able by him/her to the concerned.
 In the case of a person who has been sentenced to punishment pursuant to Section 160, a
period of one year is not lapsed from the date of sentence, or in the case of a person who
has been sentenced to punishment pursuant to Section 161, a period of six months has
not lapsed after the date of sentence.
 In the event that the prevailing laws prescribed any qualification or disqualification in
the case of a company carrying on any specific business, who does not possess such qual-
ification or suffers from such disqualification.
 Person who is already a director of any company which has not submitted such reruns
and reports as required to be submitted to the Office under this Act, for any continuous
three financial years.
 Person who has not paid fine pursuant to Sub-section (2) of Section 81 of the Act.
 Person holding the office of director receiving from another listed company any remu-
neration or facility, other than a meeting allowance and actual expenses to be in curried
in coming to, going from, and staying in, the place of meeting.

Qualifications of Independent Directors: Sub-section (2) of Section 89 of the Companies Act,

2063 has stated the different grounds where one is disqualified to be appointed as a director of a
company. The following persons shall not be appointed as an independent director.
 Person as referred to in Sub-section (1).

 Person who is a shareholder of the concerned company.
 Person who has not obtained at least bachelor degree in a subject that is related to the
business to be carried on by the concerned company and gained at least ten years of
experience in the related field or in the company management affairs or who has not ob-
tained at least bachelor degree in finance, economics, management, accounts, statistics,
commerce, trade or law and gained at least ten years of experience in the related field.
 Person who is an officer, auditor or employee of the concerned company or a period of
three years has not lapsed after his/her retirement from any such office.
 Person who is the close relative of the office of the concerned company.
 Person who is an auditor of the concerned company or his/her partner.
Share Qualification of directors: Section 88

If the articles of association of a company specify any number of shares required to be held by
a person for his/her appointment as director of the company, the person who becomes director
shall hold such number of shares. Failing any provision specifying such number of shares, any
such person shall hold at least one hundred shares.
However, any director who is appointed as an independent director pursuant to Subsection (3) of
Section 86 and as a nominee or alternate director under Sub-section (2) of Section 87 shall not be
required to hold such shares.
Terms of office of directors

As per Sub-section (1) of Section 90, the tenure of office of a director of a private company shall
be as provided in its articles of association and Sub-section (2) provides that the tenure of office
of a director of a public company shall be as specified in its articles of association, which shall not
exceed four years.
Exceptions:
 A director appointed by the Government of Nepal or a corporate body shall hold office
so long as the Government of Nepal or the appointing body desires.
 A director appointed pursuant to Clauses (1) and (2) of the proviso to Section 87 shall
hold office only until the holding of the annual general meeting.

 The term of office of a director appointed to the office of any director which has fallen
vacant before the expiry of his/her term of office shall be only the remainder of the ten-
ure of office of that director whose office has so fallen vacant and in whose place one is
appointed.
Reappointment: Unless otherwise provided in the prevailing law or articles of association, a

person retired from the office of director on expiry of his/her tenure of office shall be eligible for
reappointment to the office of director.
Removal of directors
Sub-section (3) of Section 89 of the Company Act, 2063 has stated the grounds where a director
shall not continue to hold the office of a director or shall be removed from the post of director.
Further, Prior to removal of director from his office, the company shall give information thereof to
him/her and provide him/her with a reasonable opportunity to defend him/herself.
 If one suffers from any disqualification for appointment to the post of director as men-
tioned in Sub-section (1) or (2);
 If the general meeting passes a resolution to remove him/her from the office of director,
 If the resignation tendered by the director is accepted by the board of directors;
 If one is held by a court to have done any act involving dishonesty or ulterior motive in
the activities of the company;
 If one is held by a court to have done any act prohibited by this Act from being done by
a director or to have failed to do any act required to be done under this Act;
 If one is blacklisted by a competent body pursuant to the prevailing law for his/her de-
fault in repaying a loan of any bank or financial institution, and the period of such black
listing has not expired.
Remuneration, allowance, reward etc. of directors

According to Sub-section (1) of Section 91 of the Act, the general meeting can determine the meeting
allowance to be receivable by the directors for attending a meeting, their monthly remuneration,
daily allowance and traveling allowance or other facility. The general meeting may, by adopting
a special resolution, grant a reward in a sum not exceeding three per cent of the net profits after
payment of income tax to the directors who work full time for the company so as to encourage
them.
However, where, on final assessment of tax under the prevailing law, the company has to pay
additional income tax, the company shall recover the amount of such additional tax from the
directors, who have received such reward, on a proportional basis up to the extent of the amount
of reward received by them.

Further, Sub-section (3) has authorises the board of directors to determine the remuneration and
facilities of the managing director or other directors who work full time for the company before
the holding of the first annual general meeting.
Disclosure by directors
Under Section 92 of the Companies Act, 2063, a director shall disclose in writing to the company
the following matters within fifteen days after assuming the office of director and the company,
further, shall have to submit to the Office the information given by the director within fifteen days
of the receipt of such information.
a) If he/she or his/her close relative has direct involvement or any kind of personal interest in
any kind of sale and purchase or other kind of contract related with the transactions of the
company;
b) If he/she has any kind of interest in the appointment of the managing director, company
secretary, officer of the company;
c) If he/she is a director of any other company;
d) If he/she has made any dealing in the shares or debentures of the company or of its holding
or subsidiary company, about matters of such dealing.
e) A copy of the written agreement, if any, concluded between the company and the director or
his/she close relative or the substantial and necessary matters concerning the transaction or
interest or involvement.
f) If any director has an interest directly or indirectly linked to any kind of contract, lease,
transaction or agreement entered or to be entered with the concerned company or its subsidiary
company or comes to his/her knowledge that such interest will be so linked setting out the
extent and kind of such interest.
g) If any director has his/her personal interest in a transaction with any certain person.
Directors' disclosure in shares: Under Section 94 (1) of the Act, a person while holding the office
of director, acquires title to any shares or debentures of the company or of a company which
is a subsidiary or holding company of that company or of another subsidiary company of the
holding company, he shall give information to the company about the details of his/her title and
the number of shares of each class in the concerned company or another company to or in which
he/she has title or interest while holding the office of director and details of amount of debentures
of each class. The provisions contained in this Section shall also apply to the close relative of a
director as if such relative were a director.
Similarly, Sub-section (2) of Section 94 provides that in the following situations, any director of a
company shall give written information thereof to the company in which he/she is a director no

later than fifteen days after such situation comes to his/her knowledge and the company shall
maintain a separate register to record the information so received.
 If, for any reason, he/she is going to acquire title to any shares or debentures of the
company in which he/she is a director or of a company which is a subsidiary or holding
company of that company or of another subsidiary company of the holding company, in
any manner , or he/she is going to lose his/her title;
 If he enters into an agreement to sell the shares or debentures, as referred to in Clause
(a), held in his/her name;
 If he/she assigns to any other person the authority granted by the company in which he
is a director to him/her to subscribe the shares or debentures of such company;
 If a company which is a subsidiary or holding company of the company in which he/she
is a director or another company which is a subsidiary of such company or other subsid-
iary of the holding company grants authority to him/her to subscribe the shareholders
or debentures of such company;
 If he assigns to any other person the authority to subscribe the shares or debentures or
the company as referred to in Clause (d).
Transaction with company in which director is involved

Sub-section (1) of Section 93 of the Act has envisaged a general rule that no public company shall,
without approval of the general meeting, do any significant transaction with its director or his/her
close relative or substantial shareholder or no subsidiary company shall, without approval of the
general meeting of its holding company, do any significant transaction with any director or his/
her close relative or substantial shareholder of the holding company. If any transaction is done in
contravention of Sub-section (1) and if any loss or damage is caused from such transaction to the
company, the person deriving benefit from such transaction shall also pay compensation for such
loss or damage and the amount or benefit derived from that transaction directly or indirectly shall
be returned to the company.
By contrast, Sub-section (3) has released the directors from liability to the following property
acquired by them under the provision of Sub-section (1).
 While acquiring such property by a holding company from its wholly owned subsidiary
company.
 While acquiring such property by a subsidiary company wholly owned by a holding
company from another subsidiary company wholly owned by the same holding com-
pany.
 While doing transaction at the prevailing market price in the ordinary course of business
transaction of the company.

Powers and duties of board of directors

Powers: The Company Act, 2063 under Sub-section (1) of Section 95 empowers the board of
directors that subject to the provisions of the Act, the board of directors of a company shall be
entitled to exercise all such powers and to do all such acts and things as the company is authorised
to exercise and do and perform duties through the board of directors collectively. The effect
of this section is that subject to the restrictions contained in the Act, and in the MoA and AoA,
the powers of directors are coextensive with those of the company itself. There are, however,
two important limitations upon their powers. Firstly, the board is not competent to do what
the Act, Memorandum and Articles require to be done by the shareholders in general meeting
and, secondly, in the exercise of their powers the directors are subject to the provisions of the
Act, Memorandum and Articles and other regulations not inconsistent therewith, made by the
company in general meeting. However, shareholders’ intervention is allowed in the following
exceptional cases:
 Where act done is Mala fide or lack of honesty or probity or acts done without good faith.
 Where the board is incompetent to do the act
 Where there is deadlock in management
 Where the board exercises the residuary powers
Duties: The duties to be followed by the directors can be classified in to two headings- statutory
duties and fiduciary duties. Statutory duties are those which are imposed on the directors by the
law or statute. Therefore, the duties fixed by the Companies Act, 2063, other laws-in-force and
provided in the articles of association are the statutory duties. The duties stated under Section 95
of the Act can be listed as under-
Duty of care and skill: It is the first and foremost duty of directors to act with utmost good faith
exercising with high degree of care and skill. As a trustee, they have to perform their duties and
exercise authority for the maximum benefit of the company. A minor negligence or indifference
of the director impacts with huge loss to the company. Hence, the success or failure of a company
depends upon the skillful hands of the directors.
Duty not to act for the personal benefit: Except in accordance with a decision of the general meeting
no director of a public company shall do anything yielding personal benefit to him/her through
the company. However, a private company may make a reasonable provision on the benefit which
the director may derive thought the company, as mentioned in the memorandum of association
and articles of association or consensus agreement. [(Sub-section (2) of Section 95)]
Duty not to delegate authority: The acts the directors supposed to discharge depend on the personal
skill, trust and confidence, hence, the directors, in general cannot their rights and duties to any
other persons, i.e., they have to perform these acts by themselves in person. However, except as
otherwise provided in this Act, the memorandum of association and articles of association or the

consensus agreements, the case of a private company, the board of directors may appoint any
director from amongst themselves or any employee of the company as its representative and so
delegate to him/her any or all of its powers, inter alia, to do any act or thing, make correspondences
or sign bills of exchange or cheques etc. on behalf of the company that such powers are to be
exercised individually or jointly. In so delegating the powers, at least one director and their
company secretary, if any, shall certify such delegation, pursuant to a decision of the board of
directors. [(Sub-section (3) of Section 95)]
Whatsoever may be stated above, the board of directors shall not delegate the following powers
conferred to the company and shall exercise such powers only by means of resolutions passed at
meetings of the board of directors:
 The power to make calls on shareholders in respect of amount unpaid on their shares;
 The power to issue debentures;
 The power to borrow loans or amount otherwise than on debentures;
 The power to invest the funds of the company;
 The power to make loans.
Duty to compensate for loss: The company may recover damages from a person acting in the
capacity of director or representative of the company for any loss or damage caused to the company
from any act or action done by such person beyond his/her jurisdiction.
Duty to attend board meetings: It is the primary function of directors to attend board meetings.
Without sufficient reasons, he cannot remain absent in the meetings. If the board's functions have
been affected because of absence of director, the general meeting can dismiss him from the post.
Further, directors themselves must present in the board meeting in person and the representation
by proxy is not valid.
Duty to disclose the interests: As per Section 92 of the Companies Act, 2063, the directors within
fifteen day from the date of assuming their post have to disclose as prescribed to the company and
thereafter, the same is submitted by the company to Company Registrar Office. In case of failure
to disclose their interests, they are fined as per the Act.
The second categories of duties to be observed by the director, i.e., fiduciary duties are resulted
through the position of directors vis-a-vis to the company. The directors apart from those of
statutory duties have to follow other duties as necessary to protect and preserve the economic
and financial interest of the company and other stakeholders are characterised under the fiduciary
duties. They are as follows-
 Duty not to breach of trust.

 Duty not to secure personal profits.
 Duty not to misuse corporate business opportunities.

 Duty not to Compete by directors.

 Duty to act on behalf of company.
 Duty to act with due care and diligence.
Responsibilities and duties of directors: Section 99

 The formal relation between a company and directors is as like of the principal and agent
in a contract of agency. The director being an agent of company has to act on behalf of
the company. Therefore, no director of a company shall do anything to derive personal
benefit through the company or in the course of conducting business of the company.
 If any person has derived personal benefit in the course of business of the, the company
shall recover the amount involved in the matter from such director as if such amount
were a loan.
 Any person appointed as a director of a public company shall, prior to assuming the
duties of his/her office, take an oath of secrecy and honesty in a format as prescribed.
 Every director and officer of a company shall, in discharging their duties, act honestly
and in good faith, having regard to the interest and benefit of the company, and exercise
such care, caution, wisdom, diligence and efficiency as a reasonable and prudent person
exercises.
 The company may recover damages for any loss or damage caused to the company from
a director who does any act with ulterior motive, causing\such loss or damage to the
company.
 The directors under duty to comply with the provision of this Act, memorandum of
association, articles of association of the company and the consensus agreement if any.
Restrictions on authority of directors: Section 105

The board of directors of a public company, or of a private company receiving loans from any
bank or financial institution, shall not, except with a special resolution being adopted by the
general meeting of shareholders, do or cause to be done the following act and the general meeting
may fix the necessary terms to that effect.
 Selling, donating, gifting, leasing or otherwise disposing of more than seventy per cent
of one or more undertakings being operated by it. However, the title of a buyer who
buys any property or undertaking of a company on payment of the prevailing market
price from a company which is solely engaged in the business of buying and selling of
movable and immovable properties shall not be affected.
 Borrowing moneys, where the moneys to be borrowed will exceed the aggregate of the
paid up capital of the company and its free reserves, apart from any loans and faculties
with a term of less than six months obtained by it from a bank or financial institution in
the ordinary course of business transaction. It shall not be applicable to the acceptance by

a company carrying on banking or financial transaction or insurance business of depos-

its or insurance premium from the general public in the ordinary course of its business
transaction.
 making a contribution, donation or gift in a sum exceeding hundred thousand rupees
in one financial year or a sum exceeding one per cent of the average net profits of the
company during the last three financial years, whichever is the lesser, except the contri-
bution, donation, gift etc. made for the welfare of its employees or for the promotion of
its business.
Appointment of managing director

Under Sub-section (1) of Section 96 of the Companies Act, 2063, the directors may, subject to the
articles of association, appoint one managing director from amongst themselves. The functions,
duties and powers of the managing director shall be as provided in the articles of association or as
prescribed by the board of directors.
Agreement to be entered: As per Sub-section (3) at the time of appointment of a managing director
and other director taking responsibility of the management of the company pursuant to Sub-section
(1), there shall be entered into an agreement in writing stipulating the terms of appointment,
remuneration and facilities; and no facilities or payment other than the remuneration and facilities
specified in such agreement and any other facilities receivable as specified by the general meeting
shall be provided or made. The term of such agreement shall not exceed four years at a time and
the shareholders can inspect, free of charge, the agreement entered into with the directors.
Further, Sub-section (6) has imposed restriction on a director who is receiving regular remuneration
or facilities, other than meeting allowances, from any one listed company to be appointed to the
post of managing director in another listed company, with entitlement to regular remuneration
or facilities.
12. Accounts and Records of Company
General notes
Accounting records are most important whereby all the necessary information of the affairs and
business of the company are required to be given. Accounts is a means of publicizing information
and hence on the annual accounts through which that publicity is achieved. Every company
should keep records sufficient to show and explain the company's transactions, to disclose, with
reasonable accuracy at any time, its financial position and to enable its directors to ensure that any
balance sheet and profit and loss account will comply with the provisions of the Act.
The record must contain day to day entries of all money received or expended and of the matters
to which that related and a record of the company's assets and liabilities. If the company's business
involves dealing in goods, the records must also contain a statement of stock held at the end of the

financial year and statements of stocktaking from which that was prepared, and, statement of all
goods sold or purchased in the financial year of the undertakings included in the consolidation as
a whole, so far as it concerns the members of the company. The annual accounts must be approved
by the directors and signed by a director on behalf of the board. If the approved accounts do not
comply with the Act, every director who was a party to their approval and who knows that they
do not comply or is reckless as to whether or not they comply is guilty of an offence.
Publicity of the affairs of company and its importance: The general issue is how far the law
makes the controllers of companies accountable to those who have invested in them, whether as
shareholders or as creditors. There are three main legal techniques to promote such accountability.
 The provisions to the public of full, accurate and verified information about the compa-
ny.
 The provisions to make report by the controllers of companies to those who have invest-
ed in the company to submit themselves to periodic re-election and to seek shareholders'
approval for certain types of corporate decision.
 The provisions of imposing legal duties on the directors to promote the interests of the
company.
The fundamental principle underlying the company legislation is the disclosure of full, accurate
and verified information about the company to the public. This publicity is mainly secured in
different ways-
 By provisions for registration at Companies House.

 By compulsory maintenance of various registers and the like by the company.
 By compulsory disclosure of the financial position in the company's published accounts
and by attempting to ensure their accuracy through a professional auditor.
 By compulsory disclosure of information on all business communication.
 By informing of all major developments if the company is listed and if it does not the
Security Exchange may publish the information.
 By appointing inspector by the Office of Companies Registrar to investigate and report
on the affairs of a company is that the company's members have not been given sufficient
detail to enable the other party to be identified.
Accounts of company
The directors of every company are under the duty to prepare for each financial year of the
company a balance-sheet and a profit and loss accounts and on directors of a company which is a
parent company additionally to prepare a consolidated balance sheet and profit and loss account.
The basic and overriding principle is that the balance sheets must give a true and fair view, in the
case of individual accounts of the state of affairs of the company at the end of the financial year and

in case of the group accounts, of the state of affairs as at the end of all the information with respect
to its affairs which they reasonably expect.
Under Section 108 (1) every company shall duly maintain its accounts in the Nepali or the English
language and it shall be maintained according to the double entry system of accounting and in
consonance with the accounting standards enforced by the competent body under the prevailing
law and with such other terms and provisions required to be observed pursuant to this Act, in
such a manner as to clearly reflect the actual affairs of the Company. The books of account of a
company shall be kept at its registered office.
Sub-section (5) of Section 108 has assigned the final responsibility to maintain books of account
and records of the company to the directors or other officers. Sub-section (6) further provides that
the account must be prepared as per the Act and reflect the true position of the company. Where
there is a default in complying with the provisions made in this Act in respect of the preparation of
books of account and annual financial statements of a company, the director or officer him/herself,
during whose tenure the annual financial statements and other reports have been prepared, shall
be responsible under this Act.
Annual financial report

It is a comprehensive report on a company's activities throughout the preceding year. Annual
reports are intended to give shareholders and other interested people information about the
company's activities and financial performance. Most jurisdictions require companies to prepare
and disclose annual reports, and many require the annual report to be filed at the company's
registry. Companies listed on a stock exchange are also required to report at more frequent
intervals depending upon the rules of the stock exchange involved.
Pursuant to Sub-section (1) of Section 109 of the Act, the following annual financial statements
shall be prepared by the board of directors of a public company every year at least thirty days
prior to the holding of its annual general meeting, and in the case of a private company, within six
months of the expiry of its financial year:
 Balance sheet as at the last date of the financial year.

 Profit and loss account of the financial year.
 Description of cash flow of the financial year.
As per Sub-section (2), the annual financial statement to be prepared pursuant to Sub-section (1)
shall give true and fair view of the state of affairs of the company as at the last day of the financial
year concerned and also state the account of profit and loss and description of cash flow made in
that financial year. Such financial statements shall be prepared in the format prescribed by the
prevailing law. Typically annual reports will include:

 Chairman's report
 CEO's report
 Auditor's report on corporate governance
 Mission statement
 Corporate governance statement of compliance
 Statement of directors' responsibilities
 Invitation to the company's AGM
 Financial statements including:
 Auditor's report on the financial statements
 Balance sheet
 Statement of retained earnings
 Income statement/Profit and loss account of the financial year.
 Cash flow statement
 Notes to the financial statements
 Accounting policies
Abstract of financial statement

As per Section 84 of the Companies Act, 2063, a company listed in the stock exchange shall not
be required to send the annual financial statement and director’s report to its shareholders or
debenture-holders. However, the company shall have to sent an abstract of financial statement
to every shareholder along with the notice of annual general meeting. The abstract of financial
statement shall be prepared on the basis of the annual financial statement of the company and
the director’s report. The format of such statement shall be as specified by the Office based on the
suggestions of the body specified to set accounting standards under the prevailing law.
Pursuant to Sub-section (3) of Section 84, the abstract of financial statement shall contain, inter alia,
the flowing matters:
 Matter indicating that the abstract of annual financial statement is only an abstract of the
annual financial statement of the company and their director’s report,
 An opinion of the company’s auditor as to whether or not the abstract of annual financial
statement is in consonance with the annual financial statement of the company and the
 director’s report and whether or not the abstract is consistent with the format specified
pursuant to this Section,

 Matter as to whether or not the auditor has made any remarks about the annual financial
statement of the company and, if such remarks have been made, full details of such re-
marks and such materials as required to understand such remarks,
 In cases where the auditor has mentioned in his/her report anything about the inade-
quacy of the accounts and accounting returns or about the company’s accounts not being
verifiable with the records and returns maintained by the company or about the non-re-
ceipt of any such information and explanation as sought, full details thereof.
Further, under Subsection (4), Instead of sending the abstract of annual financial statement to the
shareholders at their personal addresses, the company many publish it at least twice in a national
daily newspaper at the time of publishing the notice of meeting. In the event of publication of the
abstract of annual financial statement pursuant to Sub-section (4), there shall not be required to
send the abstract at the personal addresses of shareholders.
The director's report

Under section 109(4) of the Companies Act, 2063, the directors must prepare a report for each
financial year. This must contain a fair review of the development of the business of the company
and its subsidiaries during the financial year and the position at the end of it, they must state
what amount if any, they recommend should be paid as dividend, and what amount if any, they
proposed to carry to reserves. In addition, it must give the name of all persons who at any time
during the financial year were director of the company and describe the principal activities of the
company and its subsidiaries and any changes therein during the course of the year. The board of
directors in addition to the annual financial statements shall prepare a separate report stating the
following matters: -
 Review of the transaction of the previous year.

 Impacts, if any, caused on the transactions of the company from national and interna-
tional situations.
 Achievements in the current year as at the date of report and opinions of the board of
directors on matters to be done in the future.
 Industrial or professional relation of the company.
 Alterations in the board of directors and the reasons thereof.
 Major things affecting the transactions.
 Remarks in audit report.
 Amount recommended for payment by way of dividend.
 Details of forfeiture of shares.
 Progress of transactions of the company and of its subsidiary company in the previous
financial year and review of the situation existing at the end of that financial year.

 In the event of buy back of shares, the reasons and number of shares.
 Details of total management expenses during the previous financial year.
 Amount of remuneration, allowances and facilities paid to the directors, managing di-
rectors, CEO.
 Details of sale and purchase of properties.
 Disclosures made by the substantial shareholders of the company to the company in the
previous financial year.
 Any other matters required to be set out in the board's report under the Companies Act
or other prevailing laws.
 Other necessary matters in the opinion of the board of directors.
13. Audit
General notes
Audit of annual accounts of a company is compulsory and is an indispensible part of incorporated
business. Those who carry on business with other people's money have to be accountable to
those people. Management and accountancy demand specialized skill. There was thus need of an
agency to stand in between the shareholders and management. The agency is a statutory auditor,
should be technically qualified for the job and should also be independent, and able to withstand
the pressure of management.
Due to constraints, an audit seeks to provide only reasonable assurance that the statements are free
from material error. Hence, statistical sampling is often adopted in audits. In the case of financial
audits, a set of financial statements are said to be true and fair when they are free of material
misstatements – a concept influenced by both quantitative (numerical) and qualitative factors. But
recently, the argument that auditing should go beyond just True and fair is gaining momentum.
The companies Act, 2063 seeks to ensure that the appointment of an auditor is not in the hands of
the directors. That is why it is vested in the general body of shareholders. In order to assure due
and proper attention, the number of appointments that an auditor may accept has been restricted.
Where the shareholders fail to appoint auditor, the power can be exercised by the Office of the
Companies Registrar. Thus the Act tries to assure in every possible way that an auditor is not a
puppet of the directors. The only exceptions are that the directors may appoint the first auditor.
The shareholders have been given the opportunity to exercise their power of appointment by
providing that the appointment would have to be renewed every year and that the shareholders
may even replace the previous appointee. Especial notice of any such move of replacement has to
be given so that the auditor sought to be replaced may have an opportunity of explaining matters
to the whole body of shareholders. Some very important information may come out in the process.

Appointment of auditor
As the auditor is appointed to examine the records and accounts of a company whether or not the
records and accounts represent the exact position of the company and it is provision in favour of
the shareholders and other stakeholders of the company, in general, the auditor is appointed by
the shareholders. The different ways of the appointment of auditor are given as under.
1. By the board of directors: The board of directors may appoint the auditor prior to the holding
of the first annual general meeting.
2. By the general meeting of shareholders: At each annual general meeting, an auditor has to
be appointed by the company. The appointment/re-appointment of auditors at the annual
general meeting is one of the items of ordinary business to be transacted at such a meeting.
Section 111(1) states that the auditor of a company shall be appointed from amongst the
auditors licensed to carry out audit under the prevailing law by the general meeting. The
appointment of auditor is mandatory in the annual general meeting for the ensuing year.
3. By the Office of the Company Registrar: Section 113 provides that where the annual general
meeting of a company fails to appoint an auditor for any reason or where the annual general
meeting itself cannot be held or where the auditor appointed pursuant to this Act ceases to
continue his office for any reason, the Office may, at the request of the board of directors of
the company, appoint another auditor. Therefore, the casual vacancy of auditor is fulfilled by
the Office of the Company Registrar whether the auditor is vacant by reason of resignation or
other causes.
4. By the Auditor General Office: The auditors of the government companies will be appointed
by the Office of the Auditor General of Nepal under the Audit Act, 2048.
Tenor of office of auditors

An auditor appointed at the annual general meeting holds the office from the conclusion of the
annual general meeting at which he is appointed until the conclusion of the next annual general
meeting. He will continue in office until the next annual general meeting is actually held and
concluded and he cannot be deemed to have retired on the date when the meeting ought to have
been held. Therefore, Section 111(2) states that the auditor appointed shall hold his office until the
next annual general meeting.
Disqualifications of auditor
The Companies Act, 2063, under different clauses of Section 112 (1) has provided the disqualifications
of an auditor. As per the Act, the following persons or the firms or companies in which such
persons are partners shall be qualified for appointment as auditor and continue to hold office:
 A director, advisor appointed with entitlement to regular remuneration or cash benefit, a

person or employee or worker involved in the management of the company or a partner

of any of them or/and employee of any of such partners or a close relative of a director
or partner, out of them, or/and employee of such relative.
 A debtor who has borrowed moneys from the company in any manner, or a person who
has failed to pay any dues payable to the company within the time limit and is in such
arrears or close relative of such person.
 A person who has been sentenced to punishment for an offense pertaining to audit and
a period of Three years has not elapsed thereafter.
 A person who has been declared insolvent.
 A substantial shareholder of the company or a shareholder holding one percent or more
of the paid up capital of the company or his/her close relative.
 A person who has been sentenced to punishment for an offense of corruption, fraud or
a criminal offense involving moral turpitude and a period of five years has not elapsed
thereafter;
 An auditor or his/her partner or ex-partner or employee or ex-employee shall be ap-
pointed as auditor for more than three consecutive terms.
 to perform the audit of a public company.
 In the case of a public company, any person who works, whether full time or part time,
for any governmental body or anybody owned fully or partly by the Government of
Nepal or any other company or a partner of such person or a person who is working as
an employee of such partner or a person who is authorized to sign any documents or
reports to be prepared by the management of the company.
 A company or corporate body with limited liability.
 A person having interest in any transaction with the company or his/her close relative
or a director, officer or substantial shareholder of another company having any interest
in any transaction with the company.
Where any auditor becomes disqualified to audit the accounts of a company or there arises a
situation where he/she becomes disqualified for appointment or can no longer continue to act as
an auditor of the company, he/she shall immediately stop performing audit which is required to
be performed or is being performed by him/her and give information thereof to the company in
writing. The audit performed by an auditor disqualify this Section shall be invalid.
Remuneration of auditor: Section, 118 of the Companies Act, 2063 states that the remuneration
of an auditor shall be as prescribed by the appointing authority; and such remuneration shall be
borne by the company.

Removal of auditor
The general rule of law regarding the removal of auditor is that no auditor appointed pursuant
as per the Act shall be removed pending the completion of audit of accounts of any financial year
for which he/she was appointed as the auditor. By contrast Sub-section (2) of Section 119 of the
Companies Act, 2063 has provided that if any auditor breaches the code of conduct of auditors or
does any act against the interest of the company which has appointed him/her as the auditor or
commits any act contrary to the prevailing law, such auditor may be removed through the same
process whereby he/she was appointed as auditor, by giving prior information to the Institute
of Chartered Accountants of Nepal, and with the approval of the regulatory authority, if any
authorized by the prevailing law for the regulation of business of the company concerned , and
failing such authority, with the approval of the Office. While removing an auditor pursuant to Sub-
section (2), the auditor shall be provided with a reasonable opportunity to defend him/herself.
Auditor's report
The final document that has to accompany the annual accounts is the auditors' report thereon.
This has to be addressed to the company's members and to state whether in the auditors' opinion
the annual accounts have been properly prepared in accordance with the Act and, in particular,
whether they give a true and fair view. The report must also state whether the auditor considers
the information given in the directors' report is consistent with that in the annual accounts and, if
they are not satisfied, they must say so in the report. In preparing this report they must carry out
such investigations as will enable them to form an opinion on:
 Whether proper accounting records have been kept by the company and whether proper
returns adequate for their audit have been received from branches which they have not
visited.
 Whether the company's individual accounts are in agreement with the accounting re-
cords and returns.
If they are not of those opinions they must say so. If they have failed to obtain all the information
and explanations which, to the best of their knowledge and belief are necessary for the purpose of
their audit, their report must so state. Moreover, if the requirements of disclosure of emoluments
and benefits of the directors are not complied with in the accounts, the auditors shall include in
their report, so far as they are reasonably able to do so, a statement giving the required particulars.
Section 115 (1) provides that auditor shall make a report to the members of the company on the
accounts examined by him and on every financial statement which is required to be laid in the
general meeting of the company. The Audit report should take into consideration the provisions
of this Act, the Accounting and Auditing standards and matters which are required under this Act
or rules made there under. The Audit report should state that to the best of his information and
knowledge, the said accounts and financial statements give a true and fair view of the state of the
company’s affair as at the end of the financial year and the profit or loss and the cash flow for the

year and such other matters as may be prescribed. Section 115 (3) lay down that auditor’s report
shall also state other details which are as under:
 Whether such information and explanations have been made available as were required
for the completion of audit;
 Whether the books of account as required by this Act have been properly maintained by
the company in a manner to reflect the real affairs of its business;
 Whether the balance sheet, profit and loss account and cash flow statements received
have been prepared in compliance with the accounting standards prescribed under the
prevailing law and whether such statements are in agreement with the books of account
maintained by the company;
 Whether, in the opinion of the auditor based on the explanations and information made
available in the course of auditing, the present balance sheet properly reflects the finan-
cial situation of the company, and the profit and loss account and cash flow statement
for the year ended on the same date properly reflect the profit and loss, cash flow of the
company, respectively;
 Whether the board of directors or any representative or any employee has acted contrary
to law or misappropriated any property of the company or caused any loss or damage
to the company or not;
 Whether any accounting fraud has been committed in the company
 Suggestion, if any.
Rights and duties of auditors

Under Section 115 of the Companies Act, 2063, here are two fundamental functions and duties of
auditor. Firstly, the auditor shall, addressing the shareholders or the appointing authority, submit
to the company his/her report, certifying the balance sheet, profit and loss account and cash flow
statement based on the books of account, records and accounts audited by him/her and, secondly,
the auditor must prepare the audit report in accordance with the prevailing law or in consonance
with the audit standards prescribed by the competent body; and such report shall state the matters
to be set out under this Act, as per necessity. Sub-section (3) has laid down the contents to be
included in the audit report by the auditor.
Rights of auditors: The rights and powers which an auditor is entitled and can exercise the powers
under the Companies Act, 2063 can be stated as under-
 Right of access to books, accounts and vouchers: Auditor of a company shall have right of
access, at all times, to the books accounts and vouchers of the company, whether kept at the
head office of the company or elsewhere. The auditor shall also have access to books of ac-
count containing cost data which required from certain class of companies to include in the
account in respect of utilisation of material, labour or other terms of costs. They must have

free access to the information which is necessary material for their report. The court will grant
to the auditor an injunction for enforcing this right only when there has been general meeting
decision to appoint him or to continue his appointment. In Culf v. London and County Land
& Building Co. Ltd.; (1912) 1 Ch. 440, it was observed that-
The right of access to books can be enforced by mandatory injunction but not where litigation
is pending between the company and the auditor. Where the auditors were refused to access
to the books in a case of their negligence, the court refused to make an order for access to be
given but directed that the members of the company should meet for that purpose.
 Right to obtain information and explanation: In Newton v. Birmingham Small Arms Co. Ltd.,
(1906) 2 Ch. 378, it was stated that the auditor shall be entitled to require from the officers of
the company such information and explanation as he thinks necessary for the performance
of his duties as auditor. The Articles of a company cannot preclude the auditor team from
availing himself of all information which is material to enable him to make his report and
from fulfilling his statutory duties to the shareholders. In case the information is not supplied
to the auditor, he can report the same to the members.
 Right to visit branch offices and right of access to books kept therein: Where the accounts of
any branch office of a company are audited by a person other than the company's statutory
auditor, the auditor shall have a right-
 To visit the branch office, if he deems it necessary to do so for the performance of his
duties as auditor.
 To access at all times to the books and accounts and vouchers of the company maintained
at the branch office.
 Right to receive notice of and to attend the general meeting: The auditors have the right to
attend any general meeting of shareholders and to receive any notice and other communica-
tions relating thereto which members are entitled to receive and to be heard at any general
meeting on any part of the business which concerns them as auditors.
 Right to receive remuneration: The auditor shall have right to receive remuneration for au-
diting the accounts of a company. the rights of auditor cannot be limited or abridged either
by the Articles or by any resolution of the shareholders. The auditor is entitled to receive a
reasonable amount as remuneration of his work even if the matter regarding remuneration
has not been provided in the agreement or at the time of his appointment for the audit works.
 Right to prepare, sign and present his report to the members: The audit report is prepared
by the auditor so appointed and verified by him after examining the books and vouchers
and other concerned documents of the company. Only the person appointed as auditor of a
company may sign the auditor's report or sigh or authenticate any other documents of the
company required by law to be signed or authenticated by the auditor.

Duties of auditor: In general, an auditor has to follow the following duties while auditing the
accounts and records of a company. These duties are topmost important to make audit valid
and reliable.
 Duty to act with due care and caution: The auditor while verifying the accounts has to act
with due care, skill and diligence. The act of auditing involves high skill and caution of ex-
amining the documents kept in the company. A company’s auditor, in preparing his report,
must carry out such investigations with due care and skill as it will enable him to make
opinion as to –
 Whether adequate accounting records have been kept by the company and returns ade-
quate for their audit have been received from branches not visited by him, and
 Whether the company’s individual accounts are in agreement with the accounting re-
cords and returns, and
 In the case of a quoted company, whether the auditable part of the company’s directors’
remuneration report is in agreement with the accounting records and returns.
 Duty to verify the accounts: The auditor is appointed to examine and verify the books and
accounts of a company. While verifying the accounts, the auditor shall state that fact in his
report if the auditor is of the opinion–
 That adequate accounting records have not been kept, or that returns adequate for their
audit have not been received from branches not visited by him, or
 That the company’s individual accounts are not in agreement with the accounting re-
cords and returns, or
 In the case of a quoted company, that the auditable part of its directors’ remuneration
report is not in agreement with the accounting records and returns.
 Duty to conduct necessary interrogations and inquires: Where there is a reasonable ground
for suspicion in the business from the books and accounts of company or there is some am-
biguous transactions or any other documents, the auditor must be assure the clarity of these
documents and examine them with necessary clarification provided by the directors or other
officers of the company. To discharge this duty, the auditor, when necessary, has to conduct
necessary interrogations and inquires to the directors and other managers of the company.
When such interrogations have been made, the concerned directors or managers have to give
the answer for the satisfaction of the auditor.
 Duty to report the members with the matters to be stated in his report: It is the fundamental
function, right and duty of any auditor that he has to make a comprehensive report of ac-
counts of a company and submit this report to the shareholders. The matters to be included in
the audit report have been provided under Sub-section (3) of Section 115 of the Act.

 Duty to give suggestions if any to the company: If in the opinion of auditor, based on the
examination of the books, accounts and other documents, thinks appropriate to give sugges-
tions as to the management, legal compliance, account keepings, regulatory compliance or
other financial administration or in the corporate governance issues and the corporate social
responsibilities etc., he can give suggestions to the company incorporating in the audit report.
These suggestions may be creditworthy for the better management of the company which is
ultimately in favour of the shareholders' benefit.
Position of auditor: In a company, money is contributed by the shareholders by subscribing

shares but their monies are in use of the board of directors without theirs direct access to
both, the business and management of the company and its assets. The company legislations,
therefore, impose liabilities to the board of directors to submit themselves to the shareholders in
the general meetings held periodically as the shareholders, the owner of the company, should
have opportunity to know that what is going on to their monies and if possible they have
further opportunity in the general meeting to discuss with their collective efforts the future of
the company and can get clarification to the business of the company directed or effectuated by
them. Hence, the shareholders can control the management and business of the company. In spite
of this, the fact is that most of the shareholders of a company do not know and understand the
accounting system and cannot find out the trueness of the documents and records maintained
by the directors. In fact, in most of the cases, the directors do prepare report exaggerating or
manipulating the facts which leads to the false statement. To protect the shareholders' proprietary
and economic interests, the company legislation has provided and intermediaries between the
management and shareholders to examine and provide exact information with facts by which
the shareholders can have opportunity to know the correct information and take appropriate
actions for the betterment of the company. The provision of intermediaries is the Auditor who
is appointed by the shareholder and has got power to examine the books, records and accounts
of the company kept by the directors. While exercising the powers and rights and duties to be
followed by him, his position cannot be characterised by a single point. Hence, the position of an
auditor can be summerised into the following points-
 Auditor as an agent of members/company.

 Auditor as an employee of company.
 Auditor as an officer of company.
 Auditor is not an advisor of company.
 Auditor is not an insurer.
 Auditor is not a critic of management decisions.
 Auditor is a watch-dog, not a bloodhound. Means that his duty is verification and not
detection. But where there was material before the auditor to arouse suspicion, he should
have at least appraised of if in his report to the shareholders.

Test Questions
1. What is company? State the characteristics of a company?
2. State the principles of law laid down in Salomon v. Salomon & Co.
3. "The legal personality of a company is distinct and different from its members individually
and collectively." Comment and point out the circumstances when the separate of a company
is disregarded by the courts.
4. Distinguish between a public limited company and private limited company.
5. What are the provisions of the Companies Act, 2063 for the conversion of (i) a private company
into a public company; and (ii) a public company into a private company.
6. Who is a promoter? Explain duties and liabilities of promoters.
7. Write short notes on (i) certificate of incorporation. (ii) commencement of business.
8. State the usual steps to be taken in the formation of a company under the Companies Act,
2006.
9. Is a contract made before incorporation of a proposed company binding on it?
10. Write a short note on 'consequences of incorporation of a company'.
11. Define memorandum of association. What does it contain?
12. State the relation of a memorandum of association with the articles of association.
13. What is a prospectus? Who are liable for misstatements in a prospectus? Explain the extent of
civil and criminal liability for such misstatements.
14. Write a short note on statement in lieu of prospectus.
15. Define 'share' and 'stock' and distinguish between the two.
16. Write a short note on the following: (i) Issue of shares at premium (ii) Issue of shares at
discount.
17. Write short notes on: (i) Right shares (ii) Bonus shares.
18. What is meant by allotment of shares?
19. 'A share certificate is prima facie evidence of the title of the person whose name is entered on
it." Comment'
20. How is membership of a company acquired? Distinguish between a member and a shareholder.
21. How does one cease to be a member of a company?

22. The Articles of association of a public limited company empower the Board of Directors to
refuse registration of transfer of its shares without assigning any reasons. Is it valid? Explain
the provisions regarding refusal to transfer shares.
23. Distinguish between transfer and transmission of shares.
24. What is a debenture?
25. What are the different kinds of debentures that may be issued by a company?
26. Distinguish between a share and a debenture.
27. What are the different kinds of general meetings of a company?
28. Summaries the provisions as regards annual general meeting.
29. What are the provisions of the Companies Act, 1956 in respect of an extraordinary general
meeting to be held on requisition?
30. Write a short note on the powers of the Tribunal to call meetings.
31. Write short notes on: (i) Notice of a meeting (ii) Proxy (iii) Voting by poll (iv) Resolutions (v)
Explanatory statement (vi) Quorum
32. Are company directors trustees or agents of the company? Explain.
33. How is a director appointed?
34. What are the disqualifications of a person for appointment as the director of a company?
35. State in relation to a public company: (i) When additional directors can be appointed and for
what period? (ii) When an alternate director can be appointed and for what period? (iii) How
the office of a director is filled in case of a casual vacancy and for what period?
36. When can Board of Directors appoint directors?
37. How many meetings of a Board of Directors of a company must be held in a year and at what
intervals?
38. Define Managing Director and state the statutory provisions regarding his appointment and
remuneration.
39. What are the powers of directors that cannot be exercised without the approval of members
given in a general meeting?
40. What is winding up? Discuss the circumstances in which a company may be wound up by the
Tribunal.
41. What is the effect of a winding up order passed by the Court?

42. Discuss the liability of members of a company in the event of its being wound up.
43. Explain the procedure to wind up a company voluntarily.
44. What is the difference between winding up and dissolution?
45. Highlight the importance and provisions of holding the AGM of shareholders under the
Companies Act, 2063.
46. What is Board’s Report? State the matters to be included in it.
47. When the office of company registrar can appoint the auditor of a company?
48. What is the legal provision regarding the notice for AGM?
49. Who are disqualified to be an independent director under the Companies Act, 2063?


CHAPER 2 : SECURITIES ACT, 2063
CHAPTER 2
SECURITIES ACT, 2063

1. Meaning and Concept of Securities
General notes
Dealing on securities is one of the major tools of corporate investment. The public companies may
raise their capital through the public subscription of their shares either by way of initial public
offerings (IPO) or further public offerings (FPO). When there is public offerings, the investors
invest their money in the business of the company after due calculation. As the shares are free
transferable, the investors may invest in companies by purchasing their shares through the
secondary market. Share market, hence, provides a platform to deal on securities to create a good
investment environment and at the same time, the investors may be suffered by loss because of
fraud in dealings on securities. The state has two fundamental concerns in the securities market,
firstly, to create and enhance the creditworthiness or trustworthiness of the share market as it is
the main source of investment leading the country to the economic development and secondly,
to protect the investor's economic interest against the fraudulent acts which can be committed
while dealing on securities by providing various provisions to regulate the securities business and
imposing punishment to those involving in improper conducts and fraud. Hence, the Securities
Act, 2063 has been enacted in order to regulate and manage the activities of the securities markets
and persons involved in the dealing of securities by regulating the issuance, purchase, sale and
exchange of securities for the purpose of protecting the interests of investors in securities, by
developing the capital market to mobilize necessary capital for the economic development of the
country.
Meaning of securities and stock exchange

There is no fixed and concrete meaning of the term securities. It includes the various instruments
or means by which a company raise its capital, e.g., share, debenture, bond etc. through the public
subscription in case of a public company. These securities provide various rights to the holder of
them and they are generally transferable in nature.
Securities: Section 2 (f) of the Securities Act, 2063 has defined the term securities. It states that the
"securities" means any shares, stocks, bonds, debentures, debenture stocks or collective investment
scheme certificate issued by a body corporate or treasury bonds, saving bonds or bonds issued by
the Government of Nepal or by a body corporate against the guarantee of the of the Government
of Nepal, and this term also includes such other securities as may be specified by the Board to
be transacted or transferable through the stock exchange or the instrument to purchase, sell or
exchange such securities.
Securities transactions: Under Section 2 (g) of the Act the term securities transaction means the
issue, purchase, sale or exchange of securities and other acts pertaining thereto.

Stock exchange: The term exchange means an act concerning purchase, sale or transfer of securities
already issued pursuant to this Act. Section 2 (i) of the Act has defined stock exchange as a market,
place or facility performing the purchase, sale or exchange of securities on regular basis by bringing
together to the purchasers and sellers of securities. Further, the issuance, sell, purchase, exchange
or securities and other acts pertaining thereto come within the ambit of security transaction.
Securities business: Securities business shall only be carried out by the company or entity that
has obtained license pursuant to this Act. The term securities business has been defined by the Act
under Section 2 (j) which means the transactions in securities to be carried on by a company or
body licensed to carry on the securities business under this Act and the company or body licensed
under Section 58 to carry on securities business is called the securities business person.
2. Establishment of Nepal Securities Board
General notes
Stock exchange or securities business involves lots of risks as it includes large scale of monies
and resources. It is one of the major investment area around the world which indicates the
investment scenario of a country and further, the economic indicator determines by the securities
stock exchange market of the concerned country. In one hand stock exchange shows the current
financial position of the business sector and on the other hand, it gives impression of the
investment environment in a country. Hence, it is one of the priority of state, at now, is to boost
up the security business in safe and secure manner for good investment environment which
only helps to maintain the stable economy which is the basic essential for the development of a
country. As the common people invest their monies in securities exchange by purchasing shares,
debentures or other forms of securities issued by the companies, there is a chance of fraud and
deception against the financial interests of common people and it is the duty of the government
to protect such interest of its people. To achieve the both goals, i.e., to maintain or keep the public
confidence towards the security business and to protect the proprietary interests of common
people, the Securities Act, 2063 has designed an independent and powerful institution called
the Nepal Securities Board. Now, therefore, to regulate and manage the securities transactions
and securities business activities of the securities markets and persons involved in securities
business by regulating the issue, purchase, sale and exchange of securities in order to develop
capital market and protect the interests of investors in securities, the Act has designed a firmly
established institution in the name of Nepal Securities Board with different legal characteristics
and various functions, powers and duties.

Formation of the Board

Pursuant to Sub-section (2) of Section 3 of the Securities Act, 2063, the board to be established
under the Act shall consist of the following members-
S. No. Person Designation

1. A person appointed by the Government of Nepal Chairperson
2. Joint Secretary, Ministry of Finance Member
3. Joint Secretary, Ministry of Law, Justice and Parliamentary Affairs Member
4. Representative, Nepal Rastra Bank Member
5. Representative, Institute of Chartered Accountants of Nepal Member
6. Representative, Federation of Nepalese Chambers of Commerce Member
and Industries
7. A person nominated by the Government of Nepal from amongst the Member
experts who have obtained at least master's degree in economics,
management, finance, commerce or law from a recognized univer-
sity and gained at least seven years of experience in stock exchange,
management, capital market development, finance and economic
sector
An officer employee designated by the Board shall act as the Secre-
tary of the Board.
Tenure of Office: Under Sub-section (4), the tenure of office of the member nominated by the
Government of Nepal shall be three years. No act or proceeding of the Board shall be affected
merely on the reason of any vacancy in office of any member.
Office of the Board: Sub-section (8) of Section 3 has stated that the central office of the Board shall
be situated in Kathmandu Valley; and the Board may, as required, open its branch or contact office
within or outside of Nepal.
Features of the Board: Section 4
 The Board shall be an autonomous body corporate having perpetual succession.

 The Board shall have a separate seal of its own for all of its acts and proceedings.
 The Board may acquire, use, purchase, sell, or otherwise deal with, any movable or im-
movable property as like an individual.
 The Board may sue by its own name and be also sued in the same name.
Meeting and decision of the Board

Section 6 of the Securities Act, 2063 has provided the provisions for the board's meetings and its
decision making process. As per Sub-section (1) of Section 6, the meeting of the board shall be
held at least once a month. The Chairperson shall call the meeting of the Board as per necessity on

such date, at such time and at such place as may be specified by the Chairperson. However, under
Sub-section (4) where at least two members request in writing to call a meeting of the Board, the
Chairperson shall have to call a meeting of the Board within seven days from the date of receipt
of such a notice. Sub-section (3) further, provides that the meeting of the Board shall be presided
over by the Chairperson and by a member chosen by the members from amongst themselves, in
the absence of the Chairperson.
Quorum and voting: Under Sub-section (5), the Secretary of the Board shall provide the agenda to
be discussed at the meeting to the members, along with the notice for the meeting. The presence of
more than fifty percent of the total number of members of the Board shall be deemed to have been
constituted a quorum for a meeting of the Board. -(Sub-section 6).
Further, A majority opinion shall prevail at the meeting of the Board and in the event of a tie; the
person presiding over the meeting shall exercise the casting vote. -Sub-section (7)
Minute: Under Sub-section (8), a separate minute book shall be maintained about recording the
names of members present at, matters discussed at and decisions made by each meeting of the
Board, and such a book shall be signed by members present. The decisions made by the Board shall
be authenticated by the Secretary of the Board and shall provide to all members. Other procedures
relating to the meeting of the Board shall be as determined by the Board itself.
Functions, duties and powers of the Board

Section 5 of the Securities Act, 2063 has stated the different functions to be carried out by the board
and conferred various powers and imposed duties to the board. The functions, duties and powers
of the Board shall be as follows:
a) To offer an advice, as per necessity, to the Government of Nepal on matters incidental to

the development of capital market.
b) To register the securities of any corporate body established with the authority to make a
public issuance of its securities.
c) To regulate and systematize the issue, transfer, sale and exchange of registered securities.
d) To grant permission to any corporate body desirous of operating a stock exchange, to

operate the stock exchange subject to this Act or the Rules and bye -laws framed under
this Act.
e) To regulate and monitor the activities of the stock exchange.
f) To inspect as to whether or not any stock exchange is executing its activities in accordance
with this Act or the Rules and Bye-laws framed under this Act, and to suspend or revoke
the license of such a stock exchange, if it is found that the same has not been done.
g) To issue a license to companies or institutions, which are desirous of carrying on the

securities business subject to this Act or the Rules and Bye-laws framed under this Act.

h) To regulate and monitor the activities of securities business person.
i) To classify securities business persons and fix their standards according to their functions
and capability by fulfilling such procedures as prescribed.
j) To grant a permission to operate collective investment schemes and investment fund

programs, and to regulate and monitor the same.
k) To approve Bye-laws of stock exchanges and those bodies which are related with securities
business and engaged in securities transactions, and to issue orders to stock exchanges
and those bodies which are related with securities business and engaged in securities
transactions to make necessary amendment in their Bye-laws with a view to making
necessary provisions concerning the development of capital market and protecting the
interests of investors in securities.
l) To systematize the clearance of accounts related to securities transactions.
m) To supervise whether or not security business persons have maintained such conduct as
prescribed in this Act or the Rules, Bye-laws and Directives framed under this Act, while
carrying on securities business, and suspend or revoke the license to carry on securities
business where any securities business person is not found to have maintained such a
conduct.
n) To make or cause to be made such arrangements as may be necessary to regulate

the volume of securities and the mode of securities transactions for the promotion,
development and healthy operation of stock exchanges.
o) To make such arrangements as may be necessary to prevent insider trading or any other
offense relating to securities transactions as referred to in Chapter-9 for the protection of
the interests of investors in securities.
p) To review, or cause to be reviewed, financial statements submitted by corporate bodies

issuing securities and securities business person, sand give such directives to the
concerned corporate bodies as it deems necessary in this connection.
q) To regulate and make transparent the act of acquiring the ownership of a company there
by gaining control over its properties.
r) To maintain coordination and exchange cooperation with the concerned agencies in

order to supervise and regulate matters concerning securities or company affairs,
s) To perform or cause to be performed such other functions as may be necessary in relation

to securities and the development of capital market.

Chairperson of the Board

Appointment of Chairperson: Section 7
The Government of Nepal shall appoint an appropriate person from amongst the renowned
persons who have obtained at least master's degree and gained at least seven years of experience
in the field of stock exchange management, capital market development, economics, finance,
commerce, management or law to the office of Chairperson to act as the administrative chief of,
and perform the day-to-day business of the Board.
Under Sub-section (3) of the Act, the chairperson is appointed on the recommendation of the
committee comprising of the member of National Planning Commission responsible for the
concerned sector and the Secretary at the Ministry of Finance and an expert in the field of securities
as its members.
Remuneration: Pursuant to Section 9 of the Act, the remuneration, meeting allowance and facility
entitled to, by the Chairperson and member and daily and traveling allowance entitled to, by the
Chairperson and member while making travel within or outside Nepal shall be as prescribed.
Removal from the post: Under Sub-section (7), where the Chairperson commits any act or action
contrary to the interests of the Board or the development of capital market and causes any loss and
damage to the Board, the Government of Nepal may form an inquiry committee as prescribed and,
on recommendation of such a committee, remove him or her from the office of the Chairperson.
Grounds for the removal: Sub-section (2) of Section 12 of the Act has provided the various
circumstances where the Chairperson and the member shall be removed from the office:
a) If one is disqualified to be a Chairperson and a member, as the case may be, pursuant to
Section 11,
b) If one commits any act contrary to the interest of investors in securities or any act that
may cause loss or damage to the development of capital market,
c) If one suffers from lack of competence to implement, or cause to be implemented, such

functions required to be performed by the Board to attain the objectives of the Board
pursuant to this Act or the Rules framed under this Act,
d) If one has been held disqualified to carry on any occupation or business by the reason
of misconduct and his or her certificate has been revoked or he or she has thus been
restricted to carry on a business,
e) If one remains absent from three consecutive meetings of the Board without giving a
notice.
Qualification of Chairperson and member: In order to be appointed as a Chairperson or a

member, as per Section 10, a person shall have to possess the qualification as follows:

 One who is a citizen of Nepal,

 One who has maintained high moral character,
 One who has gained at least seven years of professional experience in the field of stock
exchange management, capital market development, economics, finance, commerce,
management or law, and
 One who is not disqualified under Section 11 of the Act.
Disqualification of Chairperson and member: Under Section 11 any of the following persons
shall not be eligible to be appointed to the office of Chairperson or member:
 Person who is an officer-bearer of a political party.

 Person involved in securities business.
 Person who is adjudicated as an insolvent.
 Person of unsound mind.
 Person who has been convicted by the court of an offense involving moral turpitude.
Functions, duties and powers of the Chairperson

Sub-section (1) of Section 8 has stated the functions, duties and powers of the Chairperson as
follows:
a) To perform such functions as may be necessary for the protection of the interests of
investors in securities for the development of capital market.
b) To regulate and monitor, or cause to be regulated and monitored, stock exchanges and
transactions of securities business persons in order to make transactions in securities
strengthened, effective and reliable.
c) To act as the executive chief of the Board.
d) To submit such long-term and short-term plans and policies as be necessary to be adopted
by the Board for the management of stock exchanges and development of capital market
to the Board for its approval.
e) To call or cause to be called the meeting of the Board and preside over the same.
f) To prepare annual programs and budget of the Board and submit the same to the Board
for its approval.
g) To implement or cause to be implemented the decisions made by the Board.
h) To inspect and supervise day-to-day business of the Board and perform the functions in
accordance with the objectives of the Board.

i) To appoint the advisers and employees required for the Board as prescribed.
j) To perform or cause to be performed such other functions as may be entrusted to him or

her by the Board.
Fund of the Board

The Board shall have a separate fund of its own and shall be credited to an account to be opened
with any commercial bank within Nepal. All the expenditures to be made on behalf of the Board
shall be chargeable on the fund. In making expenditures pursuant, such expenditures shall be
made subject to the budget approved by the Board for the incomes and expenditures to be made
in each fiscal year. Under Sub-section (2) of Section 22 of the Act, the following amounts shall be
credited to the fund:
a) Amounts received from the Government of Nepal.
b) Amounts obtained as grants, assistance or loans from any native, foreign or international
organizations, institutions or bodies with the prior approval of the Government of Nepal.
c) Amounts received by way of the license fees.
d) Amounts received by way of the fees for registration of securities.
e) Amounts received by way of the fees, charges, dues for transactions in securities.
f) Amounts received by way of fines imposed by the Board.
g) Amounts received from any other sources.
Revolving fund: Under Sub-section (1) of Section 23 of the Act, the Board may establish a revolving
fund to manage its source of income and such amounts as specified by the Board shall be credited
to that fund each year. The amounts of the revolving fund may be held in securities issued by the
Government of Nepal or in such a periodic account as may be prescribed by the Board. In general,
as per Sub-section (3), moneys held in the revolving fund, other than income earned out of the
moneys in that fund, shall be spent.
Accounts and audit of the Board

It is the obligation of the board that it shall have to maintain updated records of its activities.
Pursuant to Sub-section (2) of Section 24, the Board shall have to maintain accounts of its incomes
and expenditures, balance sheet and accounting details of each fiscal year in accordance with
accounting system conforming to international practice no later than six months after the expiry of
such a fiscal year. Section 25 of the Act, mandates that the accounts and books of the Board shall
be audited by the Auditor General or any auditor designated by him.
Under Sub-section (2) of Section 25, the auditor shall have to mention, inter alia, the following
matters in his or her audit report:

 Whether the statements of incomes and expenditures truly reflect the incomes and ex-
penditures of the Board in that fiscal year,
 Whether the balance sheet of that fiscal year reflects the true economic condition of the
Board.
Annual report: Section 26

The Chairperson shall have to present an annual report of the activities of the Board before the
Board no later than four months after the expiry of each fiscal year and also provide a copy of
such a report to the Government of Nepal and the Chairperson shall in each year make public the
annual report of the Board.
3. Registration and Issuance of Securities
General notes
Securities of a company include the shares, debentures and other bonds or instrument issued by
the company. The Securities Act, 2063 has dealt with only those securities of the public limited
companies. If a company is issuing its securities for the public subscription, it may exaggerated
the financial and other business conditions of the company in such a manner receipting or causing
harm to the investors in fraudulent ways. To overcome from such frauds and to protect the
economic interests and concerns of investors, Chapter 3 of the Securities Act, 2063 has provided
the provisions for the registration of securities to the Nepal Securities Board and has laid down
the strict provisions for the issuance of securities. This provision of the Act has two fold objectives,
firstly, unfair activities of the securities issuing company affecting adversely the interest of investors
can be prevented by making provisions of accurate and full disclosure of information about the
issuer company, hence, the investors becomes able to make their rational decision whether or not
to invest their money in the securities issued by the company. Secondly, make responsible those
involving in creating and giving false information relating to the securities.
Registration of securities
It is the mandatory provision under section 27 of the Act that a body corporate shall have to
register securities to be issued by it with the Board prior to their issuance. Under Sub-section
(2) of Section 27, a body corporate shall have to make an application in the prescribed format,
accompanied by its memorandum of association, articles of association, documents related with
such securities, and the prescribed fees, to the Board for registering securities.
Registration certificate: Where an application is received pursuant to subsection (2) the Board
under Subsection (3) shall register such securities in the register as prescribed indicating the
details of such securities and issue the securities registration certificate in the prescribed format to
the concerned body corporate if it considers appropriate to register such securities when the Board
shall make necessary inquiry into the matter.

Publication of prospectus
Under Section 30 (1), it has been provided by the Act that a body corporate shall have to get a
prospectus approved by the Board for making public issue of securities in accordance with this
Act after the commencement of this Act and publish the prospectus for information to all the
concerned. While publishing the prospectus in such a way, the prospectus shall also mention
the place where the general public can obtain or inspect the prospectus. The Board shall approve
only a prospectus which contains such information as may be adequate for investors to make
evaluation as to the assets and liabilities, financial status, profit and loss of the issuer and matters
expected in the future.
The provision of approval and publication of prospectus contained in Sub-section (1) shall not be
required to issue a prospectus to issue the following securities:
 Securities issued by the Nepal Rastra Bank,

 Securities issued against the full guarantee of the Government of Nepal,
 Securities proposed to be sold to up to fifty persons at a time,
 Securities issued to own workers or employees,
 Securities permitted by the Board as to issue and sell without issuing a prospectus.
Matters to be referred to in prospectus: Under Section 32 of the Act, a prospectus must be contained
the following matters:
 Such general matters as required to be set down in the prospectus.

 Capital and other information of the issuer.
 Main functions to be done by the issuer.
 Information pertaining to legal action.
 Economic condition, general administration, management of the issuer.
 Information relating to the expert preparing the prospectus.
 The economic statements contained in the prospectus.
 Other matters as may be prescribed.
Further, under Section 34 the body corporate issuing securities shall provide information on the
following matters to the Board and its shareholders as soon as possible:
 Matters as may be necessary and supportive to evaluate its financial condition.

 Information as may be capable of affecting the transaction of stock exchanges or the
value of securities.
 Other notice and information as prescribed.

Liability for matters referred to in prospectus

The prospectus must contained true and exact information of the company in the different matters
to be stated under Section 32 of the Act. A prospectus is an invitation issued to the public to
take shares or debentures of the company or to deposit money with the company. Therefore any
advertisement offering to the public shares or debentures of the company for sale is a prospectus.
A public company without registration and publication of prospectus cannot issue its securities
(shares) for the public subscription. Section 33 of the Securities Act, 2063 has created responsibility
of the concerned body corporate and directors signing and experts preparing such a prospectus.
1. Liability of trueness of the prospectus: Sub-section (1) of Section 33 provides that the
concerned body corporate and the director signing a prospectus and the expert preparing
such a prospectus shall be personally and collectively liable for the truth of the details and
documents underpinning the information set down in the prospectus submitted to the
Board for the purpose of registering securities with the Board and obtaining permission
to issue such securities.
2. Liability for loss or damage resulting from untrue or false statements: Under Sub-section
(2) where any person who subscribes for any securities on the faith of the matters set
down in the prospectus subsequently sustains any loss or damage by the reason that the
matters set down in the prospectus have been set down with mala fide intention or untrue
or false statements have been included therein knowingly, the body, director or experts
preparing the prospectus shall be liable to pay compensation for such loss or damage.
Defense: Directors shall not be liable to pay such compensation if he or she proves that he or she
has resigned prior to making a decision on the matters set down in the prospectus with ulterior
motive or knowingly or that he or she did not know that the prospectus was untrue.
Jurisdiction of Court: Pursuant to Sub-section (3), an investor may make a petition to the concerned
District Court for compensation within thirty five days from the date of knowledge within one year
after the making of investment if he sustains any loss or damage by the reason that the prospectus,
information, statements or returns submitted by a body corporate to the Board.
Compensation for revocation of enlisting: Section 35

Where a body corporate issuing any securities has enlisted the securities by making agreement
with a stock exchange and the stock exchange revokes the enlisting of such securities by the reason
of the failure of such body corporate to observe such matters as required to be observed by it
under this Act or the Rules or Bye-laws framed under this Act any shareholder sustains any loss
and damage by virtue of such revocation of enlisting, the directors of such a body corporate shall
personally or collectively pay compensation to such a shareholder.

4. Provisions Relating to Stock Exchange
General notes
Stock Exchange is a market, place or facility performing the purchase, sale or exchange of
securities on regular basis by bringing together to the purchasers and sellers of securities. Further,
the issuance, sell, purchase, exchange of securities and other acts pertaining thereto come within
the ambit of security transaction. To make security transactions pertaining to sell, purchase or
exchange transparent, reliable and authentic and to protect the investors rights and interests
the Act has provided that the purchase, sale or exchange of securities only be carried out by
the company or entity that has obtained license from the Board pursuant to this Act to regulate
the stock exchange. A stock exchange shall manage a market only for those securities which are
recognized by either enlisting in its Bye-laws, as prescribed, securities issued by bodies corporate
or making similar other provisions. and the purchase, sale or exchange of securities not enlisted in
a stock exchange shall be as prescribed.
Stock exchange license

Securities business is highly regularized business as the economic interests of individuals and
state as well is involved in it. Hence, the Act has made provisions under Section 36 of the Act as to
the matters of license to be obtained compulsorily by a person or entity to operate stock exchange
business under the Act. Sub-Section (2) of Section 36 has made a mandatory provision of license
and has provided that no person shall operate a stock exchange or purchase, sell or exchange
securities without obtaining license from the Board under this Act nor shall any person use the
name of stock exchange without obtaining such a license. Further, only a body corporate may
make an application to the Board for a license to carry on a stock exchange in such format and
accompanied by such details. Documents and fee as may be prescribed.
Sub-section (3) and (4) of Section 36 have provided the rules regarding license of Nepal securities
exchange market which is in operation at the time of commencement of this Act. It shall have to
make an application to the Board for the license to operate a securities exchange market pursuant to
this Act within one year from the date of commencement of this Act. If Nepal Securities Exchange
Market fails to make an application to the Board for a license to operate a securities exchange
market within the period referred to in Sub-section (3), Nepal securities exchange market shall not
be entitled to operate the stock exchange after the expiry of that period.
Registration of Stock Exchange Company: Section 37

While incorporating any stock exchange as a company with limited liability under the company
law in force after the commencement of this Act, the Company Registrar's Office shall incorporate
it only with the recommendation of the Board. Similarly, Under Section 41 of the Act, the paid up
capital of Stock Exchange Company shall be so prescribed by the Board, from time to time, as it

shall not to be less than fifty million rupees; and the body corporate shall maintain such financial
source as may be adequate for the provision of stock exchange that it carries on.
Issue of stock exchange license: Section 38

If an application is received pursuant to Section 37, the Board may, if it is satisfied with the
following matters by making necessary inquiry into the matter, issue a license to carry on a stock
exchange.
a) Where it considers that the issue of the license to carry on a stock exchange would serve the
interests of investors and general public or the issuance of such a license is necessary for the
proper operation of the stock exchange.
b) Where the applicant has fulfilled the following matters in the application:
 Legal provisions of establishing the body corporate or its memorandum of association
stipulates that the body corporate has been established with object to establish and op-
erate at stock exchange,
 The body corporate maintains its paid up capital as prescribed by the Board that such
capital is not less than fifty million rupees so long as the body corporate operates the
stock exchange,
 There are sufficient grounds to the satisfaction of the Board that the body corporate can
provide such infrastructures and facilities as may be required to operate the stock ex-
change,
 Matters relating to enlisting or making similar other provisions to recognize securities to
be transacted through itself,
 Matters that the interests of investors would be protected through regular operation of
transactions in securities through the provisions and systems to be adopted by the body
corporate in relation to the exchange and transactions proposed by the body corporate
for the operation of the stock exchange,
 That it has appropriate provisions on settlement of transactions in the stock exchange
and publication of records thereof and statements of transactions,
 That complaints filed in relation to transactions carried on by its members can be exam-
ined in a proper manner,
 That action can be taken as mentioned in the Bye-laws in the event of failure of its mem-
bers to fulfill the liabilities under the contract.
Refusal to issue license

Sub-section (1) of Section 40 has provided the conditions where the Board may refuse to issue a
license to a body corporate to carry on a stock exchange. If the Board is to refuse the issue of a
license to anybody corporate to carry on the stock exchange on any condition, the Board shall give

a notice assigning the reason for such refusal to the concerned body corporate. The grounds for
the refusal to issue license are as follows-
 Where it is not necessary to carry on the stock exchange based on the development of
industry and business and feasibility of the existing transactions in securities,
 Where it does not appear just and appropriate to allow the operation of stock exchange
for the protection of interests of investors.
Validity and renewal of a license: Section 42

The license issued to carry on a stock exchange shall remain valid only until the last day of the
fiscal year of its issue. Under Sub-section (2), the corporate carrying on a stock exchange shall
have to renew the license to carrying on a stock exchange by paying to the Board an annual fee
as prescribed not later than three months after the expiry of each fiscal year. As per Sub-section
(3), in the event of failure to get renewed such a license by paying the annual fee within the time
limit, the license may be renewed by paying a fine of twenty five percent of the annual fee up to
three months after the expiry of such time limit. The license to operate stock exchange obtained
by a body corporate which fails to renew even within the time limit referred to in Sub-section (3)
shall be terminated.
Functions, duties and powers of stock exchange: Section 45

The board of directors of the stock exchange shall assume responsibility in relation to the
management of transactions in securities carried on by such a stock exchange. The functions,
duties and powers of the stock exchange shall be as follows:
a) To carry on, or cause to be carried on, transactions in securities to be carried on through

it in a transparent, fair and regular manner,
b) In carrying on the stock exchange, to carry on, or cause to be carried on, the same, having
regard to the interest of general public investors,
c) To get its members to fully comply with this Act and the Rules and Bye-laws framed
under this Act and monitor and supervise, or cause to be monitored and supervised, the
matters pertaining thereto,
d) To manage such a transaction place as may be adequate and convenient for operating
securities transaction,
e) To manage such employees as may be efficient in carrying on transactions,
f) To arrange for such facilities and systems as may be adequate and proper for emergency
and security provisions,
g) To frame Bye-laws, with the permission of the Board, for enlisting of securities for the
arrangements of the exchange, purchase or sale of securities and making provisions
relating to membership,

h) To perform or cause to be performed such other functions as may be required for the
operation of the stock exchange.
i) To submit a report on the activities carried out by it in each fiscal year not later than three
months after the expiration of such a fiscal year to the Board. (Section 47)
j) To render necessary assistance to the Board for the performance of functions referred to in
this Act. In the course of rendering such assistance, if the Board asks for any information
or advice on securities transactions or on any other specific matter, such information or
advice has also to be provided to the Board. (Section 51)
Disclosure to be made by stock exchange: Section 46

Every stock exchange shall give information on the following matters to the Board immediately
when it comes to its knowledge:
a) Where it appears that any of its members has committed any financial irregularity or the
economic status of such a member appears to be suspicious from any activities of such a
member,
b) Where it appears that any of its members has failed to fulfill such obligation as required
to be fulfilled by such a member under laws or is not capable of performing such
obligation,
c) Where it appears that any of its members has failed to observe financial Rules and Bye-
laws or is not capable of observing such Rules and Bye-laws,
d) Such other information as may be prescribed.
Stock exchange to issue direction

As per Sub-section (1) of Section 48 of the Act, the stock exchange may, where a body corporate
carrying on securities transactions through a stock exchange violates the agreement entered with
the stock exchange or where the stock exchange considers that it is necessary to give direction to
such a body corporate in order to make securities transactions fair and regular or having regard to
the interests of investors, give necessary direction to such a body corporate. It shall be the duty of
the concerned body corporate to observe the direction given by it.
Fixation of Ceiling on Securities

As per Section 49(1), the Board may fix the ceiling on securities on the basis of value of transaction
that can be transacted at one time or securities that one person can purchase, sell and hold at one
time. The ceilings may be determined based on the types of securities or types of transactions.
Without prejudice to the generality of section 49(1), the board may specify or fix the maximum
limit of securities of any type that one person may own at one time.

Circuit Breaker in NEPSE

The circuit breaker rule was first introduced in U.S. in 1987 when Dow Jones Industrial Average
(DJIA) plummets 22% in a single day “The Black Monday.” The main objective of circuit break is
to control the stock market movements for unreasonable fluctuations. Trading halt gives market
participants time to analyze event, news, announcements and take necessary rational decision.
Circuit breaker is market stabilizing tool used to check sudden rise/fall in the index.
Market will open in Nepal at 11:00 AM and it will be closed at 3:00 PM. The index-based circuit
breaker system applies at 3 stages of the NEPSE index movement of 3%, 4% and 5%.These circuit
breakers when triggered bring about a trading halt in all securities. In case of 3% movement either
way, trading would halt for 15 minutes if the movement takes place during first hour of trading
i.e. 12:00 PM. In case this movement takes after 12:00 PM there will be no trading halt at this level
and market shall continue trading. In case of 4% movement either way, trading would halt for
half an hour if the movement takes place before 13:00 PM. In case this movement takes after 13:00
PM there will be no trading halt at this level and market shall continue trading. In case of 5%
movement in either way, trading shall be halted for the remainder of the day. No trading shall be
done for the day after 5% of movement in NEPSE.
Price Range is applicable on individual securities. The trading of the individual securities are not
halted but allowed to trade within the price range. The price band is 10 percent of previous close
on either way.
Compensation fund and its operation

Section 53 of the Act has provided the provision for the establishment and operation of
compensation fund by the stock exchange as may be prescribed by the Board in order to protect
investors against possible loss or damage and the money deposited to the fund shall be used to
bear compensation as prescribed.
As per Section 55, if a stock exchange is not able to establish and operate the compensation fund
pursuant to Section 53 in order to protect investors against possible loss and damage or does not
pay or fails to pay the amount of compensation to be payable as prescribed, the Board may establish
and operate the compensation fund as prescribed or make necessary provisions in relation to the
payment of the amount of compensation required to be paid as prescribed.
Further, Section 54 of the Act has provided the following provisions to be provided in the Rules
for the operation of the compensation fund-
a) Provisions relating to the deposit of money to the fund.
b) Maximum amount to be paid as compensation from the fund.
c) Provisions relating to the accounts and audit of the fund.

d) Conditions for making claim to obtain amount from the compensation fund and
procedures from making such a claim.
e) Conditions where any claim cannot be made on the compensation fund.
f) Procedures for taking action and making decision on payment of money as claimed from
the compensation fund.
g) Maximum limit of amount payable as compensation to one person.
h) Other necessary matters in relation to the examination of compensation claims.
i) Provisions to be made in the event of the revocation of the license of a stock exchange.
j) Other necessary provisions in relation to compensation.
5. Securities Business Professionals
General notes
Securities business or transactions in securities shall be carried on by a company or body licensed
to carry on the securities business under this Act including the issue, purchase, sale or exchange
of securities and other acts pertaining thereto. As the securities business is it complicated and
carried on in big volume, the economic interests and concerns of public general place at risk. With
a view to protect the interests of public at large and enhance the creditworthiness and reliability
of securities business, the Act has intended to run and promote securities related transactions by
the ethical, skillful, reliable and organized hands. To fulfill this objective, the Act had provided the
provisions for the license to be issued to the securities business persons with imposition of various
liabilities. Hence, No one shall carry on securities business without obtaining a license to carry on
securities business from the Board pursuant to this Act.
Securities business license

A company or body desirous of carrying on securities business has to obtain a license to carry on
securities business from the Board pursuant to this Act. To obtain the license the company or body
has to make an application under Sub-section (1) of Section 57 of the Act to the Board for a license
to carry on securities business, in such form and accompanied by such details, documents and
fees as may be prescribed. The application to be made pursuant to Sub-section (1) shall specify the
following matters:
a) Type of securities business and services to be provided,
b) If an agent is to be appointed to carry on securities business and if such business is to be

carried on in collaboration with others, matters pertaining thereto,

c) In the case of those business persons, as prescribed, who are allowed to carry on business
only upon obtaining a membership of a stock exchange, a recommendation letter of the
concerned stock exchange,
d) Grounds proving the ability to carry on the proposed securities business and such other
information as may be specified by the Board.
Issuance of license: Section 58

After receiving the application, the Board may hold necessary inquiry and issue a license to carry
on securities business in such format as prescribed, to the applicant on the following grounds:-
 If it thinks that the applicant is able to carry on securities business subject to this Act or
the Rules and Bye-laws framed under this Act,
 Training and education qualification gained by the agent appointed to carry on securities
business.
Sub-section (2) of Section 58, further provides that the following matters shall also be taken in
consideration in relation to the chief executive, director, concerned officers and agents serving in
the company or body to carry on securities business while issuing the license:
 Financial status.
 Educational qualification, training and experience in the relevant work.
 Experience required carrying on securities business.
 Social status and character.
Under Sub-section (3) of Section 58, a license to carry on securities business other than securities
brokerage and investment consultancy service shall be issued only to a public limited company
or a body corporate established under the laws in force. Similarly, the Board may, having regard
to the interests of capital market and investors in securities, so issue a license to any securities
business person that such person is restrained from carrying on any securities business out of the
types of securities business.
Terms and conditions of license: Under Sub-section (1) of Section 59 of the Act, the Board may
specify necessary terms and conditions, having regard to the condition of capital market, healthy
operation of securities business and interest of investors and the terms and conditions specified by
the Board shall be followed by the company or body having obtained a license as its duty.
Similarly, Sub-section (3) has authorised the Board to make necessary modifications and alteration
in the terms and conditions specified pursuant to Sub-section (1), having regard to the condition
of capital market, healthy operation of securities business and interest of investors.
Refusal to issue license: Under Section 60, the Board may refuse to issue a license to carry on
securities business to any company or body on the following circumstances:

a) If it is proved that such company or body has been insolvent upon being unable to repay
debts to creditors,
b) If the application to be made for such a license is not accompanied by such documents
and details as required to be accompanied under this Act or the Rules framed under this
Act or such other matter as may be specified by the Board,
c) If, upon considering the matters set forth in subsection (2) of Section 58, it is not
appropriate to issue a license to carry on securities business.
Validity and renewal of license: Section 61

The license issued to a securities business person to carry on securities business under this Act
shall remain valid only until the end of that fiscal year in which it has been issued.
Under Sub-section (2) of Section 61, the securities business shall have to get such a license renewed
by paying the annual fees as prescribed to the Board within three months from the date of expiry
of each fiscal year. In the event of failure to get a license renewed by paying the annual fees within
the time-limit referred to in subsection (2), such license may be got renewed by paying a fine of
twenty-five percent of the annual fees up to three months from the date of expiry of that time limit.
Further, as per Sub-section (4), the Board shall revoke the license of a securities business person
who has failed to get such a license renewed even within the time-limit referred to in Sub-section
(3), and publish a notice thereof for information to the general public.
Types of securities business

Under Section 63 the securities business shall be divided into the following types:-
 Securities brokerage
 Securities trade
 Issue and sales management
 Investment management
 Investment consultancy service
 Collective investment fund management
 Securities registration or securities central deposit service or custodial service
 Service relating to the settlement of the account of securities transactions
 Market maker
 Such other business as may be specified by the Board to be a securities business.
Appointment of agent: As per Section 64 of the Act, license shall not be issued to carry on securities
business as a securities broker or a securities trader and securities business relating to collective
investment scheme and investment fund management without specifying at least one person to
act as an agent of the securities broker or securities trader and scheme manager respectively.

Under Sub-section (4), the procedures to be fulfilled in specifying an agent by a securities business
person, qualification of the agent and provisions relating thereto shall be as prescribed.
Rights of securities business person

Section 66 of the Act guaranteed the following rights of securities business person-
1. Right of opportunity of hearing: No license to carry on securities business obtained by a

securities business person shall be suspended or revoked without providing such a securities
business person with a reasonable opportunity of hearing.
2. Right to receive notice: In suspending or revoking a license to carry on securities business,

information thereof shall be given in writing to the concerned securities business person, and
such a notice shall indicate the reasons for such suspension or revocation, date of entry into
force of such suspension or revocation and the period of suspension, in the case of suspension.
3. Right to make appeal: A securities business person who is dissatisfied with the decision
made to suspend or revoke a license obtained by such a securities business person to carry on
securities business person may make an appeal to the concerned High Court within thirty five
days from the date of such decision.
Capital of Securities Business Person

A securities business person shall maintain the minimum capital as prescribed. If a securities
business person fails to maintain the minimum capital required to be maintained, it shall be
given to the Board immediately. If the Board receives the information of non-maintenance, it
may immediately order such a securities business person to maintain the minimum capital as
prescribed or give other necessary directives in that regard.
As per regulation following are the minimum paid-up capital prescribed:

a) Securities Broker: 2 crores
b) Market Maker: 2 crores
c) Mutual Fund: 100 crores
d) Merchant Bankers:
Issue Manager: 5 crores
Securities Underwriter: 7 crores
Share Registrar: 3 crores
Investment Manager: 5 crores

Institutional Consultant: 3 crores

Records of securities business persons

Pursuant to Sub-section (1) of Section 68, the Board shall maintain a register of all licensed securities
business persons and maintain updated records in the register and it shall provide the following
matters therein:
 Names and addresses of securities business persons,

 Date of issue of license to securities business persons,
 Types of securities business,
 Terms and conditions specified in the license,
 Names and addresses of the formal agents,
 Names and addresses of managers and officers,
 Place where documents and records pertaining to securities business are kept,
 Names of the directors of company or body, names of company secretaries and name of
each shareholder and number of shares held by such a shareholder,
 Such other details as the Board considers necessary and appropriate.
Information to the board: Under Section 70 of the Act, the securities business person shall, on any
of the following circumstances, give information in writing thereof to the Board within seven days
from the date of such occurrence:-
 If the securities business person ceases to carry on the securities business specified in the
license.
 If any formal agent ceases to act in such capacity.
 If any alteration is made in any details set forth in the register maintained pursuant to
Section 68.
Records of formal agents
As per Sub-section (1) of Section 69, the Board shall maintain a register of all formal agents and
maintain updated records in the register containing the following matters therein:
 Name and address of formal agent,

 Date of registration as formal agent,
 Name and address of securities business person appointing agents,
 Such other details as the Board considers necessary and appropriate.

Test Questions
1. Define the terms Securities and Stock Exchange.
2. How Nepal Securities Board is formed under the Securities Exchange Act, 2063?
3. State the role importance of Securities Board of Nepal.
4. State the legal provisions of the meeting of Securities Board of Nepal.
5. How chairperson of Board appoint? State the grounds of removal of chairperson and member
of the Board.
6. List out the functions, duties and powers of the chairman of Board.
7. Enumerate the source of the Board's fund and the provisions of its audit.
8. What is prospectus? When security can be issued without issuing prospectus?
9. List out the matters to be included the matters in the prospectus.
10. What is the liability for the matters referred in the prospectus?
11. When can a director free from liability for the false statements in prospectus?
12. State the legal provisions of registration and license of Stock Exchange Company.
13. When can the Board refuse to issue the license?
14. State the functions duties and powers of stock exchange.
15. What are the operational provisions of the compensation fund under the Securities Act, 2063?
16. What should be mentioned in the Securities Business License?
17. When the Board refuse to issue Securities Business License?
18. What are the rights a securities business person can exercise?
19. State the matters to be included in the records of securities business persons.
20. Explain any five types of securities business.
21. When the Chairperson and the member shall be removed from the office pursuant to the
Securities Act, 2063?


CHAPER 3 : BANK AND FINANCIAL INSTITUTION ACT, 2073
CHAPTER 3
BANK AND FINANCIAL

INSTITUTION ACT, 2073

1. Meaning and functions of Banks
General notes
Financial sector can be classified in to two divisions, viz., banking and insurance. The role of banks
and services provided by them is indispensible for the economic development because of their
participation in the trade, commerce industries of a country. The banks are not only accelerating
the business within a country but they are facilitating the international trade. On the other hand,
banks as the main source of investment to both the commercial world and household activities
to fulfill the business and family needs, play an influential role by engaging in different types of
functions such as accepting deposits and disbursing loan, remittance, exchange currency, joint
venture, underwriting, bank guarantee, discounting bills etc.
As there is interconnectedness of the banking industry and the reliance that the national (and
global) economy holds on banks, it is important for regulatory agencies to maintain control
over the standardized practices of these institutions. The financial regulations are laid out for
the purpose of creating a fair and customer-friendly environment in the financial market of a
particular country, which is conducive for economic growth. Some of the examples of financial
regulatory bodies are the Federal Reserve Bank (United States), Reserve Bank of India (RBI), Nepal
Rastra Bank (Nepal), the Financial Services Authority (FSA) in the United Kingdom and many
others. For the promotion and regulation of banking sector to make them capable, competitive and
accountable the Bank and Financial Institution Act, 2073 has been enforced and the provisions are
made applicable from the beginning of incorporation of banks and financial institutions, licensing
provisions and banking operation regulation as well as their obligation to comply with the banking
rules and regulations.
Meaning of bank
A bank is an institution, company or a firm with a place of business dealing with money and
credit. It accepts deposits from the public and mobilizes the fund to the productive sectors as a
dealer of money. In other words, it is a custodian of money received from the depositors.
Kent: A bank is an organisation whose principal operations are concerned with the accumulation
of the temporarily idle money of the general public for the purpose of advancing to others for
expenditure.
Black's Law Dictionary: A financial establishment for the deposit, loan, exchange or issue of
money and for the transmission of funds.
Hulsebury's Law of England: A banker is an individual, partnership of corporation whose sole or

predominating business is banking, that is the receipt of money on current and deposit account,
and the payment of cheques drawn by and collection of cheques paid by a customer.

Summarizing above definitions, we can say that bank is an institution or firm or corporation which
accepts deposits from the public and in turn, advances loan to business and personal customers.
It is the financial institution which provides wide range of banking services such as saving, credit
payment, remittance, currency exchange, guarantee etc. Hence, the organisation which has the
following features is called as bank:
 It deals with money-it accepts deposits and advances loans.

 It deals with credit-it creates credit by expanding its liabilities.
 It is a business institution- profit motive organisation.
Functions of bank
Commercial banks perform a variety of functions. All functions of commercial banks may be
broadly classified into two -primary functions and secondary functions. Primary functions consist
of accepting deposits, lending money and investment of funds.
1. Accepting deposits: Bank receives idle savings of people in the form of deposits. It borrows
money in the form of deposits. These deposits may be either of current or demand deposit or
fixed or time deposits or savings deposits or recurring deposits.
2. Lending money: Lending constitutes the second function f a commercial bank. Out of the
deposits received, a bank lends money to the traders and businessmen. Money is lent usually
for short periods only. A commercial bank lends either by ways of Loans or Cash credit or
Overdraft or Hire purchase or Discounting of bills etc.
3. Investment of funds: Another function is investing the funds in some securities. While making
investment a bank is required to observe three principles, namely liquidity, profitability and
safety. A bank invests its funds in government securities issued by central government as
well as state government. It also invests in other approved securities like the units of UTI,
shares of GIC and LIC, securities of State Electricity Board etc.
4. Credit creation: When a bank advances loan to its customer if doesn’t lend cash but opens an
account in the borrowers name and credits the amount of loan to that account. Thus, whenever
a bank grants loan, it creates an equal amount of bank deposits. Creation of deposits is called
Credit Creation. In simple words we can define Credit creation as multiple expansions of
deposits. Creation of such deposits will results an increase in the stock deposits. Creation of
such deposits will results an increase in the stock of money in an economy.
Secondary functions include agency services and general utility services.
1. Agency Services: Modern commercial banks render a number of services to its customers. It
acts as an agent to its customers. The following are the important agency services rendered
by a commercial bank:
 It collects the cheques, bills and Notes for and on behalf of its customers

 It collects certain incomes like dividend on shares, interest on securities etc., on behalf of
its customers.
 It undertakes to purchase or sell securities for its customers.
 It accepts bill of exchange on behalf of its customers.
 It acts as an executor, administrator and trustee.
2. Remittance and exchange services: Banks can do foreign exchange service. For this different
Money Changer are also involved in this business by obtaining the license to carry on the
business from the Nepal Rastra Bank. Both domestic and international remittance service
can be provided by banks. Whereas the remittance companies are allowed only for inward
remittance.
3. Other services: The other services provided by the banks are- Safe vaults, retirement plan,
electronic cards and merchant banking etc.
Hence, the common functions and services that the modern banks and financial institutions
generally do offer can be stated as given below-
Major functions Other functions

(i) Accepting Deposits (i) Discounting of bills and cheques
(ii) Granting Advances (ii) Collection of bills and cheques
(iii) Remittances
(iv) Safe custody of articles
(v) Safe Deposit Lockers
(vi) Issue of Letter of Credit
(vii) Issue of Guarantees
Besides the above functions, Banks now-a-days associate themselves in the following activities
also either by opening separate departments or through separately floated independent
subsidiaries:
 Investment Counseling
 Investment Banking
 Mutual Fund
 Merchant Banking Services
 Taxation Advisory Services
 Executor Trustee Services
 Credit Card Services
 Forex Consultancy

 Transactions of Government Business

 Securities Trading
 Factoring
 Gold/Silver/Platinum Trading
 Venture Capital Financing
 Bankassurance - Selling of Life and General Insurance policies as Corporate Agent
2. Banking regulation
General notes
Bank regulation is a form of government regulation which subjects banks to certain requirements,
restrictions and guidelines, designed to create market transparency between banking institutions
and the individuals and corporations with whom they conduct business, among other things. As
regulation focusing on key actors in the financial markets, it forms one of the three components
of financial law, the other two being case law and self-regulating market practices.
global) economy holds on banks, it is important for regulatory agencies to maintain control over
the standardized practices of these institutions. This holds that many financial institutions hold
too much control over the economy to fail without enormous consequences. This is the premise
for government bailouts, in which government financial assistance is provided to banks or other
financial institutions that appear to be on the brink of collapse. The belief is that without this aid,
the crippled banks would not only become bankrupt, but would create rippling effects throughout
the economy leading to systemic failure.
Regulations of financial institutions differ from one country to another. The financial institution
regulations are delineated by the government authorities of different countries. The principal
objective of these government authorities is to regulate the financial activities going on in the
country. The financial regulatory bodies control the stock markets, bond markets, foreign exchange
markets, and various other segments of financial markets. The financial regulations are laid out
for the purpose of creating a fair and customer-friendly environment in the financial market of a
particular country, which is conducive for economic growth.
Need of banking regulation

Banking regulations are a form of government regulations providing guidelines and restrictions. It
determines the requirements for a bank and financial institution to establish and operate within a
country. The banking regulatory structure creates transparency between banking institutions and
the individuals or organisations with which they conduct business. The statutory objectives of the
regulatory bodies of financial institutions include the following:

 Sustaining confidence in the financial markets is one of the most important objectives of
the financial regulatory bodies
 Ensuring the most suitable level of customer protection
 Reducing the level of risk exposed to depositors and risk of failure of banking institu-
tions.
 Encouraging public awareness about the financial market through imparting education-
al programs
 The financial regulations are designed for the purpose of reducing financial crimes and
frauds
Further, the regulatory principles followed by the regulators of financial institutions include the
following:
 Role of management: Regulatory measures on the senior management of the financial

institutions so that they do not take decisions that are detrimental to the financial market.
 Innovation: Innovation should be facilitated with restriction so that the financial prod-
ucts and services launched are compliant to the rules and regulations
 International aspects: Strict monitoring should be there to see whether the international
standards are maintained or not
 Efficiency and economy: The financial resources of a country should be used in the most
prudent and effective way
 Proportionality: The financial regulations that are imposed should be proportional to
the advantages that are anticipated from the regulations
 Competition: There should be strict supervision on the financial market for the purpose
of minimizing harmful effects of competition.
General aspects of regulation

Bank regulation is a complex process and generally there are three aspects of banking regulations
which may be stated as under-
Licensing and supervision: Licensing sets certain requirements for starting a new bank. Licensing
provides the license holders the right to own and to operate a bank. Licensing involves an
evaluation of the entity's intent and the ability to meet the regulatory guidelines governing the
bank's operations, financial soundness, and managerial actions. The regulator supervises licensed
banks for compliance with the requirements and responds to breaches of the requirements by
obtaining undertakings, giving directions, imposing penalties or (ultimately) revoking the bank's
license.

The supervision is an extension of the license-granting process and consists of supervision

of the bank's activities by a government regulatory body (usually the central bank or another
independent governmental agency). Supervision ensures that the functioning of the bank complies
with the regulatory guidelines and monitors for possible deviations from regulatory standards.
Supervisory activities involve on-site inspection of the bank's records, operations and processes or
evaluation of the reports submitted by the bank.
Minimum requirements: A national bank regulator imposes requirements on banks in order to

promote the objectives of the regulator. Often, these requirements are closely tied to the level
of risk exposure for a certain sector of the bank. The most important minimum requirement in
banking regulation is maintaining minimum capital ratios.
Market discipline: The regulator requires banks to publicly disclose financial and other information,
and depositors and other creditors are able to use this information to assess the level of risk and
to make investment decisions. As a result of this, the bank is subject to market discipline and the
regulator can also use market pricing information as an indicator of the bank's financial health.
Objectives of bank regulation

The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common
objectives are:
 Prudential- to reduce the level of risk to which bank creditors are exposed, i.e., to protect
depositors.
 Systematic risk reduction- to reduce the risk of disruption resulting from adverse trad-
ing conditions for banks causing multiple or major bank failures.
 Avoid misuse- to reduce the risk of banks being used for criminal purposes, e.g. laun-
dering the proceeds of crime.
 Protect banking- to direct credit to favored sectors.
 Equal treatment and corporate responsibility- it may also include rules about treating
customers fairly and having corporate social responsibility.
 Confidentiality- to maintain the confidentiality of the banking transactions and the cus-
tomers banking activities for the personal and business security of the customers.
Significance of banking regulation

 Banking regulation protects the public interest as money is the most important asset of
every person.
 It helps to provide fair and competitive banking services to customers.
 It ensures the sound financial position of banks protecting the interest of bank.
 It protects the depositors from abuses by banks.

 It helps banks to expand, growth and diversification.

 It maintains the balance in national payment system.
 It helps to maintain the monetary stability in the country.
 It promotes the effective banking transactions in business world.
Principal reasons of Government regulation on banks

 To protect the safety of the public's savings.
 To control the supply of supply of money and credit in order to achieve the nation's
broad economic goals- high employment and low inflation.
 To ensure equal opportunity and fairness in the public 's access to credit and other vital
financial services.
 To ensure a safe, sound and stable financial system.
 To ensure an efficient and effective financial system.
 To promote public confidence in the financial system so that the savings flow smoothly
into productive investment and payments for goods and services are made speedily and
efficiently.
 To avoid concentrations of financial power in the hands of a few individuals and insti-
tutions.
 To provide the government with credit, tax revenues and other services.
 To help economic and financial sectors that have special credit needs like housing, infra-
structure, agriculture energy etc.
3. Incorporation of Banks & Financial Institutions
General notes
It is the mandatory provision that no person can operate and provide banking services without
getting registered their business as per the prevailing law. When a bank or financial institution
is incorporated, it becomes a body corporate with separate and distinct legal personality and its
member's liability is, in general, limited up to the face value of their shares in it. Incorporation
formalizes the business and services provided and systematize its functions through regulatory
measures. Similarly, the Government or regulating body gets opportunity in advance to control
the possible financial mismanagement, unfair practice and chaos by setting out the terms and
conditions for the incorporation and approval for the license to carry on banking and financial
activities. Establishment of banks and financial institutions is one of the major area of banking
regulation.

Incorporation of a bank or financial institution

As the financial sector especially banking sector is highly regulated, the regulation process
begins with the initial stage of the banking business, i.e., the incorporation of banks and financial
institutions. Hence, the general rule under the Nepalese legal system is that no person can carry
on banking or financial activities without incorporating a bank or financial institution as per the
prevailing laws. Those laws applicable for the registration of BFIs are:
 Bank and Financial Institution Act, 2073

 Companies Act, 2063
 Nepal Rastra Bank Act, 2058 and regulations thereof.
In our legal system every bank or financial institution has to pass through the following 3 steps
for its incorporation:
 Prior approval of NRB- under the Bank and Financial Act, 2073
 Incorporation of company as a public limited company- under the Companies Act,
2063
 License for transaction- under the Bank and Financial Act, 2073 and the Nepal Rastra
Bank Act, 2058
The provisions and process envisaged in the Bank and Financial Institution Act (BAFIA), 2073 can
be discussed as under-
Registration of a public limited company

Sub-section (1) of Section 3 of the Bank and Financial Institution Act, 2073 has made a mandatory
provision that a person desirous of incorporating a bank or financial institution to carry on financial
transactions pursuant to this Act may do so by getting such bank or financial institution registered
as a public limited company in accordance with the laws in force. Before getting registered the
company, the institution must necessarily obtained prior approval from the Nepal Rastra Bank.
Application for approval to incorporate bank or financial institution
Sub-section (1) of Section 4 of the Act has listed the required documents for the purpose of
incorporating a bank or financial institution under Section 3, The concerned person shall, before
making an application for the registration of the bank or financial institution pursuant to the laws
in force, make an application, accompanied by the following documents and the fee prescribed by
the Rastra Bank, to the Rastra Bank for prior approval:
 Memorandum of association of the proposed bank or financial institution.

 Articles of association of the proposed bank or financial institution.
 Feasibility study report of the proposed bank or financial institution.

 Personal details of the promoters in the form prescribed by the Rastra Bank.
 A certified copy of the agreement, if any, entered into between the promoters prior to the
incorporation a bank or financial institution in relation to the incorporation of the bank
or financial institution.
 Details of the applicant's source of investment and evidence of tax clearance by the pro-
moters up to the fiscal year immediately preceding the making of application pursuant
to this Section.
 Details whether or not the applicant is bankrupt in Nepal or foreign county, whether or
not he has received loan from any bank or financial institution or blacklisted in connec-
tion with any transactions with the bank or financial institutions, and a period of at least
three years has not lapsed after his or her name has been removed from that list.
 Declaration by the applicant that no legal action has been commenced in the case of
deceit, fraud or in other acts deemed as offence under the prevailing laws in Nepal or
foreign country and not punished therein.
 Details that no action has been taken against the applicant by the regulating or supervi-
sory body of Nepal or foreign country, no license of the company or institution where he
is involved has been suspended or cancelled or liquidated compulsorily or under such
process.
 Details of the applicant's family members' name and relationship or position and if they
were acting as director, official or staff, the details of the post of each person.
 If the applicant is the body corporate, the details of the person holding substantial owner
or position, audited financial details of last three years and tax clearance certificate of
such body corporate shall be included.
 Authorization letter in writing given to the Rastra Bank to investigate or cause to make
investigation to the applicant's financial and business background or communicate or
cause to communicate of such notice or information.
 Commitment to protect the deposits to the extent of limit fixed by the Rastra Bank.
 Such other particulars and documents as may be prescribed by the Rastra Bank from
time to time.
If an application is made for prior approval pursuant to Sub-section (1), the Rastra Bank shall, if it
finds appropriate to grant approval upon the examination of the submitted documents, grant its
approval to incorporate such bank or financial institution within one hundred twenty days after
the making of application, with or without prescribing any conditions. If there exists a ground for
refusing to grant such approval, information thereof, accompanied by the reason for such refusal,
shall be given to the applicant.

Prohibition on prior approval: Under Sub-section (3) of Section 4 no prior approval shall be granted
to the firm or company to incorporate bank or financial institution if there is significant ownership
of the following persons or their family members.
 Subjected to regulatory action of the Rastra Bank.

 Convicted in banking offence.
 Convicted in deceit, fraud or forgery.
 Convicted for the financial investment in the money laundering and terrorists activities.
 Convicted in corruption.
 Convicted in heinous crimes like, human trafficking, abduction, hostage, rape etc.
Refusal of prior approval

The Rastra Bank, pursuant to Sub-section (1) of Section 7 of the Act, may refuse to grant prior
approval for the incorporation of a bank or financial institution in any of the following circumstances
and if the Rastra Bank refuses to register the memorandum of association and articles of association
of the proposed bank or financial institution, it shall give a notice thereof to the applicant.
 If the name of the proposed bank or financial institution or the financial transactions to
be carried on by it appears to be improper or undesirable in view of public interest, de-
cency, etiquette, religion, nationalities or communities;
 If the objectives of the proposed bank or financial institution are contrary to the laws in
force;
 If the incorporation of the bank or financial institution seems to be technically inappro-
priate;
 If a study of the feasibility study report, particulars and documents and information on
other infrastructures submitted by the proposed bank or financial institution does not
provide a ground to believe that it can carry on financial transactions in a healthy and
competitive manner;
 If all promoters of the proposed bank or financial bank or financial institution have not
signed the memorandum of association and articles of association, also setting out their
names and addresses, in the presence of any one witness, and the name and address of
the witness has not been set out;.
 If per person share investment limit and share ownership ratio has not been found to
have been maintained as specified by the Rastra Bank from time to time
 If it is found to be contrary to the policy issued by the Rastra Bank towards the incorpo-
ration and license of the bank or financial institution.
 If any condition prescribed by the Rastra Bank is not fulfilled.

Prior approval for the incorporation of BFIs with foreign investment

Section 5 of the Act has provided the provision of prior approval for the incorporation of bank
or financial institution with foreign investment either in joint venture or fully owned subsidiary.
Sub-section (1) reads that if any foreign bank or financial institution makes an application for the
incorporation of a bank or financial institution under this Act in joint investment with a corporate
body incorporated in the State of Nepal or with a citizen, or as a subsidiary company subscribing
shares of the foreign bank or financial institution as fixed by Rastra Bank, the Rastra Bank shall
grant approval for the incorporation of such bank or financial institution, it has to submit the
following details and documents apart from those stated under Subsection (1) of Section 4 of the
Act along with fees as fixed by the Rastra Bank.
 The Memorandum of Association, Articles of Association of foreign bank or financial in-

stitution and a copy of the certificate of incorporation of the bank or financial institution
in the concerned country and capital structure thereof,
 Copy of license of the foreign bank or financial institution obtained from concerned
country for carrying on banking and financial transactions,
 Details as to the principal place of business,
 Certified copy of the audited balance-sheet and profit and loss account of latest three
years of the foreign bank or financial institution,
 Details as to proposed business plan in Nepal, business strategies and types of transac-
tion to be carried out, internal control, and risk management,
 Decision made by the foreign bank or financial institution as per the prevailing laws of
concerned country to open bank or financial institution in Nepal and authority granted
by regulatory body of concerned country.
Under Sub-section (2) of Section 5, Rastra Bank may, if it finds appropriate to grant approval
upon examination of the application submitted for prior approval pursuant to Sub-Section (1) and
enclosed documents, grant its approval to foreign bank or financial institution for incorporation
of bank or financial institution in joint venture or within the prescribed share limit within one
hundred twenty days after filing of the application, with or without prescribing any conditions.
Similarly, as per Sub-section (3), a foreign bank or financial institution may, with approval from the
Rastra Bank, take share ownership of local bank or financial institution having been in operation,
as a joint venture by completing the procedures as prescribed by the Rastra Bank.
Notwithstanding anything contained in this act, if any foreign bank or financial institution or
any other institutions has made investment in any bank or financial institutions and obtained
the approval before the commencement of this act, investment made in such bank or financial
institution shall remain unaffected.

Prior Approval for the opening branch office of foreign BFIs

The Act has made compulsory that the internationally rated foreign bank or financial institution
has to obtain approval from the Nepal Rastra Bank if it desires to open branch office to carry
on banking and financial transaction or non-banking financial transaction within Nepal. For this
purpose, an application has to be submitted to the Rastra Bank along with the capital and fees as
prescribed by the Rastra Bank pursuant to Sub-section (2) of Section 6 of the Act. While submitting
application pursuant to Sub-Section (2), such foreign bank or financial institution as per Sub-
section (3) shall have to submit the following details and documents in addition to the details and
documents as referred to in Sub-Section (1) of Section 5:
 Written commitment of the Board of Directors that it will make available on demand
of the Rastra Bank the amount necessary for fulfilling its entire liabilities with regard to
business activities of its branch of representative or liaison office of concerned foreign
bank or financial institution in Nepal,
 Details as to the location of the proposed branch office of the foreign bank or financial
institution,
 Details as to the possible office bearers to be engaged in the proposed branch office of the
foreign bank or financial institution.
As per Sub-section (4), the Rastra Bank may, if deems necessary to demand further documents or
details while carrying out inquiry to the documents or details submitted pursuant to Sub-section
(3), demand required documents or details from concerned applicant.
Pursuant to Sub-section (5), the Rastra Bank may, if it deems appropriate to grant prior approval
while carrying out inquiry of the additional documents submitted pursuant to Sub-section (3)
and of the documents asked for submission pursuant to Sub-section (4), grant approval to open
a branch office in Nepal within one hundred twenty days after filing of the application, with or
without prescribing any conditions.
Registration of branch office: As per Sub-section (6) of Section 5, the foreign bank or financial
institution, after obtaining prior approval pursuant to Sub-section (5), shall have to get registered
as the branch office according to the prevailing laws relating to companies, i.e., the Companies
Act, 2063. The branch office of the foreign bank or financial institution registered pursuant to Sub-
Section (6) shall have to submit an application before the Rastra Bank along with the following
documents and details as well as the charge or fee as prescribed by the Rastra Bank for approval
to carry on baking and financial transaction in Nepal:
 Registration certificate of being registered according to the prevailing laws to carry on

baking and financial transaction in Nepal as a branch office,
 Letter of approval or consent granted by the Government or central bank or regulating
agency according to the law of concerned country of the foreign bank or financial institu-
tion to open branch office of such bank or financial institution in Nepal,

 Details of the discrepancy, if any, in any matter to be completed by the concerned foreign
bank or financial institution under this Act after submission of application before the Ra-
stra Bank for establishment of a branch office of the foreign bank or financial institution
or after obtaining approval from the Rastra Bank,
 Other information and documents demanded by the Rastra Bank.
The Rastra Bank may, if it deems appropriate upon carrying out inquiry over the application
received pursuant to Sub-Section (7), grant approval to such branch office of foreign bank or
financial institution for carrying on banking and financial transaction in Nepal within 90 days
from the date of filing the application and may, while granting approval pursuant to Sub-Section
(8), prescribe necessary terms and conditions.
Prior approval may be denied: Under Section 7 of the Act, the Rastra Bank may deny to grant prior
approval for incorporation of any bank or financial institution and for open branch office of the
foreign bank or financial institution in following circumstances:
 If the name or banking and financial transaction to be carried out by the proposed bank
or financial institution is not found to be appropriate from the point of view of public
interests, religion, ethnicity or traditional belief, etc.,
 If the objective of the proposed bank or financial institution is contrary to the prevailing
laws,
 If incorporation of the proposed bank or financial institution does not seem to be techni-
cally appropriate,
 If study of the feasibility study report, details and documents other infrastructures sub-
mitted by the proposed bank or financial institution does not provide a ground to believe
that it may carry on financial transactions in a healthy and competitive manner,
 If not all promoters of the proposed bank or financial institution have signed the Memo-
randum of Association and Articles of Association, also stating their names, address and
number of shares subscribed by them, in the presence witness and the name and address
of the witnesses have not been mentioned,
 If per person share investment limit and share ownership ratio has not been found to
have been maintained as specified by the Rastra Bank from time to time,
 If it is found to be inconsistent with the policy relating to incorporation of bank or finan-
cial institution and licensing policy issued by the Rastra Bank,
 If any condition as prescribed by the Rastra Bank has not been found to be fulfilled.

4. License and Conversion of BFIs
General notes
Bank regulation is a complex process and generally consists of two components, viz., licensing,
and supervision. The first component, licensing, sets certain requirements for starting a new bank.
Licensing provides the license holders the right to own and to operate a bank. The licensing
process is specific to the regulatory environment of the country and/or the state where the
bank is located. Licensing involves an evaluation of the entity's intent and the ability to meet
the regulatory guidelines governing the bank's operations, financial soundness, and managerial
actions. The regulator supervises licensed banks for compliance with the requirements and
responds to breaches of the requirements by obtaining undertakings, giving directions, imposing
penalties or (ultimately) revoking the bank's license. The Bank and Financial Institution Act, 2073
under a separate chapter has contained various provisions relating to license to be issued to the
bank or financial institution and revocation of it when required.
Essentiality of license
Section 31 of the Act has laid down the general rule that the financial transactions can only be
carried on by the bank or financial institution. Sub-section (1) of Section 31 has provided that
no one, except the bank or financial institution having obtained license pursuant to Section 34 of
the Act, shall carry on banking or financial transactions according to this Act. Under the Act, the
Rastra Bank shall formulate and execute licensing policy concerning bank or financial institution
for the purpose of granting license to the bank or financial institution.
Use of name of bank or financial institution: No one shall use the name of a bank or financial
institution for the purpose of carrying on banking and financial transactions without obtaining
approval from the Rastra Bank. Financial institution of Class “B”, “C” and “D” shall use the name
as “development bank”, “finance company” and “micro finance financial institution” respectively.
Sub-section (2) of Section 32 has provided that any person, company, or institution shall not be
entitled to use in its name the words such as “bank”, “banking”, “finance”, “financial” or other
words or symbol or adjective indicating similar meaning without getting prior approval from
the Rastra Bank, except the bank or financial institution having obtained license to carry on
banking and financial transaction pursuant to Section 49 of this Act and a foreign bank or financial
institution opening a branch office in Nepal. However, the provision as referred to in Sub-Section
(2) shall not be applicable in case of following organization:-
 Any organization established or recognized according to law, or international agreement

or practice,
 The company submitting application for carrying on banking and financial transactions
within six months of incorporation.

 Any bank or financial institution having obtained approval to carry on financial transac-
tions according to the prevailing laws during the commencement of this Act.
Application for the license

A bank or financial institution desirous of carrying on banking or financial transactions pursuant
to this Act shall make an application to the Rastra Bank for obtaining license with fee as prescribed
by the Rastra Bank. Sub-section (2) of Section 33 of the Act has provided that the bank or financial
institution shall also enclose following details and documents with the application:
 A copy of the memorandum and articles of association of the bank or financial institution
along with the certificate of incorporation.
 Particulars of an office building equipped with all infrastructures required by the bank
or financial institution to carry on financial transactions, or, if such building is to rented,
a copy of the lease agreement and the particulars of the building to be rented, including
that there are enough bases for making available banking and financial services and
facilities.
 Document evidencing that the amount of the shares undertaken to be subscribed by
promoters is paid and deposited to the Rastra Bank.
 Byelaws relating to conditions of service and facilities of the employees, financial ad-
ministration byelaws; and bye-laws relating to write-off of loans of the bank or financial
institution.
 Principal place of business or if address of the branches have been ascertained, address
thereof.
 Consent that the terms and conditions set forth by the Rastra Bank for carrying out bank-
ing and financial transaction will be abided by.
 Business plan prepared by incorporating business strategy of the bank or financial in-
stitution, organizational structure suitable to nature of the transaction to be operated,
internal control and risk management process.
 Name-list of the Directors and officials of the bank or financial institution and details
stating that they are qualified to become the Director and officials according to this Act,
 Commitment to meet the minimum capital adequacy ratio set by the Rastra Bank from
time to time until the bank or financial institution carries on banking and financial trans-
actions,
 Commitment that the bank or financial institution will maintain an internal control sys-
tem for proper management of all potential risks,
 Other details and documents specified by the Rastra Bank from time to time.

According to Sub-section (3), the following details and documents in addition to those matters as
mentioned in Sub-Section (2) have also to be submitted to the Rastra Bank by any foreign bank or
financial institution established in joint venture in Nepal:
 In case of bank or financial institutions of Class “A”, “B”, “C” and “D”, letter of consent
or approval given by the government of the concerned country or central bank or regu-
lating agency formed according to the laws of the concerned country of foreign bank or
financial institution, for operating banking and financial transactions in Nepal by such
foreign bank or financial institution,
 Upon submitting application to the Rastra Bank to incorporate foreign bank or financial
institution or upon obtaining permission from the Rastra Bank, if any matter to be ful-
filled by such foreign bank or financial institution under this Act could not be fulfilled,
details of that matter,
 Other information and documents specified by the Rastra Bank.
The Rastra Bank under Sub-section (4) may ask for additional documents or details from
concerned bank or financial institution if any documents or details are not adequate or sufficient
while carrying out enquiry to the documents and details received pursuant to Sub-Section (2) or
(3) above.
Issuance of License
Pursuant to Sub-section (1) of Section 34 of the Act, the Rastra Bank may issue license of any
class based on the classification of bank or financial institution pursuant to Section 37 within one
hundred twenty days to operate banking and financial transaction when the Rastra Bank finds,
while carrying out inquiry on the application submitted pursuant to Section 33 and documents and
details enclosed therewith, that all requirements to carry on the banking and financial transaction
under this Act are met. In case the Rastra Bank has specified the date of enforcement of license
while issuing license to carry on banking and financial transactions, the license shall be deemed
to have been activated from that specified date and if no such date has been specified, the license
shall be deemed to have been activated from the date of issuance of the license. The Rastra Bank
shall ascertain the following matters before issuing license pursuant to Sub-Section (1):
 Granting of license for operation of bank or financial institution will result in develop-
ment of healthy competition and effective financial intermediary transaction and it will
result in protection of interests of depositors.
 It is capable to carry on banking and financial transactions subject to this Act, Rules, Bye-
laws framed there under, Orders or Directives as well as Memorandum of Association
and Articles of Association.
 The documents and details submitted along with application pursuant to Section 33 for
license are sufficient and physical infrastructures are adequate.

 Any official appointed or included or to be appointed or to be included in the bank or

financial institution is capable of carrying out banking and financial transactions.
Rastra Bank may Specify Conditions: The Rastra Bank under Section 36 may, while granting license
for carrying on banking and financial transactions pursuant to Section 34, specify necessary terms
and conditions by giving consideration to existing position of the bank or financial institution,
healthy operation of financial transaction and interests of depositors. It shall be the duty of the
concerned bank or financial institution to abide by such terms and conditions. Similarly, the Rastra
Bank may bring necessary alterations and changes from time to time as per the requirement in the
terms and conditions.
Grounds of refusal to issue license

The Rastra Bank under Section 35 may refuse to issue license to operate banking and financial
transactions to a bank or financial institution in any of the following circumstances:
 If it causes adverse effects on the stability, fair competition and credibility of the financial
system of Nepal.
 If it is not reasonable and appropriate to issue license for operation of financial transac-
tion for protection of interests of depositors.
 If the infrastructure to operate banking and financial transactions are not completed.
 If other particulars or conditions pursuant to this Act are not found to be completed.
Under Sub-section (2) of Section 35, the Rastra Bank shall, in case there is a situation that the
license to operate banking and financial transactions could not be issued according to this Section,
inform to the concerned bank or financial institution stating the reasons thereof within ninety days
of the date of filing of the application.
Classification and conversion of bank or financial Institution

Under Section 37 of the Act, the Rastra Bank can classify banks or financial institutions in classes
“A”, “B”, “C” and “D” and issue license to concerned banks or financial institutions accordingly
based on minimum paid up capital of the bank or financial institution submitting application
pursuant to Section 33 for carrying on banking and financial transactions and transaction to be
operated on by such bank or financial institution and the working areas. Provided, however, that
an infrastructure development bank shall not be classified in any class.
Conversion into higher class: If a licensed institution of lower class desires to be converted into
a bank or financial institution of one level higher class, it has to submit an application to the
Rastra Bank but the class "D" financial institutions shall not be converted into the higher class. Sub-
section (2) of Section 38 of the Act has provided the terms and conditions to grant approval for the
conversion of bank or financial institution of higher class if the Rastra Bank deems appropriate,

upon carrying out inquiry into the application and details enclosed with the application. The
Rastra Bank shall make the bank or financial institution to amend the memorandum of association
and articles of association and then issue the license of bank or financial institution of such higher
class. The terms and conditions are as follows:
 If it has the met the paid up capital requirement for a bank or financial institution of
higher class as prescribed by the Rastra Bank,
 If it has continuously maintained the capital fund adequacy according to the Rastra Bank
directives for the last five years,
 If it is in profit continuously for the last five years,
 If the average non-performing loans of the last five years is within the limits as pre-
scribed by the Rastra Bank,
 If the preliminary expenses have already been written off,
 If the shares required to be issued publicly have been issued and already been allotted,
 If the General Meeting has already passed the special resolution for conversion into up-
per class of the bank or financial institution,
 If it has met all conditions as prescribed by the Rastra Bank.
Special provision on branch of foreign bank

The branch of the foreign bank only may carry on wholesale banking transactions and the function
and activities of branch office of foreign bank shall be as prescribed by the Rastra Bank. In case the
Rastra Bank has granted license to an internationally classified foreign bank to carry on banking
and financial transactions through a branch in Nepal, the branch so established in Nepal as per the
prevailing law shall be deemed as equivalent to the bank or financial institution established under
this Act and unless otherwise provided by this Act or Rules, Byelaws, order or directives framed
under this Act, all other provisions shall be applicable equally even in case of such a branch.
Under Sub-section (2) of Section 40 of the Act, the Rastra Bank may issue necessary directives
with regard responsibility of the officials and employees taking responsibilities of the functions,
duties, powers, responsibility, liability, assets, accounts, etc. of the branch of the foreign bank and
carrying out such functions. Pursuant to Sub-section (3), the branch of a foreign bank located in
Nepal shall, give first priority to its liability towards Nepal while using its own assets in the course
of bearing own responsibility subject not to make adverse effect in any other legal provisions.

5. Securities Transactions
General notes
The securities which a company can issue fall, specifically, into two primary classes which legal
theory tries to keep rigidly separated but which in economic reality merge into each other. The
first of these classes is described as shares; the second as debentures. Section 2 (r) of the Bank and
Financial Institution Act, 2073 has defined that “Securities” means a share, stock, bond, debenture,
debenture stock, or mutual investment scheme certificate issued by a bank, financial institution or
body corporate; certificate, saving bond or bond issued by Government of Nepal or by a corporate
body against the guarantee of Government of Nepal, and the word also includes other stock
specified by the Securities Board as the stock to be transacted or transferrable through the stock
market to sell or exchange such stock.
A share is a right to a specified amount of the share capital of a company carrying with it certain
rights and liabilities, while the company is a going concern and in the winding up. Shares are
simply, a bundle of intangible rights against the company which had issued them. Share
certificates are not valuable property in themselves but just an evidence of the true property which
are the proportionate interests of the shareholders in the ownership of the company. On the other
hand, the debenture simply means a document acknowledging a loan made to the company and
providing for the payment of interest on the sum borrowed until the debenture is redeemed, i.e.,
the repayment of the principal sum.
The Act has provided the provisions for the issuance of securities, conditions for the public
subscriptions and allotment applied to the banks and financial institutions. Further, the legal
provisions of sell, transfer and transmission of shares and the conditions of buy back of shares by
the bank and financial institution are provided by the Act to ensure the fair dealing on securities
and enhance the public confidence to the securities market through regulating and mandatory
provisions under the Act. The securities transactions of banks and financial institutions, hence,
governed under three major enactments- the Bank and Financial Institution Act, 2073, Companies
Act, 2063 and Securities Act, 2063.
Prospectus
A prospectus is an invitation issued to the public to take shares or debentures of the company or
to deposit money with the company. Therefore, any advertisement offering to the public shares
or debentures of the company for sale is a prospectus. A public company without registration and
publication of prospectus cannot issue its securities (shares) for the public subscription. It includes
any document described or issued as prospectus, any notice, circular, advertisement or other
document inviting deposits from the public or inviting offers from the public for the subscription
or purchase of any shares in or debentures of a body corporate. Thus, a prospectus is not merely
an advertisement; it may be a circular or even a notice.

Pursuant to Sub-section (1) of Section 8 of the Act, a bank or financial institution shall, before
public offering of its securities, have to get the prospectus registered at the Rastra Bank having
obtained necessary approval concerning securities according to the prevailing laws. The Rastra
Bank without receiving a written notification of the approval from the Securities Board to register
the prospectus, the Rastra Bank shall not register such prospectus. Unless such prospectus
is registered, the said bank or financial institution or anyone on behalf of the bank or financial
institution shall not be allowed to publish prospectus of such bank or financial institution.
Allotment of Shares
It is mandatory that the bank or financial institution shall set aside at least thirty percent share of
its total issued capital for subscription by the general public and the term general public means
natural person. The bank or financial institution may allot 0.5% shares except that of the limit
to its employees. The ratio of share ownership is not necessary in case of the bank or financial
institution and infrastructure development bank to be incorporated under significant ownership
of Government of Nepal. Similarly, the bank or financial institution to be incorporated in joint
venture with a foreign bank or financial institution or other foreign institution or infrastructure
development bank shall have to allot the shares to general public as specified by the Rastra Bank.
Under Sub-section (2) of Section 9 of the Act, the shares allotted to general public shall be sold to
the general public within the stipulated time. The shares that could not be sold in such a manner
may be sold to other firm, company or institution.
Further, as per Sub-section (4), the bank or financial institution may, if it desires, convert the shares
to ordinary shares having fulfilled the process specified by the Rastra Bank subject not to be the
share ownership of the promoter shares group less than 51 percent.
Application money: Pursuant to Sub-section (7), every bank or financial institution shall demand
payment of hundred percent amount of the face value of its shares1 along with application while
call upon application from the general public for subscription of its shares.
Issue of securities: Section 10

The bank or financial institution shall, while issuing its securities for subscription to the general
public, carry out the acts of sale, allotment and the act of exchange in accordance with the
prevailing laws relating to securities. The bank or financial institution shall, while issuing any type
of debenture or financial instrument, have to obtain prior approval of the Rastra Bank. The Rastra
Bank, while granting approval, specify required terms and conditions and it shall be the duty of
the concerned bank or financial institution to abide by such terms and conditions.
Under Section 10 (2) of the Act the bank or financial institution shall submit a copy of an agreement
entered into by it on the dealing of securities through any institution dealing in securities before
the Rastra Bank, within seven days after the date of entering into such agreement.

Sale or pledging of securities: Section 11

The promoter of the bank or financial institution shall not be entitled to sell or pledge any share
registered under his/her ownership for at least five years from the date of commencement of
financial transactions. However, in case of arising a special circumstance due to emergence of
any obstruction or hindrance in the operation of the bank or financial institution or the promoter
shareholder is included in the blacklist owing to transactions with another bank or financial
institution, shares may be sold or brought amongst promoters by obtaining approval from the
Rastra Bank.
Explanation: For the purpose of this Section, “special circumstance” means failure of holding
meeting of the Board of Directors due to lack of quorum for a consecutive period of three times or
a situation of indecision because of disputes amongst Directors.
Promoters shares: If the promoter of the bank or financial institution wishes to sell or pledge the
shares held in his/her name after five years from the date of commencement of financial transactions
by the bank or financial institution, his/her/its’ may sell or pledge such shares pursuant to Sub-
section (3) by obtaining approval from the Rastra Bank subject to belong such share under the
promoter’s group. Provided that, approval of the Rastra Bank shall not be required while selling
or pledging the shares by the promoter having subscribed the shares of less than two percent of
the paid up capital.
Whatsoever may be provided in Sub-section (1) and Sub-section (2) of Section 9, after completion
of a period of ten years of transactions of bank or financial institution, the promoter shares may
be converted into ordinary shares with approval of the Rastra Bank by giving due consideration
to impact it causes on the capital market, banking and overall financial sector. As per Sub-section
(5) in case any company or body corporate has subscribed promoter shares, prior approval of the
Rastra Bank shall be obtained before alteration of shareholders or sale or transfer the ownership of
share among the shareholders having substantial ownership of such company or body corporate.
By contrast, the approval of the Rastra Bank shall not be required while selling or mortgaging the
shares by company or body corporate having subscribed the shares of less than two percent of the
paid up capital of the bank or financial institution.
Prohibition on transaction of securities: Section 12

The Act has imposed prohibition on buy or sell, mortgage, transfer, transact or give or accept
as donation the securities of the concerned bank or financial institution or of its subsidiary
company in his/her name or family members' name. It is one of the legal instrument to control
the insider dealing. Under Sub-section (1) of Section 12 of the Act the Director, Chief Executive,
Auditor, Company Secretary of the bank or financial institution or the person directly involved in
management and account of a bank or financial institution shall not buy or sell, mortgage or cause
to be mortgaged, transfer or transact or give or accept as donation the securities of the concerned
bank or financial institution or of its subsidiary company in his/her name or in name of member

of his/her family or a firm, company or institution under the control of such person or to any
other person until he/she is in such position or until one year from the date of retirement from
such position.
It is to be noted that this provision is not deemed to have hindered to buy and sell securities among
Directors to Directors or Directors to Promoters with the approval of the Rastra Bank while issuing
bonus shares, rights shares or the shares allotted for employee or issuing new shares, or while
implementing a directive of the Rastra Bank or while selling entire share having in any bank or
financial institution under own ownership by any Director or any corporate body having power
to appoint Director or while merging or amalgamating bank or financial institutions in each other
according to provisions made in Chapter-10 or while acquiring all assets or liabilities of one bank
or financial institution by another bank or financial institution or while carrying out purchase
or sale of securities among promoter directors or directors to directors with the approval of the
Rastra Bank in case of emergence of any hurdle in operation of the bank or financial institution
or while carrying out purchase or sale or transfer of shares during the process of reformative or
settlement process of a problematic bank.
In case anyone commits any act in contrary with Sub-section (1), pursuant to Sub-section (2) the
concerned bank or financial institution shall have to forfeit such securities and sell them according
to the process as prescribed by the Rastra Bank.
Buy back of shares

Buy back of shares means the act of buying or purchase of shares by a bank or financial institution
issued by it. The Act Prohibited the Bank or Financial Institution to purchase or buy back of its’
own Shares, Sub-section (1) of Section 13 of the Act reads, thus, no bank or financial institution
shall purchase its own shares or lend loan against security of its own shares.
Exceptions: Under Sub-section (2), in the following circumstances, a bank or financial institution
may, with the approval of the Rastra Bank, purchase its shares out of its free reserves available
for being distributed as dividends not exceeding the percentage prescribed by the Rastra Bank: -
 If the shares issued by the bank or financial institution are fully paid up,
 If the shares issued by the bank or financial institution have already been listed in the
securities market,
 If the buy-back of own shares is authorized by the Articles of Association of the con-
cerned bank or financial institution,
 If a special resolution has been adopted at the General Meeting of the concerned bank or
financial institution authorizing the buy-back of own share,
 If the ratio of the debt owed by the bank or financial institution is not more than double
of the capital and general reserve fund after such buy-back of shares,

 If the value of shares to be bought back by a bank or financial institution is not more
than 20% of the total paid up capital and general reserve fund of that bank or financial
institution,
 If the buy-back of shares comply with the directives relating to capital fund issued by the
Rastra Bank to the bank or financial institution,
 If it is not against the directives issued by the Rastra Bank from time to time with regard
to buy back of shares.
Approval for buy back: As per Sub-section (3), any bank or financial institution shall have to make
an application before the Rastra Bank for getting approval to buy-back own share. The Rastra
Bank may, in case it deems appropriate to grant approval to such bank or financial institution to
buy back its own shares based on the application acquired and details enclosed with it, grant such
approval. The application must include the following details:
 The reason, necessity, time duration and modus-operandi for the buy-back of shares,
 A statement of the evaluation of possible impacts on the financial situation of the bank or
financial institution as a result of the buy-back of shares,
 The type of share, par value of share and number of shares purpose to buy-back,
 The maximum or minimum amount required to buy-back shares as referred to in Part
(c), and source of such amount,
 Such other matters as specified by the Rastra Bank with regard to the buy-back of shares,
 Other necessary matters to be mentioned as per the prevailing laws.
Process and manner of buy back of shares: Upon receipt of the approval from the Rastra Bank, the
concerned bank or financial institution may buy back its shares in any of the following manners,
within 6 months from the date of receipt of such approval or within 12 months of the adoption of
a special resolution at the General Meeting, whichever occurs later:
 Purchasing through the securities market,

 Purchasing from the existing shareholders on a proportional basis.
Pursuant to Sub-section (6) if a bank or financial institution buys back its own shares, it shall file
with the Rastra Bank a report containing the number of shares bought back, amount paid for the
same and other necessary details within 30 days of the date of such buy-back called share returns.
As per Sub-section (7) the bank or financial institution shall have to establish a separate capital
redemption reserve fund, to which a sum equal to the face value of the shares bought back shall
be transferred and the amount of such fund shall be maintained as if it is the paid-up capital. If the
bank or financial institution buys back its shares, it shall cancel the shares so bought back within
120 days of the date of such buy-back. The other provision regarding to buy-back own shares by
the bank or financial institution shall be as prescribed by the Rastra Bank.

6. Board of Directors and Chief Executive
General notes
The board of a company provides leadership and strategic guidance, objective judgment
independent of management to the company and exercises control over the company, while
remaining at all times accountable to the shareholders. The measure of the Board is not simply
whether it fulfills its legal requirements but more importantly, the Board’s attitude and the
manner it translates its awareness and understanding of its responsibilities. An effective corporate
governance system is one, which allows the Board to perform these dual functions effectively. The
Board of directors of a company thus directs and controls the management of a company and is
accountable to the shareholders.
The Boards directs of the bank and financial institutions, by formulating and reviewing
company’s policies, strategies, major plans of action, risk policy, annual budgets and business
plans, setting performance objectives, monitoring implementation and corporate performance,
and overseeing major capital expenditures, acquisitions and divestitures, change in financial
control and compliance with applicable laws, taking into account the interests of stakeholders.
It controls the company and its management by laying down the code of conduct, overseeing
the process of disclosure and communications, ensuring that appropriate systems for financial
control and reporting and monitoring risk are in place, evaluating the performance management,
chief executive directors and providing checks and balances to reduce potential conflict between
the specific interests of management and the wider interest of the company and shareholders
including misuse of corporate assets and abuse in related party transactions. It is accountable to
the shareholders for creating, protecting and enhancing wealth and resources for the company,
and reporting to them on the performance in a timely and transparent manner. However, it is not
involved in day-to-day management of the company.
Corporate reporting: Objectives and importance

The board of directors is responsible for the corporate reporting to be made to all the regulating
bodies and concerned authorities quarterly or annually. The objective of corporate reporting is
“to provide information about the financial position, performance and changes in financial position of the
banks and financial institutions that is useful to a wide range of users in making economic decisions.” The
following points sum up the objectives & purposes of corporate reporting –
 Providing information to management of an organization which is used for the purpose

of planning, analysis, benchmarking and decision making.
 Providing information to investors, promoters, debt provider and creditors which is used
to enable them to male rational and prudent decisions regarding investment, credit etc.
 Providing information to shareholders & public at large in case of listed companies about
various aspects of an organization.

 Providing information about the economic resources of an organization claims to those

resources (liabilities & owner’s equity) and how these resources and claims have under-
gone change over a period of time.
 Providing information as to how an organization is procuring & using various resources.
 Providing information to various stakeholders regarding performance management of
an organization as to how diligently & ethically they are discharging their fiduciary du-
ties & responsibilities.
 Providing information to the statutory auditors which in turn facilitates audit.
 Enhancing social welfare by looking into the interest of employees, trade union & Gov-
ernment.
Importance of Corporate Reporting: The importance of corporate reporting cannot be over

emphasized. It is required by each and every stakeholder for multiple reasons & purposes. The
following points highlights why corporate reporting framework is important –
 In helps and organization to comply with various statues and regulatory requirements.
The organizations are required to file financial statements to ROC, Government Agen-
cies. In case of listed companies, quarterly as well as annual results are required to be
filed to stock exchanges and published.
 It facilitates statutory audit. The Statutory auditors are required to audit the financial
statements of an organization to express their opinion.
 Financial Reports forms backbone for financial planning, analysis, bench marking and
decision making. These are used for above purposes by various stakeholders.
 Corporate reporting helps organizations to raise capital both domestic as well as over-
seas.
 On the basis of financials, the public in large can analyze the performance of the organi-
zation as well as of its management.
 For the purpose of bidding, labor contract, government supplies etc., organizations are
required to furnish their financial reports & statements.
 Corporate reporting should provide information that is useful to present and potential
investors and creditors and other users in making rational investment, credit, and simi-
lar decisions.
 Corporate reporting should provide information to help present and potential investors
and creditors and other users to assess the amounts, timing, and uncertainty of prospec-
tive cash receipts.
 Corporate reporting should provide information about the economic resources of an
enterprise; the claims to those resources (obligations); and the effects of transactions,
events, and circumstances that cause changes in resources and claims to those resources.

Formation of board of directors

Section 14 of the Act has provided the provisions for the formation of board of directors and
appointment of directors of a bank or financial institution. Under Sub-section (1) of Section 14,
a bank or financial institution shall have a board of directors comprising of at least five directors
and not exceeding seven directors who are appointed by, subject to this Act and the articles
of association, the general meeting of the bank or financial institution. Further, the following
provisions applied to the appointment of director are to be noted-
 Until the first annual general meeting of the bank or financial institution is held, promot-
ers shall appoint the directors.
 In case the position of any director falls vacant before the holding of the annual general
meeting, the board of directors may appoint director until next general meeting is held.
 No more than one member of a family may become the director of any bank or financial
institution at the same time.
 In case any corporate body has subscribed shares, it may appoint director to the propor-
tion of the number of shares it has subscribed and while nominating in such a manner,
the same person shall not be nominated to more than one bank or financial institution.
However, a person, who is a director in any bank or financial institution, can be appoint-
ed as a director of an Infrastructure Development Bank.
 The company, corporate body, foreign bank or financial institution which has subscribed
shares of a bank or financial institution may, while appointing a director proportionate
to the shares as it has subscribed, appoint an alternate director to work in absence of the
director.
 A director chosen by the directors from among themselves by majority decision shall be
the chairperson of the board of directors.
Independent director: Under Sub-section (3) of Section 14 of the Act, the board of directors shall
appoint at least one independent director from among the persons possessing qualifications
and experience pursuant to Section 17 of the Act and information thereof shall be furnished to
the first general meeting to be held after such appointment. However, the promoter, director or
shareholder possessing more than 0.1 percent share of the bank and financial institution and his/
her family member shall not be allowed to become a professional director.
Term of office of the director: Pursuant to Sub-section (1) of Section 15, the term of office of a
director shall be of four years in maximum as provided for in the articles of association and he/she
may be reappointed or re-nominated. The executive chairperson or managing director appointed
after commencement of this Act shall remain in the office only for two consecutive terms. But the
independent director may be appointed for only single tenure of office.

Qualification of director
Section 16 of the Act under Sub-section (1) has enumerated the qualification of a person to be
appointed to the office of director. The qualifications of director are as follows:-
 Having had work experience of five years as a director or office bearer level of a foreign
or local bank or financial institution or of body corporate of related sector or in officer
level of Government of Nepal.
 Having attained bachelor degree and had work experience of at least three years as a
Director or office bearer level of a foreign or local bank or financial institution or of body
corporate of related sector or at least in officer level of Government of Nepal.
 Having attained master degree in the related subject as prescribed.
Qualifications of independent director

Section 17 of the Act has provided the qualification of independent director. The person having
met the following qualification and experience shall be appointed as an independent director:
 In case of class “A” bank or national level class “B” development bank, having obtained
at least master’s degree in the subject as prescribed by the Rastra Bank and experiences
as prescribed by the Rastra Bank,
 In case of class “B” development bank and financial institution of class "C", except the
class “B” development bank of national level, having obtained at least bachelor’s degree
in the subject prescribed by the Rastra Bank and work experiences as prescribed by the
Rastra Bank,
 In case of micro finance institution of class "D", the person possessing the qualifications
and experiences prescribed by the Rastra Bank.
Disqualification of directors
Section 18 has stated the various grounds where a person cannot be appointed as a board of director
as he is treated as disqualified. The objective of law is to have a director in the banks and financial
institutions a capable, experience and creditworthy person to handle financial transactions carried
out by the banks and financial institutions. The depositors and creditors interest cannot be protect
and enhanced until and unless the money and management of banks entrusted to rightful hands
with dignity and integrity. Under Sub-section (1) of Section 18 of the Act, the following persons
shall not be eligible to become a Director of the bank or financial institution:-
 Having not attained the age of 25 years.

 Having unsound mind or insane.
 Having declared bankrupt in Nepal or in abroad for being unable to pay debt.
 Having blacklisted or declared defaulter in connection with any transaction with any

bank or financial institution in Nepal or in abroad, and a period of at least three years
has not been completed after removal of his\her name from blacklist or list of defaulter.
 The incumbent Director or an employee of any corporate body carrying out transactions
of bank or financial institution or any institution collecting any type of deposits or carry-
ing out transactions relating to insurance. However, an official or employee of a bank or
financial institution may work as a Director of the subsidiary company of the same bank
 Borrower or incumbent auditor or advisor of concerned bank or financial institution or
the person, firm or company who/which is the partner in any kind of contract with the
concerned bank or financial institution or having personal interests.
 Who has acquired membership of the Stock Exchange to act as a securities broker of
merchant banker.
 Incumbent Director of the bank or financial institution.
 The person, who has not subscribed to the minimum number of shares required to be
subscribed to be eligible for appointment as a Director pursuant to the Articles of Asso-
ciation of the bank or financial institution.
 Incumbent employee of Government of Nepal, or an organization having ownership of
Government of Nepal, or Rastra Bank or of a bank or financial institution.
Provided that this provision shall not be deemed to have made obstruction to nominate Director
in micro-finance or infrastructure development bank, of which share has been purchased by
Government of Nepal or the institution having under the ownership of Government of Nepal
or Rastra Bank or bank or financial institution.
 Who, having a liability to pay tax pursuant to the laws in force, has failed to pay the
same.
 Having not completed a period of ten years after replenishment of punishment upon
being convicted of an offence of theft, cheating, forgery, fraud, corruption, any offence
involving moral turpitude or a banking offence from a court of Nepal or of a foreign
country.
 Having been taken action by a regulatory agency as per law for committing an act against
law and not having completed a period of five years after being taken such action.
 In case of an independent director, promoter or shareholder holding ownership of more
than 0.1 % share of concerned bank or financial institution.
 Having remained to clear imprisonment and dues of fine as imposed by the court or
having defaulted to pay government due.

Further Sub-section (1) of Section 19 provides that no person shall be remained in the office of
Director of the bank or financial institution in any of the following circumstances:-
 If having no qualifications as referred to in Section 16 or 17 or is ineligible pursuant to

Section 18,
 In case the motion to remove from the office of a Director is passed by majority of the
general meeting at the recommendation of the group from which he/she is appointed to
the office of Director that is passed by the shareholders having representation of at least
51 percent of the shares of the same group,
 In case the resignation tendered by a Director from his/her position is approved,
 In case of commission of any act that is not supposed to be committed under this Act or
directives of Rastra Bank,
 In case the Rastra Bank directs to remove from the office stating that since a Director
has committed acts against rights and interests of the bank or financial institution or of
the depositors and since he/she is not competent to carry out works as in the office of a
Director of the bank or financial institution.
Note: During the serving period, person holding constitutional position cannot hold the position
of a director or executive chief.
Meetings of Board of Directors

Pursuant to Section 21 (1) of the Act, the meetings of board of directors shall have to be held at
least 12 times in a year and the gap between two meetings shall not be more than sixty days. Under
Sub-section (2), the chairperson shall convene a meeting of the board of directors at any time when
at least one-third of the directors request in writing to convene the meeting by mentioning the
agenda to be discussed in the meeting. Similarly, as per Sub-section (3), the meetings of board of
directors shall be presided over by the Chairperson. In absence of the Chairperson, the meeting
shall be presided over by a director selected by majority of the Directors from amongst themselves.
Quorum: No meeting of the Board of directors shall be held unless it is attended by at least fifty
one percent of the total number of directors.
Decision: Sub-section (5) provides that the decision of a majority in the meeting of the board of
directors shall be binding and the chairperson may exercise the casting vote only in the event of
a tie.
Minutes: Minutes regarding the names of directors attend in the meeting of board of directors,
the agenda discussed and the decisions taken thereon shall be recorded in a separate book, and
such minutes shall be signed by all directors attended in the meeting and if any director puts
forward any dissenting opinion in the decision of the board of directors, he/she may mention such
dissenting opinion in the minutes by putting own signature.

Functions, Duties and Powers of Board of Directors

The functions, duties and powers of board of directors are provided under Section 22 of the Act.
These functions, duties and powers to be exercised by the board of director are as follows.
 All functions, duties and powers to be exercised by the bank or financial institution, except
those functions to be performed by the general meeting, shall be vested in the board of di-
rectors subject to this Act, prevailing laws and the memorandum and articles of association.
 It shall be the duty of the Board of Directors to operate bank in the interests of depositors,
costumers and general shareholders having taken overall risks management of the bank or fi-
nancial institution and to make assurance not to intervene into daily conduct of business such
as deposit collection, lending, investing, managing personnel, making expenses from budget
having maintained appropriate corporate governance in the bank or financial institution.
 Other functions, duties and powers of the Board of Directors shall be as follows:-
 To frame necessary Byelaws, directives, procedures and to enforce them subject to this
Act, the prevailing laws and directives of the Rastra Bank in order to carry on the func-
tions of bank or financial institution in well order.
 To prepare internal control system and risks management norms for avoiding the emergence
of risk or risk-prone situation in transactions of bank or financial institution and to carry on
banking and financial transactions carefully according to its policies and strategies.
 To make necessary policy management for carrying out functions of bank or financial
institution and to operate the bank or financial institution in well order and rational
manner by carrying out regular monitoring of such functions.
 To prepare clear organizational structure of the bank or financial institution and frame
policies and implement it accordingly.
 To submit audit report including annual progress report of the bank or financial institu-
tion before the General Meeting.
 To carry out other functions as specified by the Rastra Bank from time to time.
Accountability and responsibility of director: Under Section 23 of the Act a director shall perform
his functions, duties and power with accountability and responsibility. The Act has provided that,
 A Director shall not commit or cause to be committed any act for personal benefit through
a bank or financial institution or in the course of business of bank or financial institution.
 A Director shall be personally liable to any act carried out exceeding his/her authority as
in the capacity of a Director of the bank or financial institution.
 A Director of a bank or financial institution shall have to assume responsibility with
regard to risks management and internal control by following sound business strategies
of the institution.

 A Director shall not have to intervene in the daily functions and activities of the manage-
ment of the bank or financial institution.
 A Director shall have to fully comply with the directives issued by the Rastra Bank from
time to time.
Records of details of directors: Under Section 24 of the Bank and Financial Institution Act, a bank
or financial institution shall collect the following details of a Director:-
 Full Name, address, academic qualifications, profession and experience of the director,
 Details as to designation and responsibility if he/she has worked earlier as Director,
official or employee of any other agency,
 Details as to name and address of family of the Director and relevant person's details
and financial interests of himself/herself or his/her family in bank or financial institu-
tion or other agencies, share ownership in his/her name and names of the family of said
institution,
 Details of the shares and debentures subscribed by the Director or his/her family mem-
bers in the bank or financial institution or its holding or subsidiary company,
 Details of the family members is working as official or employee in the concerned bank
or financial institution, if any,
 Details as to whether the concerned bank or financial institution has, or is going to have,
any type of agreement with himself/herself or his/her family member,
 Details as to whether any type of interests or concerns with regard to appointment of
Chief Executive, Company Secretary and Auditor,
 Written authority given to the Rastra Bank to allow it to conduct an inquiry or to cause to
be conducted the inquiry as to the financial and professional background of the Director,
 Self-declaration that he/she is qualified to be the Director pursuant to this Act,
 Any other details as specified by Rastra Bank from time to time to be furnished before the
Rastra Bank and the Board of Directors.
Information of the director and its record: It is mandatory under Sub-section (1) of Section 25 that
every director shall have to submit the details referred to in Sub-Section (1) of Section 24 to the
bank or financial institution within seven days of his/her appointment.
When the details have been provided by the directors, the bank or financial institution shall have
to separately maintain records of such details. As per Sub-section (3), in case a Director or any
member of his/her family acquires any significant ownership or any type of interests in the bank
or financial institution directly or indirectly, such Director shall have to present full details thereof
at the first meeting of the Board of Directors.

Further, The Director shall, while conducting discussions on any subject related to any interests
in the Board of Directors or in any other sub-committee, have to inform about such interests at
the beginning of the meeting and he/she shall not take part in the discussions or voting on such
subjects.
Under Sub-section (5), the information has to be submitted to the Rastra Bank within 15 days in
case there is change in the details or Director has been changed. In addition, the Rastra Bank, if it
deems it appropriate to conduct an inquiry on the information forwarded pursuant to Sub-Section
(5), shall have powers to conduct or cause to be conducted inquiry on it.
Appointment of Chief Executive and terms and conditions of service

Business and day-to-day administration and management of bank or financial institution is under
control of the chief executive officer. The Act has intended to appoint chief executive as a leader
of management. Sub-section (1) of Section 29 of the Act has provided that the board of directors
shall, subject to this Act, Memorandum and Articles of Association, appoint one Chief Executive
for management of the bank or financial institution. A prohibition has been made under Sub-
section (8) that the Chief Executive of any bank or financial institution may not be appointed as
the Chief Executive, official, employee or in other position in any other business organization.
However, this provision shall not be deemed to have made obstruction to be the Director of an
Infrastructure Development Bank in which the bank or financial institution has made investment
in such development bank.
The Act under Sub-section (2), has fixed the tenure of office of the Chief Executive shall be of four
years in maximum and he/she may be re-appointed again for next one term of office. By contrast,
the board of directors may remove the Chief Executive from his/her office at any time in case his/
her work performance has not been satisfactory and before removing from the office, reasonable
opportunity shall have to be provided to him/her to submit clarification.
Qualifications of the chief executive

Sub-section (5) of Section 29 has laid down the qualifications of Chief Executive as under-
 Person having attained Master’s degree in management, banking, finance, monetary,

economics, commerce, bookkeeping, statistics, account, mathematics, business admin-
istration or law.
 Person having work experience of at least ten years as an officer level or above in bank-
ing or finance sector, government agency, corporate body, university or an international
institution or organization to carry on similar works after having attained bachelor’s
degree in chartered accountancy or management, banking, finance, monetary, econom-
ics, commerce, bookkeeping, statistics, account, mathematics, business administration
or law. Provided that in case of the Chief Executive of a Class "D" financial institution,
one shall have to possess the academic qualifications and work experience as specified
by the Rastra Bank.

 Person having completed the criteria as prescribed by the Rastra Bank with regard to
appointment of the Chief Executive.
 Person who is not been disqualified pursuant to Sub-Section (1) of Section 18 except for
clause (i) and (n).
Under Sub-section (6), the Rastra Bank may issue order to the concerned bank or financial
institution to remove such Chief Executive and to appoint another person being qualified to get
appoint in the post of Chief Executive in case the Chief Executive appointed pursuant to Sub-
Section (1) has not been found qualified according to this Act.
Remuneration: Remuneration and terms and conditions of service and other facilities of the Chief
Executive shall be as specified by the Board of Directors and the terms and conditions of service
and facilities shall have to be fixed at the time of his/her appointment.
Removal by BOD: The Executive Chief shall be accountable to the Board for all of his functions.
The board of director can remove the chief executive from his post if his work performance is
not satisfactory. Provided, however, that he shall be granted a reasonable opportunity to defend
himself prior to remove him from his post.
Removal by Rastra Bank: The Rastra Bank can remove the chief executive and give direction to
concerned bank or financial institution for appointment of another person, who is qualified for
appointment as chief executive as pursuant to this Act, in the position of chief executive, if he does
not seem to be qualified as pursuant to this Act.
Functions, duties and powers of the chief executive

The Chief Executive shall be accountable to the board of directors for own work. The various
functions, duties and powers to be exercised under Section 30 of the Act by the Chief Executive
shall be as follows-
 To exercise the powers delegated by the Board of Directors and to implement decisions
of the board of directors subject to the Memorandum and Articles of Association and
oversee and control the activities and transactions of the bank or financial institution,
 To prepare annual budget and action plan of the bank or financial institution and submit
before the board of directors for approval,
 To manage necessary human resources subject to the Personnel Byelaws of the bank or
financial institution,
 To implement or cause to be implemented the decisions of the general meeting,
 To operate the institution according to this Act and directives of the Rastra Bank and to
have effective internal control system and risks management,
 To submit statements, documents, decisions, etc. to be submitted by the bank or financial
institution to the Rastra Bank or any other agency on time subject to this Act, directives
of the Rastra Bank and memorandum and articles of association,

 To operate the institution with optimum protection of interests of depositors, sharehold-

ers and the institution itself,
 To apply appropriate norms for senior management subject to the policy as determined
by the board of directors.
7. Capital of Banks and Financial Institutions
General notes
The creditworthiness of the banks or financial institutions depend on the adequacy of its capital
and this being so it is essential that capital should be more clearly defined and inviolable than
is the case with an individual or partnership. Banks or financial institutions provide financial
services which requires sufficient capital to meet the financial requirements of their customers.
The expansion of economy, trade and industry is an essential for the national development which
demands the huge supply of capital investment and that is possible through the banks by lending
and other credit facilities. On the other hand, banking services are full of risk and for the balance
payment system, protection of depositor holders, maintain the investment ratio and foreign
reserve, the banks and financial institution shall have to maintain their capital, and other funds,
viz., capital fund, general reserve fund, exchange equalization fund etc.
Paid up capital
Section 41 of the Bank and Financial Institution Act, 2073 has provided the different provisions
for the capital to be maintained by each bank or financial institution. As per the Act the minimum
paid up capital of the bank or financial institutions shall be as prescribed by the Rastra Bank from
time to time.
Minimum Paid up Capital Requirement
Source: NRB

The minimum paid up capital to be maintained by the banks or financial institutions as shown above
may be changed by the Rastra Bank from time to time by considering the financial or monetary
market and need of the country. When the Rastra Bank prescribes the minimum paid up capital, it
becomes mandatory and the banks or financial institution shall have to fulfill the minimum paid up
capital so prescribed within the time frame as set by the Rastra Bank. However, the Rastra Bank may
issue order to decrease the issued and paid up capital of a bank or financial institution.
Sub-section (3) of Section 41 has fixed the limit of investment in a bank or financial institution. The
Act has provided that the Rastra Bank may make provisions that any person, firm, company or
institution may only invest up to fifteen percent of the paid up capital of any one bank or financial
institution.
Similarly, while investing in other bank or financial institution by any person, firm, company
or institution having investment in one bank or financial institution pursuant to Sub-Section
(3), investment shall have to be made subject to be less than one percent of the paid up capital
of said bank or financial institution. This limitation does not apply as to the investment by any
person, firm, company or institution in the paid up capital of any bank or financial institution to be
established in foreign joint venture, "D" class financial institution and infrastructure development
bank. Under Sub-section (5) the amount and ratio of investment shall be as prescribed by the
Rastra Bank from time to time.
Further, the percentage of the share capital that may be invested by any person or institution in
order to incorporate a bank or financial institution or invest in a bank or financial institution shall
be as prescribed by the Rastra Bank from time to time.
Capital fund
As per Sub-section (1) of Section 42, a bank or financial institution shall have to maintain a capital
fund in the ratio as prescribed by the Rastra Bank on the basis of its total assets or total risk-
weighted assets. The Rastra Bank may, while prescribing such ratio, also prescribe the ratio of
additional capital fund. If any bank or financial institution fails to maintain the capital fund in
accordance with Sub-Section (1), pursuant to Sub-section (2), the Board of Directors of such bank
or financial institution shall have to give information thereof to the Rastra Bank within one month.
The information shall also be accompanied by, inter alia, the reasons for the failure to maintain the
capital fund and the plans or programs prepared by the Board of Directors to increase the capital
fund and restore it to the position as prescribed by the Nepal Rastra Bank.
Further, on receipt of the information, if the Rastra Bank deems the plan or program submitted
by the Board of Directors reasonable, it may give directive to the concerned bank or financial
institution to implement such plans or programs; and if any amendment or alteration is to be
made in the proposed plans or programs it may give a direction to the concerned bank or financial
institution to amend or alter such plan or programs stating the reasons for such amendment or
alteration, and to implement the same.

General reserve fund

Under Sub-section (1) of Section 44, a bank or financial institution shall have to maintain a general
reserve fund. At least twenty percent of the net profits of each fiscal year shall have to be added
until the paid up capital is doubled and at least ten percent shall have to be deposited in every
fiscal year thereafter in such reserve fund. The amount credited to the reserve fund of a bank
or financial institution may not be invested or transferred to any other headings without prior
approval of the Rastra Bank.
Exchange equalization fund

A bank or financial institution carrying on foreign exchange business shall make necessary
accounts adjustments in the profit and loss account of the revaluation profits earned as a result
of fluctuations in the exchange rates of foreign currencies, other than the Indian currency, every
year at the end of the same fiscal year as per Section 45 of the Act. While making such accounts
adjustment in the profit and loss account, if revaluation earning has been made in any fiscal
year, at least twenty five per cent of such profits shall be credited to the exchange equalization
fund.
Provided, however, that in the case of revaluation profit-loss resulting from fluctuation in the
exchange rate of the Indian currency, it shall be as prescribed by the Rastra Bank.
Under Sub-section (2) of Section 45, no amount credited to the exchange equalization fund
pursuant to Sub-Section (1) shall, without the approval of the Rastra Bank, be spent or transferred
for any purpose other than the adjustment of loss resulting from the devaluation of foreign
currencies.
Declaration and distribution of dividends

A bank or financial institution shall have to maintain liquid assets as prescribed by the Rastra Bank
from time to time. A bank or financial institution shall have to obtain approval of the Rastra Bank
before declaring and distributing dividends causing adverse effects to the capital requirement as
prescribed by the Rastra Bank. By contrast under Sub-section (2) of Section 47, a bank or financial
institution shall not be allowed to declare or distribute dividends to its shareholders until it
recovers all of its preliminary expenses and the losses sustained by it until the previous year,
capital, capital fund and possible loan loss provisioning as prescribed by the Rastra bank and
for general reserve fund pursuant to Section 44 and until complete sale of shares to be allotted to
general public.

8. Banking and Financial Transactions
General notes
Banks or financial transactions are those financial activities performed by the banks or financial
institutions. These transactions are the basic and core business functions and services provided by
the banks or financial institutions. To operate the banking and financial transactions, the bank or
financial institutions must obtain approval as per the Bank and Financial Institution Act, 2063. The
Act has prescribed the banking and financial transactions to be carried on by a bank or financial
institution. Certain transactions which class A licensed institution can operate cannot be operated
by the class B, C, or D and vice-versa. Similarly, there are various acts which a bank or financial
institution is prohibited from carrying on them. Regarding banking and financial transactions, the
Rastra Bank has authority to issue directives to regulate and manage them. The Rastra Bank may
issue necessary directives with regard to procedural aspects and other matters to be followed by
the bank or financial institutions while carrying out activities A bank or financial institution may
incorporate subsidiary company with the approval from the Rastra Bank to operate the banking
and financial transactions.
Banking and financial transactions of class 'A' licensed institution
Under Sub-section (1) of Section 49 of the Act, subject to this Act, Memorandum of Association
and Articles of Association and limitation, conditions imposed and direction issued by the Rastra
Bank, the class “A” banks may carry on the following banking and financial transactions:
 To accept deposits or to mobilize deposits through various financial instruments and

make payment thereof with or without interest,
 To accept deposits, making payments, having transactions, carry on intermediary ser-
vices and transfer funds through various electronic instruments or devices,
 To lend loan including hire-purchase, leasing, housing and overdrafts,
 To lend loan on collateral of project and hypothecation and lending or causing to be
lending loans in consortium financing having divided the collateral on pari passu accord-
ing to mutual agreement entered into between one another,
 To lend loans on the guarantee of foreign bank or financial institution,
 To lend loans in the amount covered by the value of the movable or immovable assets
which has already been mortgaged to it or lending loans on remortgage in the amount
to be covered by the value of the movable or immovable assets which has already been
mortgaged to other bank or financial institution,
 To issue guarantees on behalf of its customers and getting executed necessary bonds
with such customers in consideration thereof, obtaining security, and acquire their mov-
able or immovable assets as collateral or on mortgage, or the assets of third persons

as collateral and to acquire, accept the assets holding as security and to carry on other
related transaction,
 To make available of refinance from the Rastra Bank as may be necessary or to lend or
borrow loans from other bank or financial institution,
 To supply loan or managing loans from the amount received from Government of Nepal
or other native or foreign agency for promotion of a project,
 To Write-off credits subject to the prevailing credits write-off Byelaws,
 To issue shares, debenture, debenture bond, etc. so on for the purpose of meeting the
capital fund,
 To issue, accept, pay, discount or purchase and sell letters of credit, bills of exchange,
promissory notes, cheques, travelers cheques, drafts or other financial instruments,
 To issue, accept and manage digital card or other instruments for electronic transactions
and appointing agents for carrying out acts relating thereto,
 To carry on foreign exchange business subject to the prevailing laws,
 To carry on government transactions subject to the limits, terms and conditions or direc-
tion of the Rastra Bank,
 To purchase, sell or accept treasury bills issued by Government of Nepal or bonds issued
by the Rastra Bank,
 To remit or transmit amount to different places within or outside Nepal through bills of
exchange, cheques or other financial instruments receiving remittance from abroad and
to make payment thereof,
 To take responsibility of and arranging for the sale or purchase of shares, debentures or
securities; collecting interest, dividends etc. accruing from shares, debentures or secu-
rities; remitting or transmitting such interests or dividends to places within or outside
Nepal; and arranging safe deposit vaults for customers acting as a commission agent of
its customers,
 To carry on off-balance sheet transactions,
 To disburse credits up to the amount as prescribed by the Rastra Bank against individual
or collective guarantee for the economic upliftment of the peoples from deprived sector,
low-income families, victims of natural calamities and inhabitants in any area of the
country,
 To exchange details, information or notices on debtors or customers who have obtained
credits from it or other banks or financial institutions with the Rastra Bank or any other
bank or financial institutions,
 To buy and sell of gold and silver bullions,

 To conduct, or causing to be conducted, study, research and survey work relating to the
establishment, operation and evaluation of projects, and providing training, consultancy
and other information,
 To manage properly or sell its assets of every type to come under its ownership accord-
ing to this Act and the prevailing laws,
 To give guarantee with consent of the parties involved on matters of payment to be made
or values to be recovered for performance of any act between two or more persons, sub-
ject to the prevailing laws,
 To perform other functions as may be prescribed by the Rastra Bank.
Banking and financial transactions of class 'B' licensed institution

Likewise, under Sub-section (2) of Section 49, the Class “B” financial institution in addition to
banking and financial transactions as referred to in clauses (a), (b), (c), (f), (h), (i), (j), (k), (n), (p),
(r), (s), (t), (u) and (x) of Sub-Section (1), subject to this Act, the Memorandum of Association and
Articles of Association and limitation and conditions imposed and directives issued by the Rastra
Bank may carry on the following banking and financial transactions:
 To lend credit in collateral of project, to make or cause to be made arrangements for

jointly lending credits on the basis of consortium financing in collaboration with other
bank or financial institutions in accordance with the mutual agreement entered into for
the division of the collateral (pari passu),
 To issue guarantees on behalf of its customers and to cause to be executed necessary
bonds with such customers, to acquire their movable or immovable assets as collateral or
on mortgage, or the assets of third persons as collateral in consideration thereof,
 To issue, accept, make payment, discount or purchase and sell bills of exchange, promis-
sory notes, cheques, travelers cheques, drafts,
 To accept loans in mortgage of its movable and immovable assets,
 To carry on transactions of letters of credit and remittance with prior approval of Rastra Bank,
 To take custody of and arrange for the sale or purchase of shares, debentures or securities,
to collect interest, dividends etc. accruing from shares, debentures or securities, to make ar-
rangement of safe deposit vaults for customers acting as a commission agent of its customers,
 To carry on transactions of transfer of amount within Nepal,
 To carry on, or cause to be carry on study, research and survey work relating to the
project establishment and operation as well as banking, account, property, loan evalua-
tion and to provide training, consultancy and other services and to provide information
thereof,
 To carry out other functions as may be prescribed by the Rastra Bank.

Banking and financial transactions of class 'C' licensed institution

Similarly, under Sub-section (3), the Class “C” financial institution in addition to the financial
transactions referred to in clauses (a), (b), (f), (h), (j), (k), (p), (r), (t) (u) and (x) of Sub-Section (1),
subject to this Act and the Memorandum and Articles of Association, the limitation and conditions
imposed and directives issued by the Rastra Bank may carry on the following financial transactions:
 To disburse credit for hire-purchase, leasing, housing loans,

 To make arrangements for jointly disbursing credits on the basis of consortium financing
in collaboration with other bank or financial institutions in accordance with the mutual
agreement entered into for the division of the collateral pari passu,
 To accept loans having mortgaged its movable and immovable assets,
 To properly manage its assets, to sell or rent or lease them out,
 To issue, accept, make payment, discount or purchase and sell bills of exchange, promis-
sory notes, cheques, travelers cheques or other financial instruments,
 To carry on the transaction of foreign currencies by obtaining approval from the Rastra
Bank,
 To disburse installment or hire-purchase loan to any person, firm, company or institu-
tion for motor vehicles, machinery, tools, equipment, durable household goods or simi-
lar other movable property,
 To provide leasing finance to any person, firm, company or institution to hire vehicle,
machines, tools or instruments, household durable goods, or similar types of movable
assets or to accept or provide such goods on hire,
 To issue guarantees on behalf of its customers and to cause to be executed necessary
bonds with such customers, to acquire their movable or immovable assets as collateral or
on mortgage, or the assets of third persons as collateral in consideration thereof,
 To sell off or leasing out whole or part of its assets,
 To prescribe prices of goods on consent with the finance company and seller in case any
goods procured has to be sold to other purchaser on current price or deferred price.
 To carry out other functions as may be prescribed by the Rastra Bank.
Banking and financial transactions of class 'D' licensed institution

Further, the Class “D” financial institution, subject to this Act, Memorandum of Association and
Articles of Association and limitation, conditions imposed and direction issued by the Rastra Bank
may carry on the following banking and financial transactions:
 To Disburse micro-credit, with or without any movable or immovable property as the

collateral or security, for operating any micro-enterprise prescribed by the Rastra Bank

to any project, any group or a member thereof who have regularly saved for the period
and maintained the prescribed saving.
 To accept loans or grants from any bank or financial institution or native or foreign orga-
nization or institution, and use such loans or grants for the supply of micro-credit or for
making the same effective, Provided that approval of the Rastra Bank shall be obtained
prior to obtaining loans or grants from any foreign organization.
 To evaluate the schemes for which micro-credits have been requested and determining
whether or not they are feasible prior to disbursing micro-credits.
 To provide services and consultation to groups with regard to mobilization of micro
finance.
 To carry out necessary actions for recovery of the micro credits on time.
 To accept deposits and refund such deposits subject to the limit prescribed by the Rastra
Bank by getting approval of the Rastra Bank.
 To issue shares, debentures, bonds, etc. for the purpose of meeting the capital fund re-
quirements,
 To exchange information or notices on debtors or customers who have obtained credit or
any kind of facility from it and other bank or financial institutions with the Rastra Bank
or any other bank or financial institutions particulars thereof.
 To carry out such other functions as may be prescribed by the Rastra Bank.
Financial transactions of Infrastructure Development Bank

Under Sub-section (5) of Section 49 of the Act, the infrastructure development banks may carry on
the following transactions subject to this Act, Memorandum of Association, Articles of Association,
and limits, conditions and directives of the Rastra Bank:
 To Disburse loans and financing in shares in projects relating to infrastructure develop-

ment.
 To Finance in securities of the companies operating projects relating to infrastructure
development.
 To open letters of credits and issue guarantees for purchase, sale or supply or installation
of machineries, equipment and tools required for construction and operation of projects
relating to infrastructure development.
 To issue financial instruments in national or foreign currencies with approval of the Ras-
tra Bank for collecting fund required for investment in projects concerning infrastructure
development and to acquire loan to that effect.
 To mobilize resources by accepting long term deposits or issuing debenture.
 To carry on leasing transactions with approval of the Rastra Bank.

 To provide loans and facilities for projects by accepting guarantee of foreign bank or
financial institutions.
 To carry out other acts as prescribed by the Rastra Bank.
Acts not to be carried out by Bank or Financial Institution

Pursuant to Sub-section (1) of Section 50 of the Act, a bank or financial institution shall not have to
carry out or cause to be carried out any of the following acts:
 To purchase and sell goods with an objective of business and to purchase immovable
land and to construct building except those are necessary for its own purposes.
 To disburse credit against security of one’s own shares.
 To provide any type of credit facility to the Directors, person having subscribed one
percent or more than that of the paid up capital, Chief Executive, or a member of family
of such persons, or the firm, company or organization having significant ownership or
financial interest in any person, firm, company or organization having authority to nom-
inate or appoint Director or managing agent.
 To provide any type of credit or facility exceeding per customer limit prescribed by the
Rastra Bank from its capital fund to the single customer, company, companies or part-
nership firms of the same group and relevant person.
 To provide any type of credits to any person, firm, company or institution on the guar-
antee of promoters, Directors, or Chief Executive.
 To make investment in the securities of the bank or financial institutions of class “A”, “B”
and “C”, classified by the Rastra Bank.
 To invest the amount more than the limit as prescribed by the Rastra Bank in share cap-
ital of other institution.
 To create any type of monopoly or other type of restrictive practices in banking and fi-
nancial transactions in collusion of banks or financial institutions.
 To commit in any act to create an artificial hurdles in competitive environment in finan-
cial sectors with an intention to get undue advantage.
 To carry out any other functions prescribed by the Rastra Bank as the functions not be
carried out by a bank or financial institutions.
Exceptions: Sub-section (2) provides that whatsoever stated in this Act, there shall be no restriction
on the bank or financial institution to carry on the following acts:
 To carry on own banking and financial transaction.

 To provide housing or other facilities for its own employees according to prevailing Per-
sonnel Byelaws of bank or financial institution.

 To disburse any credit against the collateral security of the bond issued by Government
of Nepal or Rastra Bank, amount deposited in any account or fixed deposits receipts.
 To make available credit and credit card facilities up to the prescribed limit to promoters,
Directors, Chief Executive or shareholders having subscribed more than one percent of
shares against the collateral security of their own fixed deposit receipts, and the bonds
issued by Government of Nepal or the Rastra Bank.
9. Lending and Recovery of Credits
General notes
Collection of deposit and lending credit is the major acts of the banks or financial institutions. By
way of lending and creating other credit facilities, the banks or financial institutions facilitates
financial management through the supply of money in bulk required to the trade and industrial
sector. In such a case the banks and financial institutions play an intermediary role in between the
depositors and creditors. As the banks are major part of money supply, they can play vital role
for the balanced economic development of a country. The profit of a bank or financial institution
heavily depends upon the successful management between deposits and lending credits as the
lending poses numbers of threats in recovery of it. Therefore, the banks have to lend or invest or
provide credits after due care and thorough study and micro analysis of the proposed business
or industry hence its recovery becomes possible in future. This is possible if the banks or financial
institutions have taken due diligence and caution at the time of lending and involved continuously
in monitoring and evaluating the project for that the lending was made. If there is any misuse of
the credits and possibility of default, the bank should take the corrective measures and finally,
by selling the property taken as security, the banks or financial institution following the rules can
recover the lending so as to safeguard interests of its own and of the depositors. The Rastra Bank
may from time to time issue directives and guidelines to the banks and financial institution for the
proper and balanced lending and effective recovery of the lending.
Lending or disbursement of credits

A general duty has been imposed by the Bank and Financial Institution Act, 2073 under Section 55
that a bank or financial institution shall have to disburse credit only after disclosing the purpose
subject to the directives issued by the Rastra Bank from time to time and the credit policy as
determined by the Board of Directors. While disbursing credit, a bank or financial institution shall
have to obtain any movable or immovable property acceptable to it as a collateral security or an
appropriate guarantee so as to safeguard interests of its own and of the depositors. As per Sub-
section (3) of Section 55, the bank or financial institution shall have to write to the concerned office
to withhold any property which it has taken up as collateral security against a credit pursuant
to this Section in the name of the bank or financial institution so that such property may not be
registered in name of, or transferred to, any person in any manner whatsoever.

If any directions have been given by the Rastra Bank to disburse credits for such class and in such
area as prioritized for the economic upliftment of the persons belonging to a low-income group
and indigent class and of the inhabitants residing in any specific geographical region to the banks
or financial institutions, they have to disburse credits according to the direction.
Under Sub-section (7), the bank or financial institution shall have to collect necessary details
of identity documents of the borrower, guarantor or, if the borrower is a firm, company or an
institution, the directors, the shareholders having subscribed the shares in numbers more than the
percent prescribed by the Rasta Bank or partners or owners in any manner thereof; the members
of families of all of the above persons and if any of them is a beneficiary of any institution, and
evidence of identity that may be required while taking legal actions. While disbursing any credit
by a bank or financial institution to anyone, the regular installment of the credit, interests, penal
interests and repayment schedule shall have to be clearly specified in deed or contract and
information thereof must be given to the borrower and guarantor.
Pursuant to Sub-section (9), a borrower may request for details of the payable or paid principal,
interests, penal interests, and other fees and the deed or contract executed in the course of availing
the credit and the bank or financial institution shall have to make such details available. Moreover,
the terms and conditions, repayment schedule, and interests of the credits borrowed by the
borrower shall be according to the deeds or agreement executed between the bank or financial
institution and the borrower. Further, the banks or financial institutions have to carry out regular
monitoring by preparing a monitoring schedule as to whether or not the borrower has utilized the
credit for the purpose for which it has been disbursed.
Recovery of credit
Recovery of credit disbursed by the banks or financial institutions is the tough job as the recovery
of credit is affected by the numerous conditions or circumstances. Under Sub-section (1) of Section
57 the Act has given full authority to the bank or financial institution to recover its principal and
interests having sold by auction the assets taken or put as mortgaged by the borrower in the
name of the bank or financial institution, if the borrower fails to abide by the terms of the credit
as mentioned in the deed or agreement or any terms and covenants made with a bank or financial
institution or fails to repay credit to the bank or financial institution within the time-limit stipulated
in the deed, or if the bank or financial institution is found, through the monitoring conducted
pursuant to Section 56, that it has misused the credit by using it for the purpose other than the
purpose for which it was disbursed whatsoever may be contained in the deed of loan or in the
prevailing Nepal law. Similarly, in case the borrower gives off the title in any manner whatsoever
over the assets mortgaged collateral security or the value of assets mortgaged as collateral security
to the bank or financial institution is decreased, the bank or financial institution may ask such
borrower to place more assets as collateral security within the time limit specified by it and the
borrower shall have to place additional collateral security within the time-limit prescribed by the
bank or financial institution.

In addition to this, under Sub-section (3) the bank or financial institution may recover its principal
and interests from the movable or immovable assets under the ownership or title of the borrower
according to the prevailing laws when the borrower fails to place more assets as collateral within
the time limit or the principal and interests could not be recovered from the collateral security so
mortgaged.
Refund of surplus amount: In case any amount remains after deducting the amount realized from
auction sale or other provisions under this Section from the amount of expenses and the amount
of principal and interests of the bank or financial institution, such remaining amount shall have to
be refunded to the concerned borrower.
Transfer of title: Pursuant to Sub-section (5), the bank or financial institution shall write to the
concerned office to register or transfer the ownership of the assets so auctioned as per this Section
in the name of the person accepting the auction in accordance with the prevailing law. In case
the bank or financial institution writes for registering or transferring the ownership of the assets
the concerned office shall have to register or transfer the ownership of the assets as requested
irrespective of anything contained in the prevailing laws.
In case no one accepts the movable or immovable assets while carrying out auction by the bank
or financial institution under this Section, the bank or financial institution shall take into its
ownership such assets as prescribed. The bank or financial institution shall write to the concerned
office to register or transfer the ownership of the assets it has taken into its ownership. In case
such request is received, the concerned office shall, notwithstanding anything contained in the
prevailing laws, register or transfer the ownership of the assets in the name of the concerned bank
Black listing and its effects: Sub-section (11) of Section 57 has provided the provision of blacklisting
of borrower in default. In case a borrower does not repay the credit from a bank or financial
institution and the interests accrued thereto and penal interests within the time limit stipulated
in the deed of the credit or the contract, the bank or financial institution shall have to write to the
Credit Information Bureau Limited to blacklist such borrower according to the prevailing laws.
Other action against the defaulter: In case the credit could not be recovered even after taking
actions against the borrower under this Section, the bank or financial institution may, for the
purpose of recovering such credit amount, take actions for recovery of the credits according to
the prevailing laws including freezing of any assets of the borrower located in a foreign country.
Similarly, in case the credit could not be recovered even after taking all actions under this Section,
the concerned bank or financial institution may request the Rastra Bank for making necessary
provisions to withhold or confiscate the passport/s of the concerned borrowers and to deprive the
concerned borrower from availing the services to be made available by the state. Upon receipt of
such request, Rastra Bank shall have to forward the request to Government of Nepal for necessary
actions along with its opinion.

10. Accounts, Records, Details and Reporting
General notes
Accounting records and details are most important whereby all the necessary information of the
affairs and business of the company are required to be given. Accounts is a means of publicizing
information and hence on the annual accounts through which that publicity is achieved. Every
company including bank or financial institution should keep records sufficient to show and
explain the company's transactions, to disclose, with reasonable accuracy at any time, its financial
position and to enable its directors to ensure that any balance sheet and profit and loss account will
comply with the provisions of the Act. The record must contain day to day entries of all money
received or expended and of the matters to which that related and a record of the company's assets
and liabilities, so far as it concerns the members of the company.
Publicity of the affairs of company and its importance: The general issue is how far the law makes
the controllers of companies accountable to those who have invested in them as shareholders or
deposited their money as depositors or other stakeholders. There are three main legal techniques
to promote such accountability.
 The provisions to the public of full, accurate and verified information about the compa-
ny. The aim is to put these who are about to invest in the company in a position to assess
the company's business before they commit themselves and to enable those who have
invested to keep track of the performance of the company.
 The controllers of companies may be required to report to those who have invested in the
company to submit themselves to periodic re-election and to seek shareholders' approval
for certain types of corporate decision.
 The law may seek to secure the accountability of controllers to the shareholders, cred-
itors and perhaps others, by imposing legal duties on the directors, notably fiduciary
duties to promote the interests of the company.
The fundamental principle underlying the banking laws is the disclosure of full, accurate and
verified information about the banks or financial institutions. This publicity is mainly secured in
different ways-
 By provisions for registration at Companies House with prior approval from the Rastra
Bank and the licensing thereof.
 By compulsory maintenance of various registers and the like by the company.
 By compulsory disclosure of the financial position in the company's published accounts
and by attempting to ensure their accuracy through a professional auditor.
 By compulsory disclosure of information on all business communication.

 By informing of all major developments to the Security Exchange which may publish the
information.
 By appointing inspector by the Nepal Rastra Bank to investigate and report on the affairs
of a company is that the company's members have not been given sufficient detail to
enable the other party to be identified.
Accounts of bank and financial institutions

Every bank or financial institution shall have to maintain its accounts, books, records precisely and
correctly reflecting the exact status of transactions of the bank or financial institution according to
recognized principle of double entry book keeping system. Unless otherwise approved by the Rastra
Bank, the accounts and other statements to be maintained according to the Act shall have to be maintained
at its central office. Under Sub-section (3) of Section 58, the licensed branch or office of a foreign bank or
financial institution shall have to prepare and maintain financial statements including separate accounts,
books and records of its assets, liabilities, income and expenses and profit and loss accounts.
Balance-sheet, Profit and Loss Accounts

As per Sub-section (1) of Section 59 of the Act, the banks or financial institutions shall have to
prepare and maintain their balance-sheet, profit and loss account and cash flow statement and
other statements in the formats as prescribed by the Rastra Bank. The format, contents, methods of
certification and details of the matters to be made public in the balance-sheet and profit and loss
accounts to be prepared by bank or financial institutions under this Chapter shall be as prescribed
or directed by the Rastra Bank.
After preparing these documents, the concerned bank or financial institution under Sub-section
(2) shall have to submit balance-sheet, profit and loss account to the Rastra Bank within three
months of the completion of every fiscal year and details of such balance-sheet and profit and
loss account shall have to be published for information of general public as prescribed by the
Rastra Bank. A bank or financial institution shall have to publish the audited balance-sheet of
every Fiscal Year and profit and loss accounts of the transactions within and outside Nepal as
in the prescribed formats within nine months of next fiscal year. If a bank or financial institution
is having its subsidiary company, the balance-sheet and profit and loss accounts and status of
transaction of business of the subsidiary company and parent company must be separately stated
and stated in integrated manner as well.
According to Sub-section (5), if the Rastra Bank has suspicion that any details publicized by a bank
or financial institution is erroneous, incomplete, misleading or false, the Rastra Bank may require
by a notification in writing to the concerned bank or financial institution to do as follows:-
 To publicize the matters escaped or not stated.

 To re-publicize the details which are erroneous, incomplete, misleading or false.
 To publish by making correction of the matters required by directives of the Rastra Bank.

Audit Committee and its functions, duties and powers

Formation: Under Sub-section (1) of Section 60 of the Act, the Board of Directors of a bank or
financial institution shall have to form an Audit Committee comprising of three members under
the headship of one non-executive Director. The Chairperson of the bank or financial institution,
convener/head of the sub-committee and the Chief Executive shall not be allowed to act in the
audit committee.
Further, the members of the committee shall not be entitled to be engaged in collecting deposits,
disbursing credits, investing in securities, and making decisions in any daily transaction that
requires for making expenses out of the approved budget. Except in cases of meeting called by the
Board of Directors, meeting of the Audit Committee shall normally be held once in three months
and the procedures of the meeting of the Audit Committee shall be as prescribed the committee
itself.
Functions, duties and powers: The functions, duties and powers of the Audit Committee are
provided under Section 61 of the Act. They are as follows:
 To ascertain whether or not the accounts, budget and internal auditing procedures, inter-
nal control mechanism of bank and financial institution are appropriate and if they are
appropriate, to carry out monitoring and supervision, whether or not they are complied
with,
 To cause to carry out internal auditing of the accounts and books of records of the bank
or financial institution and to ascertain that whether or not such documents are prepared
according to the prevailing law, regulation and directives of the Rastra Bank,
 To conduct or to cause to conduct auditing of management and operation, managerial
and work performance of the bank or financial institution to be assured that the laws in
force in the bank or financial institution are fully complied with,
 To carryout monitoring that whether or not actions are being taken according to the Act
or Rules enacted under the Act, Byelaws, policies or given directives in the bank or finan-
cial institution and to submit the report thereof to the Board of Directors,
 To recommend names of three auditors for appointment of the external auditor,
 To furnish opinion on the subjects as required by the Board of Directors.
Auditing and auditor

The Bank and Financial Institution Act, 2073 has made a compulsory provision under Sub-section
(1) of Section 62, every bank or financial institution shall, within four months from the date of
completion of the Fiscal Year, have to prepare the balance sheet, profit and loss account, cash flow
statement and other financial statements in the formats and according to the methods specified
by the Rastra Bank and get the external audit conducted. Such financial statement shall have to
be signed by at least two Directors, Chief Executive and the auditor. In case the bank or financial

institution not completing the auditing within the period referred to in Sub-Section (1) makes a
request for extension of time for auditing stating reasonable cause, the Rastra Bank may extend the
period up to two months. The external auditor shall have to submit the report of auditing to the
concerned bank or financial institution and the Rastra Bank as well.
Appointment and remuneration of auditor: Section 63

The general meeting of a bank or financial institution shall appoint an auditor. The general meeting
shall not appoint the same auditor for more than three consecutive times. If the post of auditor
falls vacant for any reason whatsoever, the board of directors shall appoint another Auditor for
the remaining period. While appointing an auditor, the general meeting shall appoint a chartered
accountant in the case of a licensed bank or financial institution of Class “A” or “B” or “C”, and a
Chartered Accountant or a Registered Auditor in the case of a bank or licensed bank or financial
institution of Class “D”. In case any bank or financial institution does not or could not appoint
auditor pursuant to Sub-Section (1), the Rastra Bank may appoint the auditor.
Remuneration: The remuneration of an auditor of a bank or financial institution shall be as

determined by the Rastra Bank in case the auditor has been appointed by the Rastra Bank; as
determined by the general meeting in case the meeting has appointed and as determined by the
board of directors, in case the board has appointed the auditor.
Disqualifications of auditor
Pursuant to Section 64 of the Act has provided the various persons who are disqualified to be
appointed as an auditor of the banks or financial institutions. If any person appointed as auditor
of bank or financial institution is found to be disqualified, his/her appointment shall be deemed
to have been ipso facto invalid. The following persons or any firm, company or institution in which
such person is a promoter or partner shall not be eligible to be appointed as an auditor of a bank
or financial institution:
 A promoter, Director, Chief Executive of a bank or financial institution or his\her family

member,
 An official, employee or internal auditor of the bank or financial institution,
 A person working as a partner of any promoter, Director or employee of the bank or
financial institution,
 A borrower of the bank or financial institution, a person with significant ownership or
relevant person or person having financial interests,
 A person who has been declared bankrupt in Nepal or abroad,
 A person, firm, company or institution having subscribed one percent or more shares of
the BFI,

 A person, who has been punished in any criminal offense by the court and a period of
five years has not been lapsed after he\she has served the punishment,
 A person, disqualified to become an auditor according to prevailing laws.
Functions, duties and powers of auditor

The functions, duties and powers of the auditor under Sub-section (1) of Section 66 of the Act are
as follows:
 To conduct auditing of accounts and financial statements.

 To prepare audit report by including audited accounts, balance-sheet, and profit and
loss accounts and to produce it before the Board of Directors of the bank or financial
institution.
 If it is found that there are irregularities committed in the activities of the bank or fi-
nancial institution or works are not being carried out in appropriate manner and such
matters will cause harms or loss to the bank or financial institution, to inform the same
to the Board of Directors.
 To inform the Rastra Bank, if any of the following situation is like to emerge-
 Violation of the terms and conditions as prescribed by the Rastra Bank during issu-
ance of the license or this Act or Rules, Byelaws, Directives framed under this Act.
 To cause adverse effect on regular activities of the bank or financial institution.
 To prohibit the auditor to submit the audit report or asking to prepare false audit
report.
 To inspect all documents concerning accounts including ledger, books, account, voucher,
and goods at any time and the auditor may seek answers or explanations from a Director
or official of a bank or financial institution on matters required by him/her in the course
of performing his/her duties and carrying out his/her functions in appropriate manner.
Matters to be included in the audit report: Under Sub-section (3) of Section 66 of the Act, the
auditor shall have to include the following matters in his/her report clearly:
 Whether or not replies to the queries as per the demand were provided.
 Whether or not the balance sheet, off-balance sheet transactions, profit and loss account,
cash flow statement and other financial statements, as well, have been prepared in such
format and in accordance with such procedures as prescribed by the Rastra Bank, and
whether or not they actually matched with the accounts, records, books and ledgers
maintained by the bank and financial institution.
 Whether or not the accounts, records, books and ledgers have been maintained accurate-
ly in accordance with prevailing laws.

 Whether or not any official of the bank or financial institution has committed any act con-
trary to the prevailing laws or committed any irregularity or caused any loss or damage
to the bank or financial institution.
 Whether or not credits have been written off as per the Credit Write-off Byelaws or di-
rectives of the Rastra Bank.
 Whether or not the transactions of the bank or financial institution have been carried on
in a satisfactory manner as prescribed by the Rastra Bank.
 Matters to be informed to the shareholders.
 Matters prescribed by the prevailing laws and other matters as prescribed by the Rastra
Bank to be mentioned in audit report by the auditor.
 Other suggestions which the auditor deems necessary to be furnished.
Additional functions: When the audit report has been received, the Rastra Bank may order the
auditor of the bank or financial institution to carry out the following additional functions:
 To submit additional information as required by the Rastra Bank concerning auditing.

 To make more expand the areas of auditing of the bank or financial institution or its
subsidiary company.
 To carry out other tests as recommended to the bank or financial institution or as re-
quired by the Rastra Bank in any particular subject.
Test Questions
1. What is bank? Explain its features.
2. State the various functions of a bank.
3. What is meant by banking regulation? Elaborate the need of banking regulations.
4. Explain the different aspects of banking regulation.
5. What are the instruments and requirements of banking regulations?
6. State the objectives of banking regulation.
7. Explain the significance of banking regulation.
8. State the legal provisions for the incorporation of a bank and financial institutions.
9. List out the documents required for approval to incorporate a bank and financial institution.
10. When can the NRB refuse to give prior approval? Explain.

11. State the legal provisions for the incorporation of bank and financial institutions with
foreign investments.
12. What documents are to be attached with the application for license of a bank and financial
institutions?
13. State the grounds on which the NRB may refuse to issue license.
14. When a lower class bank and financial institution can be converted in to a higher class bank
and financial institution?
15. State the legal provisions regarding the operation of branch of a foreign bank in Nepal.
16. What are the objectives and importance of corporate reporting?
17. State the legal provisions for the formation of Board of Director of a bank and financial
institution.
18. Who can be appointed as a director? State the qualifications of Directors.
19. State the circumstances where a director cannot remain in the post of director by referring
the concerned legal provisions.
20. What are the disqualifications of the directors of a bank and financial institution?
21. State the legal provisions under the Bank and Financial Institution Act, 2073 regarding the
meetings of the Board of Directors.
22. Highlight the functions, duties and powers of the Board of Directors.
23. What are the accountabilities and responsibilities of Directors of a bank and financial
institution under the Bank and Financial Institution Act, 2073?
24. State the details of directors to be collected under the Bank and Financial Institution Act,
2073.
25. State the legal provisions regarding the appointment and qualifications of Chief Executive
of a bank and financial institution.
26. What are the functions, duties and powers of the Chief Executive?
27. Stat the capital requirement of bank and financial institutions.
28. Explain the different funds to be maintained by the bank and financial institutions under the
Bank and Financial Institution Act, 2073.
29. List out the functions to be carried out by the Class A licensed institutions.
30. Stat the banking and financial transactions to be carried out by the Class B licensed
institutions.

31. What are the financial transactions to be carried on by the Class C licensed institutions?
32. State the financial transactions to be carried on by the Class D licensed institutions.
33. What are the financial transaction that the infrastructure development bank may carry on
under the Bank and Financial Institution Act, 2073?
34. What acts cannot be carried on by the bank and financial institutions under the Bank and
Financial Institution Act, 2073?
35. Explain the legal provisions as to the lending or disbursement of credits by the bank and
financial institutions.
36. State the authorities of bank and financial institutions regarding the recovery of credit
provided by them against the defaulters.
37. Explain the legal provisions of accounts of bank and financial institutions.
38. Write short not on balance sheet and profit and loss accounts.
39. State the functions, duties and powers of the audit committee of a bank and financial
institution.
40. How an auditor is appointed in the bank and financial institutions?
41. State the disqualifications of an auditor.
42. What are the functions, duties and powers of an auditor under the Bank and Financial
Institution Act, 2073?
43. List out the matters to be included in the audit report.
44. Write short note on Audit Committee.
45. What is the importance of publicity of the affairs of the bank and financial institutions?
46. State the legal provisions on distribution of dividends by the bank and financial institutions.
47. Write short not on the Exchange Equalization Fund of the bank and financial institutions.
48. Who is independent director? State his qualifications?
49. State the objectives of the Bank and Financial Institution Act, 2073.
50. Outline the history of the banks and banking laws in Nepal.

CHAPER 4 : NEPAL RASTRA BANK ACT, 2058
CHAPTER 4
NEPAL RASTRA BANK ACT, 2058

1. Meaning and Concept of Central Banks
General notes
global) economy holds on banks, it is important for regulatory agencies to maintain control
over the standardized practices of these institutions. The financial regulations are laid out for
the purpose of creating a fair and customer-friendly environment in the financial market of a
particular country, which is conducive for economic growth. Some of the examples of financial
regulatory bodies are the Federal Reserve Bank (United States), Reserve Bank of India (RBI), Nepal
Rastra Bank (Nepal), the Financial Services Authority (FSA) in the United Kingdom and many
others. For the promotion and regulation of banking sector to make them capable, competitive and
accountable the Bank and Financial Institution Act, 2073 has been enforced and the provisions are
made applicable from the beginning of incorporation of banks and financial institutions, licensing
provisions and banking operation regulation as well as their obligation to comply with the banking
rules and regulations. Under the existing law the NRB is authorized to regulate the functions and
activities of banking companies. It can issue directives on credit control and interest rates and is
also authorized to inspect and supervise the banking companies.
Central Bank
It is a bank of the banks. It regulates the financial sector, supervises their activities, manages and
produces the national currency, formulates and implements foreign reserve policy and formulates
and implements the monetary policy of the country. Central bank neither maintains accounts of
public nor does it give loans to them. It focuses on the monetary stability of the country and not on
profit. In fact, it is the financial advisor of the government.
The concept of central banking is the product of 20th century. Central bank as a bank was first
recognised by US Congress through the passing of the Glass-Owen Bill on 23 December 1913.
This law established US Federal Reserve as central bank of the country. The Brussels Conference
of 1920 passed a principle for a central bank for every nation. Following these principles different
central banks started to be established. The oldest bank that performed some of the duties of a
central bank was the Bank of Sweden that was opened in 1668 and this was followed by the Bank
of England established in 1694 by a businessman in the City of London at the request of the English
Government to help pay for war. The other European and Asian countries followed this practice.
In Nepal, the Nepal Rastra Bank was established as a central bank in 14th Baisakh, 2013 BS under
the provision of the Nepal Rastra Bank Act, 2012 BS. Before this, Nepal Bank Limited was doing
both central banking and commercial banking functions. From the period of its establishment, NRB
is doing central banking business in the country. Nepal Rastra Bank Act, 2058 BS has substituted
the old Act and modified the objectives and functions of NRB as per the change of time. The
objectives of the Act are intended to establish NRB as a policy focused central bank.

Establishment of the Bank: Sub-section (1) of Section 3 of the Nepal Rastra Bank Act, 2058 has
provided that there shall be a Central Bank established in the name as NEPAL RASTRA BANK
in order to carry out the functions of Central Bank. Further, the Bank after its establishment
shall be an autonomous and corporate body with perpetual succession. There shall be a separate
seal for transaction of business of the Bank. The Bank may as like a person, subject to this Act,
acquire, utilize, retain, sell and otherwise dispose of or manage movable and immovable property.
Similarly, the Bank may sue in its name and the Bank may also be sued in the same name.
Objectives and functions, duties and powers of NRB

Objectives of NRB: Section 4 of the Act reads the objectives of NRB as follows:
 To formulate necessary monetary and foreign exchange policies in order to maintain

the stability of price and balance of payment for economic stability and sustainable
development of economy, and manage it.
 To increase the access of the financial service and increase the public confidence towards
the banking and financial system by maintaining stability of the banking and financial
sectors.
 To develop a secure, healthy and efficient system of payment
Functions, Duties and Powers of NRB: To achieve these objectives the following functions, duties
and powers are vested upon the NRB pursuant to Section 5 of the Act:
 Issuing bank notes and coins

 Formation and implementation of monetary policy
 Formation and implementation of foreign exchange policy
 Determining the system of foreign exchange rate
 Management and operation of foreign exchange reserve
 Issuing the license for financial transaction to commercial banks and financial institutions
and making regulation, inspection, supervision and follow up for such transaction
 Working as a banker of commercial banks and financial institution and lender of last
resort and advisor and financial agent of Government of Nepal.
 Establishing and maintaining the system of payment, clearing and settlement and their
regulation.
 Operation of open market transaction through necessary instruments or liquidity
management.
 Other functions to achieve the objectives of the Act.

Coordination with Public Bodies: The Bank may, in order to achieve its objectives, make
necessary coordination with public bodies or their agencies or their organs.
International Cooperation and Relationship: The Bank shall represent Nepal in international
organizations and associations on the matters within the jurisdiction of working areas of the Bank
such as monetary policy, foreign exchange policy, and the balance of payment, bank supervision
and other related matters.
Operation of Accounts: The Bank may open and operate account for Government of Nepal and
other governmental bodies, commercial banks and financial institutions, public corporations,
foreign diplomatic missions, foreign central banks, foreign banks and international organization,
associations.
Functions not to be Carried out by the Bank: The Act has provided the negative list of those acts
which the NRB cannot perform. Pursuant to Sub-section (1) of Section 7 of the Act, the Bank, in
general, shall not carry out the following functions:-
 Providing any loan, accepting any type of deposit or making any type of financial gift.
 Purchasing shares of any commercial bank, financial institution, public corporation or a
company or acquiring any type of proprietary right in any financial, commercial, agricul-
tural, industrial or other institution.
 Carrying out any type trade.
 Acquiring right over movable and immovable property by way of purchase, lease or in
any manner whatsoever. Provided that the Bank may acquire such property as required
for carrying out its function or for achieving its objectives.
However, the Bank may carry out the following functions:
 To provide loan to and invest in the shares of the “institutions which carry out the func-
tions helpful in carrying out the function of the Bank or in attaining its objectives”, not
exceeding ten percent of the total capital of such institutions.
 To provide loan to its own employees.
Explanation:
For the purpose of this Clause, "institutions which carry out the functions which are helpful
in carrying out the functions of the Bank or in attaining its objectives" means any institutions,
companies which are exclusively engaged in evaluating, managing, protecting the security,
restructuring and transferring the security of commercial banks or of financial institutions, carry
out the function of credit rating, exchange of credit information, process and transmit data, print
financial instruments, clearing payments, liquidate property, produce bank notes, coins, act as
trustee and any other institution or companies established for carrying out similar function as
prescribed by the Bank.

Privileges and Facilities: Pursuant to Section 8 of the Act, the Bank shall be entitled to the following
privileges and facilities notwithstanding anything contained in the prevailing laws: -
 Exemption from all types of taxes, fees and charges on the incomes, capital transactions,
houses, land, assets etc.
 No requirement for the payment of registration fee for registration of the deeds of loan
or refinance to be given by the Bank.
 No requirement of revenue stamps on any of the documents relating to the Bank.
There would be no tax, fee, charge, duty on the export and import of bank notes, coins, gold,
silver and the paper, metal, chemicals, and other materials to be used for printing bank notes and
minting coins.
Prior Right of Nepal Rastra Bank: For the purpose of recovering any loans, which the Bank has
given to any borrower or any other type of claim of the Bank against any borrower, the Bank shall
have prior right on following security for the purpose of recovering such loans:-
a) Cash deposited in an account in the name of such borrower at the Bank or in any
commercial bank or financial institution; or
b) Against any other movable and immovable property owned by the borrower.
The Bank shall take into custody the cash or movable or immovable property having its prior right
and sell such property to recover its loan.
2. Formation and Functions, Duties and Powers of Board
General notes
The board of NRB is the supreme authority to frame various policies to regulate the various aspects
of banking and monitory business. It provides leadership and strategic guidance and objective
judgment and exercises control over the acts of bank and financial institution while remaining at
all times accountable to their act. The measure of the Board is not simply whether it fulfills its legal
requirements but more importantly, the Board’s attitude and the manner translates its awareness
and understanding of its responsibilities. An effective corporate governance system is one, which
allows the Board to perform these dual functions effectively. The Board of directors of the NRB,
thus, directs and controls the management of a company and is accountable to the shareholders.
The Boards direct the NRB by formulating and reviewing its policies, strategies, major plans of
action, risk policy and business plans, setting performance objectives, monitoring implementation
and corporate performance, and overseeing major capital expenditures taking into account the
interests of all stakeholders of the banking and financial transactions. Further, it approves the
Rules and Bye-laws of the Bank and frames policies applicable to the operation and management of

the Bank. By framing necessary policies for causing the supervision and inspection of commercial
banks and financial institutions and banking and financial arrangement, it controls the company
and its management by laying down the code of conduct, overseeing the process of disclosure
and communications, evaluating the performance management, Governor and other directors and
providing checks and balances to reduce potential conflict among the banking companies and
abuse in related party transactions.
Formation of the board of directors

Section 14 of the Act has provided the provisions for the formation of board of directors and
appointment of directors of the Nepal Rastra Bank. Under Sub-section (1) of Section 14, NRB shall
have a board of directors comprising of seven members. The Board of Directors in the NRB shall
consist of the following members:
S. No. Person Number Designation

1. Governor 1 Chairperson
2. Secretary, Ministry of Finance 1 Member
3. Deputy Governors 2 Member
4. Directors appointed by the Government of Nepal from 3 Member
amongst the persons renowned in the fields of Econom-
ic, Monitory, Banking, Finance and Commercial Law
Appointment of Governor: The Government of Nepal, the Council of Ministers shall appoint
Governor on the basis of the recommendation of the Recommendation Committee formed as per
the Act under the chairmanship of Finance Minister of the Government of Nepal.
Government of Nepal, the Council of Ministers shall, for the appointment of Governor, form a
Recommendation Committee as follows:-
(a) Minister of Finance - Chairperson
(b) One person from among the former Governors - Member
(c) One person designated by Government of Nepal from amongst the persons renowned in
the fields of Economic, Monitory, Banking, Finance and Commercial Law - Member
The recommendation committee shall recommend to Government of Nepal, the Council of

Ministers the names of 3 persons renowned in the field of economic, monetary, banking, finance,
commerce, management, commercial law and from among the Deputy Governors. Government
of Nepal, the Council of Ministers shall, out of the names recommended, appoint one person to
the Office of Governor.
Appointment of Deputy Governor: Government of Nepal, the Council of Ministers on

recommendation of Governor shall appoint Deputy Governor. The Governor shall, while making
recommendation for appointment of Deputy Governor, recommend names, double in number

of the post falling vacant from among the special class officers of NRB on the basis of their
performance and capability. Person appointed in the post of Deputy Governor under this Section
shall be deemed to have been automatically retired from the service of Nepal Rastra Bank.
Appointment, Tenure and Remuneration of Directors: Government of Nepal, the Council

of Ministers appoints Director. Directors should be appointed representing different sectors
from amongst the persons renowned in economic, monetary, banking, financial, commercial,
management and commercial law sectors. The tenure of Office of the Governor, Deputy Governor
and Directors shall be of five years. Government of Nepal may, reappoint the retiring Governor for
one more term and the retiring Directors for any term, if it is deemed necessary. The remuneration
and other benefits of the Governor, Deputy Governor and Directors shall be as prescribed by the
Board.
Qualifications of the Directors

Section 20 of the Act has provided the qualifications that one has to posses to be appointed as
a member of the board of director. In order to be appointed to the post of Governor, Deputy
Governor and Directors, a person shall have to meet the following qualifications:-
a) A Nepalese citizen;
b) Having higher moral character;
c) Having work experience in economic, monetary, banking, financial and commercial law
sectors after having attained at least master's degree in economics, monetary, banking,
finance, commerce, management, public administration, statistics, mathematics and law.
d) Not disqualified under Section 21.
Disqualification of the Directors: Under Section 21, none of the following persons shall be eligible
for appointment to the Office of the Governor, Deputy Governor and Director:-
 Member or official of a political party.

 The person blacklisted in relation to transaction with a commercial bank or financial
institution.
 An official currently engaged in any commercial bank or financial institution.
 A person having five percent or more shares or voting right in a commercial bank or
financial institution.
 A person rendered bankrupt for being unable to pay debts to creditors.
 An insane person.
 A person convicted by a court in an offence involving moral turpitude.

Removal of directors from office

Under Sub-section (5) of Section 22 of the Act, the Governor, Deputy Governor and Director shall
be removed from the office by the Government of Nepal, the Council of Ministers on conditions
on any of the following grounds:
 If one is disqualified to become a Director pursuant to Section 21.

 The lack of capability to implement or cause to implement the functions which the Bank
has to carry out in order to achieve the objectives of the Bank under this Act.
 If one has committed any act causing loss and damage to the banking and financial sys-
tem of the country.
 If one is found to have acted dishonestly or with mala fide intention in any transaction
related to the business of the Bank.
 If professional license is revoked or prohibited from carrying out any profession ren-
dering disqualified to be engaged in any trade or profession on the ground of gross
misconduct.
 If one is absent for more than three consecutive meeting of Board without a genuine
reason.
Government of Nepal shall, remove the Governor from his office on the recommendation of an
inquiry committee constituted under Section 23. Members of Inquiry Committee:-
 Chairperson: The person designated by Government of Nepal from amongst the retired
Justices of the Supreme Court.
 Member: Two persons designated by Government of Nepal from amongst renowned
persons belonging to economic, monetary, banking, financial, commercial or manage-
ment sectors.
Similarly, while removing a Director or Deputy Governor, Government of Nepal shall cause
to conduct an inquiry by committee and remove him/her from the office on the basis of the
recommendation made by the committee. However, the Government of Nepal shall not deprive
the concerned person from a reasonable opportunity to defend himself/herself prior to remove
him/her from his/her office.
Resignation by Director: Under Section 24 of the Act, the Governor, Deputy Governor or Director
may resign from his/her office by tendering a written resignation to Government of Nepal.
Fulfillment of Vacant Office: According to Section 26 of the Act, in cases the office of the Governor,
Deputy Governor and Director falls vacant before expiry of the tenure of office, Government of
Nepal shall, appoint appropriate person to such office for the remaining term of office pursuant to
the provisions made under this Act.

Meetings of the Board

Board of Director is the supreme organ of the Nepal Rastra Bank to make policy level decision
and fix the priority of the functions. Pursuant to Section 28 (2) of the Act, the meetings of board of
directors shall have to be held at least once in a month and it shall be held as per the requirement
of the NRB. Under Sub-section (1), the Governor shall preside over the meeting of the Board. In
general, the Governor shall call the meeting of the Board and in case of a written request from
three Directors of the Board to call the meeting of the Board; the Governor shall call the meeting
of the Board. The Board may frame a separate Bye-law with regard to the procedures for calling
the meeting of the Board, conducting the meeting, voting, keeping minutes and for other matters.
Quorum: The presence of at least three Directors and of the person presiding over the meeting of
the Board shall constitute the quorum for the meeting of the Board. Provided, however, that out
of the three Directors present in the meeting at least one director should be the director appointed
by the Government of Nepal from amongst the persons renowned in the fields of Economic,
Monitory, Banking, Finance and Commercial Law.
Decision: Sub-section (6) provides that the decision of the majority shall be the decision of the
Board. In the event of a tie of votes for and against a resolution, the person presiding over the
meeting shall exercise a decisive vote.

Section 29 of the Act has provided the functions; duties and powers of the Board are as follows:
a) To frame monetary and foreign exchange policies.
b) To take necessary decisions with regard to the denominations of bank notes and coins,
the figures, size, metal, materials for printing notes, and other materials; and to frame
appropriate policies with regard to their issue.
c) To frame necessary policies for causing the supervision and inspection of commercial
banks and financial institutions and banking and financial arrangement.
d) To approve Rules and Bye-laws of the Bank and to frame policies applicable to the
operation and management of the Bank.
e) To frame policies with regard to the appointment, promotion, transfer, dismissal,

remuneration, pension, gratuity, provident fund, leave, code of conduct and other terms
and conditions relating to the service of the employees of the Bank.
f) To approve the annual programs and budget of the Bank and the annual auditing of
accounts, and to submit its report to Government of Nepal for information.
g) To approve the annual report on the activities of the Bank.

h) To frame necessary policy for the issue of license to commercial banks and financial
institutions and for revoking such license.
i) To approve the limit of the loan to be provided to the Government of Nepal by the Bank.
j) To fix the amount, limit and terms and conditions of the loan and refinance which the
Bank provides to the commercial banks and financial institutions.
k) To make decision with regard to the Bank's membership to international organizations,

associations;
l) To frame policy for the mobilization and investment of Bank's financial resource.
m) To submit proposal to Government of Nepal along with the reasons there for if it is
necessary to make amendment to this Act.
n) To take decision on all other matters excluding the matters which are within the authority
of Governor under this Act.
o) To delegate the powers vested on the Board to the Governor or the subcommittee
constituted by the Board with or without fixing the time limit.
Functions, duties and powers of the Governor

The powers to be exercised by the Governor of a Central Bank in accordance with international
practice shall be vested in the Governor. The functions, duties and powers of the Governor
provided under Sub-section (1) of Section 30 of the Act are as follows:
a) To implement the decisions made by the Board.
b) To operate and manage the Bank.
c) To systematize the functions to be carried out by the Bank.
d) To represent and cause to represent on behalf of the Bank in international organizations

and associations.
e) To implement and cause to implement the policies relating to monetary and foreign
exchange matters.
f) To formulate necessary policy on rates of interest for deposits and loan with commercial
banks and financial institutions.
g) To formulate necessary policies with regard to the rates of interest to be paid by

commercial banks and financial institution on deposit and loan or the rate of interest to
be charged by them on deposits and loan.
h) To formulate necessary policies relating to liquidity to be maintained by commercial


i) To make necessary arrangement with regard to the basis, amount, methods, conditions
and duration of compulsory deposit to be maintained by commercial banks and financial
institutions, and its use.
j) To fix the terms and conditions relating to adequacy of the capital fund of commercial
k) To take decision with regard to the procedures and terms and conditions to be followed
while purchasing and selling gold and other precious metals.
l) To fix the charge on the services to be provided by the Bank.
m) To take decision for opening and closing branch offices and other offices of the Bank as
may be necessary.
n) To establish and close the agency of the Bank.
o) To make necessary arrangement for development and operation of information system

of the Bank.
p) To make necessary arrangement for supervision of commercial banks and financial

institutions.
q) To take decision with regard to revocation of the license provided to commercial banks
and financial institutions.
r) To take decisions on any other matters subject to the powers delegated by the Board of
Directors.
Delegation of Powers: Section 31 of the Act empowers the Governor to delegate authority invested
with him/her under this Act to the Deputy Governor or other employees of the Bank in order to
conduct the business of the Bank in a smooth manner.
Management Committee
Following are the members of management committee:
Governor - Chairman
Deputy Governor - Member
Deputy Governor - Member
Senior Officer (Designated by the Governor) - Member Secretary
The Governor may invite any of the officers to take part in the meeting of the Management
Committee.

The Committee shall in connection with discharging its functions, evaluate the country's monetary
and financial condition on a periodic basis. For this purpose, the Management Committee shall,
at least once in a month, submit a report to the Board on the bank's administration and operation,
operation of monetary and other regulatory policies, the soundness of the banking system of
the country, condition of money, capital and foreign exchange market, implementation of such
policies and impact they may have and situation on the banking system, and on the significant
events.
Audit Committee and its functions, duties and powers

To assure the authenticity and accuracy of the financial data, the Board shall constitute an Audit
Committee which will be accountable to the Board. The Audit Committee shall, therefore, furnish
the information thereof to the Governor while submitting the report and recommendations to the
Board. It shall constitute the following members:
 One Director designated by the Board - Coordinator

 One subject expert designated by the Board - Member
 Chief of Internal Audit Department of the Bank- Member
Functions, duties and powers: Under Sub-section (1) of Section 35 of the Act, the functions, duties
and powers of the Audit Committee shall be as follows:-
 To submit its report and recommendations to the Board on accounts, budget and audit
procedures and control system of the Bank;
 To ascertain whether or not the audit and preparation of periodic balance sheet and oth-
er documents of the Bank have been carried out properly;
 To supervise the implementation of the appropriate risk management adopted by the
Bank;
 To audit managerial and performance of works of the Bank in order to be assured that
the prevailing laws applicable to the Bank have been fully complied with;
 To frame bye-law for auditing of the Bank in accordance with the prevailing laws and
international auditing standard and to submit it to the Board for approval.

3. Financial Provisions of Nepal Rastra Bank
General notes
NRB is not a bank or financial institution carrying banking transactions but being the bank of
banks, it requires its own capital. In case of loss occurred, such amount shall be allocated to the
various funds created by NRB. The NRB Act has provided the capital of the Bank as five billion
rupees and the capital of the Bank shall be received from Government of Nepal and this Capital
shall not be transferred or any burden of debt be placed upon it. The Government of Nepal in
consultation with the Bank shall alter the capital of NRB. Further, it can raise fund or money by
issuing different instruments to the public to fulfill the monetary needs of the government. After
computation of net profit and loss, if there is profit, that amount shall be deposited to the various
funds and remaining profit shall be transferred to the Government of Nepal.
Computation of net profit and loss

It is the mandatory provision of the Act that the NRB shall prepare the account of its profit and
loss in each fiscal year. Under Sub-section (2) of Section 40 of the Act, the account of profit and loss
shall be prepared as per Nepal accounting standard and international accounting standard shall
have to be taken as a basis in connection to the sectors which have not been included into Nepal
accounting standard. While preparing the account of profit and loss, net profit shall have to be
calculated by deducting bad or doubtful debts, depreciation of property, loss sustained or yet to
be sustained and net valuation gain or loss.
Allocation of net profit

Pursuant to Sub-section (1) of Section 41 of the Act, if the NRB makes net profit in any fiscal year,
allocation and use of such profit shall have to be made as follows :-
a) The amount equal to revaluation profit from the net profit shall have to be separated and
kept in revaluation reserve fund.
b) Five percent distributable amount of the net profit remained after separating the amount
shall have to be kept in monetary liability fund; the amount fixed by the Board so as
not to be reduced from ten percent in general reserve fund; five percent amount in
financial stability fund and the amount as fixed by the Board shall have to be kept in net
accumulated savings fund.
c) After the amount is appropriated, the Board shall have to submit the rest of the amount
remained after appropriating the amount to other funds from the rest of the saving to the
Government of Nepal.
d) While allocating the amount in the general reserve fund, an additional amount shall
have to be appropriated to cover up to the capital expenses as well referred to in the
annual budget of the Bank.

The amount of general reserve fund and accumulated savings fund can be used for the sake of
increasing the capital of the NRB.
Allocation of net loss

The Government of Nepal shall bear the loss that could not be adjusted while allocating loss.
Under Sub-section (1) of Section 4 of the Act, if loss of the NRB exceeds in comparison to the profit
in any fiscal year, the surplus net loss amount shall have to be allocated as follows :-
a) If revaluation profit is also included in the net loss, revaluation profit shall have to be
kept in revaluation reserve fund.
b) If revaluation loss is also included in the net loss, revaluation loss shall have to be written
as loss in revaluation reserve fund. If revaluation loss exceeds the amount remained in
revaluation reserve fund, the surplus loss amount shall be written as loss in the following
fund and account in a sequence of priority:-
 In accumulated savings fund, up to the amount deposited in accumulated savings
fund,
 In general reserve fund, if loss amount remains after the adjustment in the accumu-
lated savings fund as per Sub-section (1), and
 In capital account, if loss amount remains after adjustment in accumulated savings
fund and general reserve fund.
c) The operation except for the revaluation profit as and revaluation loss as well as other
loss shall have to be written as loss in accumulated savings fund.
d) If loss amount is more than the amount remained as deposit in accumulated savings
fund, the surplus loss amount shall have to be written in following fund and account as
loss in a sequence of priority :-
 In general reserve fund, up to the amount deposited in general reserve fund,
 In capital account, if loss amount remains after the adjustment in the general reserve
fund.

4. Monetary Functions and Open Market Operation of NRB
General notes
NRB being the financial advisor of the Government of Nepal, it has full powers to formulate and
implement the monetary policy of Nepal and it may purchase or sell the debenture on behalf of
the Government of Nepal or issued by itself to operate the open market transaction. By making
compulsory provisions of deposit by the commercial banks or financial institution, on one hand,
it intends to protect the money of depositors and on the other hand, it lend the money required to
the banks or financial institution in case of need which helps to maintain the balanced payment
system in the country.
Operation of Open Market

The Bank shall operate open market transaction for immediate or late purchase or sale of debt
securities, on the basis of agreements with Government of Nepal issued on its behalf or by the
Bank itself. For the operation of open market transaction, bank may carry on transaction in the
forms of repurchase agreements or reverse repurchase agreements, by keeping GON debt bond or
debt bond issued by bank itself as its security, for the management of short-term liquidity. Bank
may use other appropriate instrument for operation of open market transaction
A repurchase agreement or “repo” is the sale of securities combined with an agreement for the
seller to buy them back from the buyer at a higher price on a future date. The difference between
the sale price and the future repurchase price represents interest, with the buyer of the securities
effectively providing a secured loan to the seller for a specified period, with the securities used
as collateral to secure the loan. The rate of interest is referred to as the repo rate and any income
earned on the securities during the period of the repo is passed back to the original seller, even
though they no longer own the securities.
Reverse repos are the same as repos except they are used to describe the other side of the repo
transaction, where a party buys securities and then must sell them back at a higher price at the
end of the (reverse) repo term. The reverse repo is therefore economically equivalent to a secured
“term” deposit or advance.
Compulsory deposit of banks and financial institutions

The Nepal Rastra Bank Act, 2058 under Sub-section (1) of Section 46 has authorises the NRB to
issue directives to the commercial banks and financial institutions to maintain compulsory reserve
with the Bank in proportion to the deposits accumulated with them, borrowed fund or other
liability prescribed by the Bank. It shall be the duty of commercial banks and financial institutions
to maintain the compulsory deposit in the Bank as prescribed by the Bank. While computing the
compulsory deposit of commercial banks and financial institutions, the Bank shall compute on the
basis of daily average of deposit by prescribing the duration.

Cash Reserve Ratio: Cash Reserve Ratio, or popularly known as CRR is a compulsory reserve that
must be maintained with the Central Bank. Every banking company is required to maintain a
specific percentage of their net demand and time liabilities as cash balance with the Nepal Rastra
Bank. Currently the rate is CRR is 4%. Time Liabilities mean the amount of money which is made
payable to the customer after a period of time while the demand liabilities means the amount of
money which is made payable to the customer at the time when it is demanded. The banks are
not allowed to use that money, kept with NRB, for economic and commercial purposes. It is a tool
used by the Central Bank of Nepal to regulate the liquidity in the economy and control the flow of
money in the country.
Therefore, if the NRB wants to increase the money supply in the economy, it will reduce the rate of
CRR while, if NRB seeks to decrease the money supply in the market then it will increase the rate
of CRR. Cash Reserve Ratio can be explained easily with an example- If the rate of CRR is 4% then
for every deposit of Rs. 100 the bank will keep the Rs. 4 with RBI and the rest of the Rs. 96 can be
used for further lending or any other commercial purposes.
Statutory Liquidity Ratio: Statutory Liquidity Ratio abbreviated as an SLR, is a percentage of Net
Time and Demand Liabilities kept by the bank in the form of liquid assets. It is used to maintain
the stability of Banks through limiting the credit facility offered to its customers. The purpose of
maintaining the SLR is to hold a certain amount of money in the form of liquid assets, so as to
fulfill the demand of the depositors when arises.
Currently the rate of SLR is 10% for Commercial Bank, 8% for Development Bank and 7% for
Finance Company. Statutory Liquidity Ratio can be explained easily with an example- If the rate
of SLR is 25% then for every deposit of Rs.100 the bank will keep the Rs. 25 by itself to meet the
requirements of the customers and the rest of the Rs. 75 can be used for any other commercial
purposes.
Failure to Maintain Compulsory Deposit: Section 47 has empowered the NRB to impose a fine on
bank or financial institution for the period of such failure in cases where any commercial bank
or financial institution fails to maintain the compulsory deposit prescribed by the Bank. While
imposing the fine, the amount of fine shall not be more than three times of the maximum of the
bank rate prescribed by the Bank.
Discount operation
Under Section 48, the Bank may conduct discount transaction on the following negotiable
instruments submitted by the commercial bank and financial institutions who maintain their
accounts with the Bank:
 A promissory note or bill of exchange signed by at least two parties including a commer-
cial bank payable in Nepal within six months.

 Debt bond issued by Government of Nepal or the Bank payable within Nepal and within
six months from the date of acquisition by the Bank.
The discount rates, terms and conditions and procedure of operating discount transaction shall be
as prescribed by the Bank.
Loan and refinance to banks and financial institutions

Loan and refinance is the credit facility provided by the NRB which helps to overcome from
financial or liquidity crunch suffered by the banks and financial institution and helps to maintain
the balanced payment system in the country. Sub-section (1) of Section 49 of the Act has provided
that the Bank may, subject to the terms and conditions prescribed by it, make available loan and
refinance to commercial banks and financial institutions for a maximum period of one year against
the security of the following assets:-
 International negotiable instrument referred to in Clause (e) of Sub-section (1) of Section

66;
 The debt bond issued by Government of Nepal payable within Nepal;
 The deposits accumulated in the Bank or the gold and precious metals, which the Bank
may transact under this Act;
 The bill of exchange or the promissory notes referred to in Sub-section (1) of Section 48;
 Other securities as prescribed.
Sub-section (2) provides that Notwithstanding the Bank may provide any type of credit to
a commercial bank and financial institution for a maximum period of one year in cases where
Government of Nepal has, for the sake of public interest and welfare, deemed it appropriate to
provide loan and has requested the Bank therefor and Government of Nepal has given a guarantee
of securities of prevailing market rate for such loan or in extraordinary circumstances where the
Bank has to work as a lender of the last resort. The credit so offered can be renewed for additional
one year upon remaining under the conditions as per prescribed.

5. Monetary Unit, Banknote and Coins
General notes
One of the major acts of the central bank is to issue banknotes and coins for a valid tender of
money. The NRB has monopoly rights to issue banknotes and coins and fix the monetary value
as well. The Rupee shall be the monetary unit of Nepal and shall be a legal tender within Nepal
and the Government of Nepal shall provide guarantee for such Rupee. If any person or body
corporate found to be produced banknote and coins, such fake banknotes and coins are forfeited
and destroyed. On the other hand, the Bank may recall the bank notes and coins in circulation
within Nepal by issuing in exchange there for other bank notes and coins in equivalent amount.
Power to issue banknotes and coins

The NRB shall have monopoly over the issue of banknotes and coins in Nepal. Such notes and
coins shall be legal tenders in Nepal and shall be responsible for payment of the banknotes
issued by the Bank. Sub-section (2) of Section 52 of the Act provides that the Bank shall issue
notes only against the security, and the liability of such issued notes shall be equal to the value
of property kept as security. At least fifty percent of the property to be kept as security shall be
one or more of gold, silver, foreign currency, foreign securities, and foreign bills of exchange
and the remaining percentage shall be one or more of the coins (Mohar, Double or coins of higher
denomination) the Debt Bond issued by Government of Nepal, the promissory note or bills of
exchange payable in Nepal within a maximum of eighteen months from the date of repayment
by bank. However, with the permission of the Government of Nepal the ratio of property kept
as security may be at least forty percent one or more of gold, silver, foreign currency, foreign
securities, and foreign bills of exchange and the remaining percentage shall be one or more of the
coins (Mohar, Double or coins of higher denomination) the Debt Bond issued by Government of
Nepal, the promissory note or bills of exchange payable in Nepal within a maximum of eighteen
months from the date of repayment by bank. For the purpose of Sub-section (2), the valuation of
property shall be made as follows:-
 The price of gold at the rate fixed by Government of Nepal on the recommendation of
the Board.
 The price of silver at the rate deemed appropriate by the Board.
 The foreign currencies at the exchange rate fixed by the Bank.
 The Debt Bond issued by Government of Nepal, the foreign securities and Bills of Ex-
change at the rate deemed appropriate by the Board on the basis of market rates.
 Coins at the rate of face value.

The NRB according to Sub-section (4) of Section 52 of the Act shall issue the bank notes of various
denominations as may be necessary. While issuing banknotes in this way, the figures appearing in
the notes, size and denominations shall be as approved by Government of Nepal and the figures,
internal security arrangements, the materials for printing banknotes and other materials shall be as
decided by the Board. The Bank shall not reissue the notes, which are torn, defaced or excessively
soiled according to the procedure provided by the Act. Further, the NRB may, with the approval
of Government of Nepal, mint and bring into circulation the coins of whatever metal or mixture of
metals or bring into circulation having minted them in Mint on specials occasions. The Bank may,
if it deems appropriate, cause such coins minted in any foreign Mint. But if coins minted once with
the approval are to be re- minted, no approval of Government of Nepal shall be required.
Similarly, under Sub-section (5), the Government of Nepal may, in consultation with the Board,
declare that banknote of any denomination shall cease to be legal tender in any place other than
the prescribed place or office having published a notification in the Nepal Gazette.
Bank notes and coins to be all acceptable: The banknotes and coins issued by the Bank having made
them legal tender shall be all acceptable to the extent of the amount of face value for repayment of
all types of public or private debts within Nepal.
Account of issued currency: The Bank shall maintain account of the entire banknotes in circulation
showing them separately as monetary liability. Such liability shall not include the bank notes in
stock or not in circulation.
Soiled or counterfeit currency

Under Sub-section (1) of Section 57 of the Act, the NRB may withdraw, destroy or replace the soiled
currency with other banknote or coin. However, the NRB may deny to replace the banknotes or
coins the design of which has been deleted, or which is torn, defaced or more than fifty percent of
its portion has been destroyed. According to Sub-section (3) The Bank may withdraw or destroy
such banknotes or with or without compensation to the owner of the banknotes or coins referred
to in Sub-section (1).
Further, Sub-section (4) provides that no owner of the lost or stolen banknotes or coins shall be
entitled to a reimbursement from the Bank. The Bank may forfeit without any compensation, the
coins or notes the outer appearance of which is changed, or which is counterfeit coins or fake note.
Explanation:
For the purpose of this Section, "Counterfeit coin" means a duplicate coin minted copying the coin
issued by the Bank or a counterfeit coin or prepared by melting or manipulating or a coin prepared
by cutting and breaking into two or more places a coin issued by the Bank or the coin the figures,
letters and signs in which have been defaced.

Currency recall or withdrawal

The NRB under Sub-section (1) of Section 60 of the Act may recall the bank notes and coins
in circulation within Nepal by issuing in exchange therefor other bank notes and coins in
equivalent amount. The Bank shall publish and transmit public notice clearly specifying the
period during which the bank notes or coins must be presented for exchange and where they
are to be so presented. The bank notes and coins to be exchanged shall cease to be a legal tender
upon expiry of the time prescribed. The Bank may cut, break or demolish or destroy in any
manner whatsoever, the banknotes and coins withdrawn from circulation and the currency with
defect, as prescribed.
Reproduction and Counterfeiting of Currency

Reproduction and counterfeiting of currency is an offence being prohibited by the Act. Therefore,
under Sub-section (1) of Section 61 of the Act, no one shall commit or cause to commit any of the
following acts:-
 To forge, counterfeit or alter banknotes and coin in circulation as legal tender in Nepal
or any cheques or payment card or to do any other act relating to it or to assist in any of
such acts;
 To possess, transport or issue any banknote or coin or cheque or payment card with
the knowledge that such banknote or coin, cheque or payment card was falsely made,
forged, counterfeited or altered or to assist in such acts in any manner;
 To possess, transport any sheet of metal, stone, paper, die or any other material or sub-
stance with the knowledge that it was destined to be used in falsely making, forging,
counterfeiting or altering any banknote or coin, cheque or payment card or to assist in
any of such acts.
Pursuant to Sub-section (2) any reproduction of banknotes, coins, checks, securities or payment
cards, denominated in Rupee, and the creation of any objects that by their design imitate any such
banknote, coin, check, security or payment card, shall require the prior written authorization of
the NRB.
Similarly, under Sub-section (3), the NRB may take appropriate action to prevent the issue of fake
note or counterfeit currency or duplicate cheque or payment. The Bank may issue necessary order,
directives or notices while taking such actions.

6. Foreign Exchange Policy, Regulation and Reserve
General notes
The NRB has full authority to formulate, implement and cause to implement foreign exchange
policy of Nepal and mobilizes the foreign exchanges reserve as well. The management or regulation
of foreign exchange falls under the power of NRB through licensing, supervising and monitoring
the same according to the prescribed rules, bylaws, directives or circulars. Similarly, the Act has
provided the provisions for the foreign exchange reserve and its mobilization by NRB. Further, the
NRB may, either for its own account or for government account, enter into clearing and payment
agreements with public or private central clearing unions domiciled abroad.
Management of foreign exchange

The Bank shall manage the foreign exchange. The Bank shall have full authority to formulate,
implement and cause to implement foreign exchange policy of Nepal. Under Section 63 of the NRB
Act, 2058, the NRB shall have the following powers for such management: -
 To issue license under this Act or any other prevailing laws to the persons willing to deal
in foreign exchange transaction.
 To frame Rules and Bye-laws and to issue necessary order, directives or circulars in order
to regulate dealings in the foreign exchange transaction by the foreign exchange dealer.
 To inspect, supervise and monitor the foreign exchange dealer.
 To set the bases, limitations and terms and conditions for the transaction of the foreign
exchange dealer.
 To prescribe the system of determining the foreign exchange rates of the Nepalese cur-
rency.
Particulars of foreign exchanges transaction: As per Section 64 of the Act, NRB shall cause the
license-holder to submit to the NRB the detailed particular of exchange of foreign currency and of
the transaction relating to it. The duration for submitting such particulars, the format and other
documents relating to it shall be as prescribed by NRB from time to time. It shall be the duty of
the concerned license holder to submit the particulars and the documents prescribed by the NRB.
Dealing in foreign exchanges: According to Section 65 of the Act, the Bank may purchase and sell
foreign exchanges, gold and precious metals and the purchase and sale to be made by the Bank
shall be affected through the spot, advance exchange rate, swap, option or the similar types of
other instruments, cash or negotiable instrument. Similarly, under Sub-section (3) of Section 65 of
the Act, the NRB may purchase or sell foreign exchange. It may affect such purchase and sale also
on the basis of spot, advance exchange rate, swap, option or similar types of other of instruments.
Further, the NRB shall deal in foreign exchange after fixing its buying and selling rates. The basis,
limitations and conditions of such dealing shall be as prescribed by the Bank.

Foreign exchange reserve

The Bank shall hold the foreign exchange reserve in its balance sheet. Section 66 (1) empowers
the NRB to mobilize the foreign exchanges reserve. Such reserve shall be denominated in the
respective foreign exchange and such reserve shall consist of the various assets and while selecting
the assets referred above, due consideration should be given to the NRB's capital and liquidity to
maximize earnings. The assets are as under:-
 Gold and other precious metals held by or for the account of the Bank.
 Foreign currencies held by or for the account of the Bank.
 Foreign currencies held in the accounts of the Bank on the books of a foreign central bank
or other foreign banks.
 Special drawing rights (SDR) held by the Bank at the International Monetary Fund.
 Bill of exchange, promissory note, certificate of deposit, bonds, and other debt instru-
ment payable in convertible foreign currencies issued by any debtor or liability holder
and held by the Bank.
 Any forward purchase or repurchase agreements of the Bank concluded with or guar-
anteed by foreign central banks or public international financial institutions, and any
futures and option contracts of the Bank providing for payment in freely convertible
foreign currency.
While selecting the assets referred to in Sub-section (1), due consideration should be given to the
Bank's capital and liquidity to maximize earnings. Under Sub-section (3) of Section 66 of the Act,
the NRB shall maintain international reserve at a level, which shall be adequate for the execution of
monitory and exchange rate policies and for the prompt settlement of the international transaction.
Further Sub-section (4) provides that if international reserves have declined or, in the opinion of
Bank, are in danger of declining to such an extent as to jeopardize the execution of the monetary
or exchange rate policies in the prompt settlement of the country's international transactions, the
Bank shall submit to Government of Nepal a report on the international reserves position and the
causes which have led or may lead to such a decline, together with such recommendations as it
considers necessary to remedy the situation. Until such time, as the declining situation has been
rectified, the Bank shall make further such report and recommendations to Government of Nepal.
Issuance of debt bond against gold and foreign currency: The NRB may, having obtained approval
from Government of Nepal, issue one or more types of debt bond denominated in gold or foreign
currency for certain purpose according to Section 67 of the NRB Act, 2058. The types, duration,
payment of principal and interest and other matters of the debt bond to be issued shall be as
prescribed by the NRB.

International Clearing and Payments: The Bank may, either for its own account or for government
account and by the order of Government of Nepal, enter into clearing and payment agreements
with public or private central clearing unions domiciled abroad. The Bank may, in order to
implement the objectives of such agreement, enter into other necessary agreements.
7. Relation with Government of Nepal
General notes
The NRB as a central banking plays a role of a banker and financial advisor of Government of
Nepal and a financial agent of Nepal. The Government of Nepal shall consult the Bank on any
matters that are within the jurisdiction of its competence. The Government of Nepal shall, while
preparing annual budget, consult the Bank on the domestic debt including overdrafts. The NRB
shall accept the deposits of Government of Nepal or other bodies prescribed by Government of
Nepal. As a responsible authority of overall economic and financial matters of the country, it
may ask for the particulars, statistics and documents necessary for conduct of its business from
the concerned bodies. Further, the NRB shall advise the Government of Nepal while formulating
new policies for the monetary market including monetary policy and its operations, credit, the
balance of payments, foreign exchange, and banking, before they are submitted for amendment
or legislative action.
Consultation and information relating to external debt

Pursuant to Section 70 of the Act, the Government of Nepal may consult the NRB while taking
loan from external sectors and it shall include the subjects such as amount of loan, the terms and
conditions of the loan and the repayment of loan. As per Sub-section (3), the Government of Nepal
shall inform the Bank when external loans have been received. Further, the Government of Nepal
shall consult the Bank while granting approval to private and public institutions to raise loan-
creating liability in foreign exchange. Further under Sub-section (5), the Government of Nepal,
public institution or private sector shall inform the NRB about the agreements concluded having
creating liability in foreign exchange.
Deposit collection
Section 71 of the Act authorises the NRB to accept the deposits of Government of Nepal or other
bodies prescribed by Government of Nepal. While accepting deposits, the NRB shall receive and
disburse monies, keep accounts therein, and provide banking services related thereto. Under Sub-
section (3), the NRB may authorize commercial banks and other financial institutions to conduct
the transaction subject to the terms and conditions prescribed by the Bank.

Functions of fiscal agent

Under Section 72 of the Act, the NRB shall, subject to the terms and conditions stipulated in the
agreement entered into with Government of Nepal, act as fiscal agent of Government of Nepal on
the following matters:-
 Marketing, purchase and sell of debt bonds issued by Government of Nepal and to act as
registrar and transfer agent therefor.
 Payment of the principal, interest and other fees of the debt bonds referred.
 Other necessary functions to be carried out as the agent.
Consultation on the matter of law reform

As provided under Sub-section (1) of Section 74 of the Act, the NRB may be consulted on any
proposals by the concerned entities for legislation with respect to matters that relate to Bank
objectives or that otherwise are within its fields of competence, including monetary policy and
its operations, credit, the balance of payments, foreign exchange, and banking, before they are
submitted for amendment or legislative action. Further, the NRB shall have powers to submit
proposals to Government of Nepal for enacting new law or amending the existing laws on the
subjects relating to the objectives of the Bank or area of its competence such as monetary policies
and its operation, credit, balance of payment, foreign exchange and banking.
Credit to Government of Nepal and purchase of Government debt bonds

Credit to Government of Nepal: Section 75 of the Act has determined the credit facilities and
financial assistance to be provided by the NRB to the Government of Nepal. It has been provisioned
under Sub-section (1) of Section 75 that except otherwise provided in this Act, the Bank shall not
provide any type of financial assistance to Government of Nepal or an institution under the full
or substantial or partial ownership of Government of Nepal. As per Sub-section (2), subject to
the limits specified in this Section, the Bank may extend credit to Government of Nepal with a
condition to repay within one hundred eighty days.
However, the Bank under Sub-section (3) may extend a special credit of long term to Government
of Nepal only on account of subscription and similar payments resulting from or incidental to the
membership of Nepal with international organization.
Further, the NRB shall disburse credit to be extended to Government of Nepal or an institution
under full or substantial or partial ownership of Government of Nepal only in Nepalese rupees.
Such credit shall be certified by negotiable debt bond issued by Government of Nepal and delivered
to the Bank. Such debt security should have the maturity corresponding to the maturity of the
extension of credit and should bear the interest at market rate. There must be a written agreement
executed between Government of Nepal and the Bank. Such agreement should clearly stipulate
the principal amount of the loan or limit on a line of credit, the maturity, and the applicable rates
of interest and other charges.

Overdraft to Government of Nepal: Sub-section (5) of Section 75 provides that the amount of
overdraft provided by the Bank to Government of Nepal shall not be more than five percent of
the revenue income of Government of Nepal in the preceding fiscal year. While computing such
revenue income, the amount of borrowing, grants or any other form of financial assistance or
income received from the sale of property shall not be included. The Government of Nepal shall
make the payment of the overdraft referred to in Sub-section (5) within one hundred eighty days
at the prevailing interest rate either in the form of cash or marketable debt bond.
Government debt bonds: Under Sub-section (7) of Section 75 of the Act, the total amount of debt
bond purchased by the Bank from Government of Nepal and taken into its ownership shall not
be more than ten percent of the revenue income of the preceding fiscal year. In the following
circumstances, the debt bond issued by Government of Nepal and purchased by the Bank shall not
be treated as the credit extended under Sub-section (7):-
 If the purchase is made in the secondary market for the operation of open market consis-
tent with the monetary policy of the Bank.
 If the purchase is made in the primary market, when it is necessary in the opinion of the
Bank, to maintain stability in the market at the time of primary issue of such securities
and such securities are divested within 60 days of purchase.
 The debt bond purchased by the Bank from Government of Nepal and retained in its
ownership prior to the commencement of Sub-section (7).
Test Questions
1. Explain the concept of central bank and its objectives.
2. State the functions, duties and powers of the Nepal Rastra Bank.
3. List out the functions which the Nepal Rastra Bank cannot perform under the Nepal Rastra
Bank Act, 2058.
4. What are the privileges and facilities given to the Nepal Rastra Bank under the Nepal Rastra
Bank Act, 2058?
5. State the qualifications of directors of the Nepal Rastra Bank.
6. How the Board of Directors of the Nepal Rastra Bank is formed under the Nepal Rastra Bank
Act, 2058?
7. Who cannot be appointed as a director of the Nepal Rastra Bank?
8. When can the Governor, Deputy Governor and Directors be removed from their office?
9. State the procedures of holding the Board Meetings of the Nepal Rastra Bank.

10. List out the functions, duties and powers of the Board of the Nepal Rastra Bank.
11. How the Governor of the Nepal Rastra Bank appointed? What are his qualifications?
12. State the functions, duties and powers of the Governor of the Nepal Rastra Bank.
13. Write a short note on the Audit Committee and its powers under the Nepal Rastra Bank Act,
2058.
14. State the legal provisions regarding the allocation of net profit under the Nepal Rastra Bank
Act, 2058.
15. How the net loss is allocated under the Nepal Rastra Bank Act, 2058?
16. State the legal provisions as to compulsory reserve to be maintained by the bank and financial
institutions and consequences of failure to do so.
17. Write the short note on loan and refinance to banks and financial institutions.
18. Explain the powers of the Nepal Rastra Bank to issue bank notes and coins.
19. What acts are treated as reproduction and counterfeiting of currency?
20. What are the powers of the Nepal Rastra Bank as to the management of foreign exchange?
21. Examine the Nepal Rastra Bank's relation with the Government of Nepal.
22. State the legal provisions under the Nepal Rastra Bank Act, 2058 regarding the credit to the
23. State the various assets consisting of the foreign exchange reserve under the Nepal Rastra
Bank Act, 2058.
24. Write short note on soiled or counterfeit currency.
25. Explain the role of the Nepal Rastra Bank in the regulation of banking business in Nepal.
26. What are the conditions for the removal of director under the NRB Act, 2058?

CHAPER 5 : INDUSTRIAL ENTERPRISES ACT, 2073
CHAPTER 5
INDUSTRIAL ENTERPRISES ACT, 2073

1. Meaning and Classification of Industry
General notes
Industries are the main source of production, employment and investment in each and every
country. Where there is an expansion of industrial activities, there is high rate of development in
terms of economy, finance, social and cultural. Industries help to the revenue collection, maintain
the international payment system, expansion of economy and trade and commerce, minimize
unemployment rate and fulfill the need of commodity market. Hence, the development of a
country is based upon sound development of the industrial sector. The Industrial Enterprises
Act, 2073 has been enacted to encourage national productivity and employment opportunity by
making the industrial environment more congenial and investment friendly to develop a strong,
dynamic, competitive and production oriented economy through the industrial development
by promoting export and replacing imports by using the natural, physical and human resources
available in the country. To achieve this objective the Act has provided various provisions relating
to the classification, registration and licensing of industries, facilities and concessions and proper
monitoring to foster the industrial development through institutional regulation.
Salient features of the Act

The salient features of the Industrial Enterprises Act, 2073 can be summarized as under:
 Industry cannot be operated or established without registering as per this Act. For reg-
istration of the industry, digital signature is applicable while relevant documents can be
submitted online as well.
 Registration Certificate of the industry will be provided within 15 days of the submission
of the application, thereafter investor, if required, needs to conduct Environmental Im-
pact Assessment (EIA) or Initial Environmental Examination (IEE).
 Export Industry has to export at least 60 percent of its products.
 Licensing/Permission from the Industry and Investment Promotion Board, chaired by
the Industry Minister, is required to establish following industries:
 Industry producing explosives including arms and ammunitions, gun powder, se-
curity printing, bank notes and coin industries.
 Cigarette, bidi, cigar, chewing tobacco, khaini industries and industries producing
other goods of similar nature utilizing tobacco as the basic raw material, alcohol and
beer producing industries.
 Industry producing sand, stones and pebbles including precious minerals and pe-
troleum product excavation.
 Industry producing radio communication equipment.

 Investor is required to commence its operations as stated in the Registration Certificate.

It is investor’s responsibility to inform the Department of the commencement of opera-
tions. Failing to do so will lead to the cancellation of the registration.
Classification of industry
The Industrial Enterprises Act, 2073 has classified the industry into various divisions on different
basis. The industries are divided not only the sake of division but it is the basis of legal recognition
and providing incentives, concession and special treatment to the specified industries. The
industries are classified under the Act as follows.
CLASSIFICATION OF INDUSTRY ON THE BASIS OF FIXED ASSETS
1 Micro Industry Following are the conditions to be fulfilled to become micro industries:
 Maximum of nine employees including the investor
 Annual turnover of maximum amount of NRs. 5 million
 Maximum application of 20 kilowatt energy
 Maximum fixed asset of NRs. 500,000
 Owner is involved in operation and management of the industry
Note:
Industries specified in schedule-I (Industries Requiring Permission) of
Industrial Enterprises Act shall not be micro industries.
2 Cottage Industry Following are the conditions to be fulfilled to become cottage indus-
tries:
 Based on traditional skill and technology
 Labour intensive and specific skill or based on local raw materials
and local technology, art and culture
 Maximum application of 10 kilowatt energy
 As stated in the Annex 2 of the Industrial Enterprises Act
3 Small Industry Apart from micro and cottage industry, maximum fixed asset of 100
million Nepalese rupees
4 Medium Industry Fixed asset between 100 to 250 million Nepalese rupees
5 Large Industry Fixed asset of more than 250 million Nepalese rupees
Meaning of Fixed Assets:

The fixed asset of an industry shall consist of the following assets:-
(a) Land, physical infrastructure constructed in space, under-ground, water or under water,
(b) Physical infrastructures above land (such as: sewerage, internal road, water distribution
system, drinking water infrastructure),

(c) Factory Office, factory building, building or godown,
(d) Residential buildings constructed for employee or workers,
(e) Electricity distribution and equipment’s related with such distribution,
(f) Machinery, equipment, tools and reserved fittings,
(g) Means of transportation,
(h) Electrical equipment and office equipment,
(i) Furniture, fixture,
(j) Communication system and related system & equipment.
Capitalization of Pre-operative Expenditure:

In addition to the assets referred above, following pre-operative expenses and expenses incurred
during different stages of construction shall be capitalized as fixed assets:
 Capitalized technical consultancy and supervision expenses;

 Pre-investment and pre-operation costs;
 Capitalized interest cost during the construction period.
CLASSIFICATION OF INDUSTRY ON THE BASIS OF ITS NATURE
1 Energy based Industry generating energy from water resources, wind, solar, coal,
Industry natural oil, gas, bio-gas or any other sources and industry producing
machines and equipment to be used by such industry; energy
transmission line; energy distribution system.
2 Manufacturing Industry based on utilizing or processing of raw materials, auxiliary
industry raw materials, semi-processed materials or unused products.
3 Agro and Forest Industry based on agriculture or forest products such as integrated
based industry sericulture and silk production, horticulture and fruit processing, animal
husbandry including bird, dairy industry, poultry farming, fishery,
tea/coffee gardening and processing, herbal processing, vegetable
seed farming, vegetable farming or processing, tissue culture, green
house, bee-keeping, honey production, rubber farming, floriculture
and production, cold storage and agro market, lease hold forests, agro
forestry, etc.
4 Minerals based Industry extracting and processing the metallic and non-metallic
industry material.

5 Construction Road, bridge, tunnel; ropeway, railway, tram, trolley-bus, cable car,
based industry monorail and sliding-car; airway and airport; conference center; waste
management; water supply and distribution; irrigation; sport complex
and stadium; parking place and parking house; export processing zone;
cargo complex; sewage treatment plant; special economic zone; telephone
tower, optical fiber network, satellite and satellite transmission center;
house and housing complex; film city, film studio; business complex
6 Tourism based Tourist house, motel, hotel, resort and restaurant; travel agency, tour
industry operator, healing center, casino, massage and spa; adventure tourism;
golf course, polo, pony trekking, hiking; village tourism, homestay and
ecological tourism; cultural, religious, conference and sports tourism;
entertainment part; conservation; mountain flight
7 Information, Information technology based industry- technology park, IT park,
transmission and biotech park, software development, computer and related services,
communication data processing, cyber café, digital mapping, BPO, data mining, cloud
based industry computing.
Communication based industry- internet, telecommunication, teleport
services, satellite establishment and operation, satellite transmission
center, VSAT, broad band, optical network, satellite network
Transmission based industry like FM radio, digital radio service, digital
television, satellite television, cable television, IPTV and online services,
Digital cable TV, network, Direct-to-home satellite services, MMDS
Network, recording studio, printing media, entertainment services, etc.
8 Service based Workshop, printing press, consultancy services, ginning and bailing
industry business, cinematography, construction business, public transportation
business, photography, hospital, nursing home, educational and training
institution, library and museum services, laboratory, air services, sports
services, non-agro cold storage, house wiring and electrical fitting
and maintenance, waste management services, cargo and courier
services, advertising services, packaging and refilling services, foreign
employment services, etc.
National Priority Industries

As per section 17 of this act, following industries are specified in Annexure 9 shall be categorized
under National Priority Industries:
a) Energy-based industries
b) Agro-Forestry Industries
c) Construction Industries

d) Export-based industries
e) Tourism industries including concerned infrastructure
f) Mining, petroleum, natural gas and exploration
g) Cement, paper, sugar, chemical fertilizers, organic fertilizer, powdered milk,

pharmaceuticals, waste product processing, manufacture of fuel saving equipment,
manufacture of equipment used by disabled people, manufacture of agricultural
equipment and industries equipment, manufacture of electric vehicles.
h) Health-service institutions established outside of Kathmandu valley, Pokhara

municipality and municipal areas of Terai region.
i) Cottage Industries
2. Registration and Licensing of Industry
General notes
Industrial activities are under the concern of a country as they are the major source of national
revenue and triggering factors of the development. Similarly, the industrial activities may,
on one hand, exploit the natural resources irrespectively, hence, cause negative impact to the
environment and on the other hand cause social unrest in economic, physical, infrastructure,
social and cultural aspects of the country. Therefore, to serve two purposes, firstly, to boost up the
industrial activities for the better economy of the country and secondly, to regulate the industry
for the broader benefit and security of the society, people, environment and social and cultural
ethics the Industrial Enterprises Act, 2073 has made provisions for the registration of industry
with compulsory provision that with registration no one establish or run any industry. Further, by
providing the provision of licensing, the Act has intended to regulate the industrial activities in a
defined way when the industrial activities are necessary to regulate for the overall benefit of the
industrial environment and social justice.
Registration of industry
The Act has made a mandatory provision that no industry shall be establish and operated
without getting it registered as per the law saving all industries already in operation before the
commencement of this Act.
Application of registration: Person desirous to establish an industry shall have to file an application
as per Sub-section (1) of Section 4 of the Act to the concerned registering authority in the prescribed
format along with the prescribed details and documents. However, a Micro and Cottage Industry
may get registered within 6 months from the date of operation.

Certificate of registration: Pursuant to Sub-section (1) of Section 5 of the Act, the registering
authority shall, within fifteen days from the date of application for registration, register such
industry and issue an industry registration certificate to the applicant as prescribed if it was found
that the required details and documents are submitted and process under the Act has been duly
fulfilled. Further, if it is required that the industry shall have to conduct environmental impact
assessment and initial environment assessment after its registration, the industry shall have to
establish, operate, commence commercial production or transaction only after preparing such
report or test controlling the adverse effect or possible adverse effect on environment while
operating the industry is that of industry itself.
While conducting the inquiry of submitted documents, “body registering the industry” may
require to submit the additional documents within 7 days. The industry registering authority,
under Sub-section (5) may refuse to register the industry and issue the registration certificate
thereof, if all the required details and documents as prescribed or asked for are not provided
or the procedure under the Act or rules are found not fulfilled or if the additional details and
documents required pursuant to section 5(3) has not been submitted. Refusal for registration shall
be informed to the applicant by providing reasonable justification.
Every industry registered under this section shall fulfill the directions given by the “body
registering the industry” from time to time and conditions as may be specified in the industry
registration certificate.
Appeal against refusal: If the authority has refused to register the industry, the dissenting applicant
under Section 9 of the Act may file a complaint to the ministry of Industry within thirty days from
the receipt of such notice of refusal and the Ministry shall give necessary decision over the matter
within thirty days from the date of receipt of such complaint.
Matters to be stated in the certificate of registration: Sub-section (4) of Section 5 of the Act has listed
out the matters to be stated in the certificate of registration apart from other matters. They are-
 Date of issue of the industry registration certificate.

 Date of commercial production and transaction to be commenced by the industry.
 Terms and conditions to be followed by the industry.
 Other terms and conditions as prescribed as per the nature of industry.
Prior approval and monitoring

Under Sub-section (1) of Section 7 of the Act, a prior approval from the Industry and Investment
Promotion Board must be obtained before the registration of the following industry.
 Industry provided under Schedule-1.

 Industry required to obtain the Board's approval pursuant to the prevailing law relating
to the foreign investment and technology transfer.

As per Sub-section (2), the persons desirous to register an industry required to have prior
approval of the board shall apply to the board through the industry registration authority. If the
authority has found that all the required details and documents are submitted, it shall forward
this application to the board. Similarly, pursuant to Sub-section (4), when such application comes
to the board, it shall decide whether or not grant prior approval to the industry for its registration
within one month. Further, under Sub-section (5), if the Board decided to grant approval, the
industry registration authority shall have to grant approval to register the industry within fifteen
days from the receipt of such approval from the Board. After the approval, the industry shall have
to be registered within the time as fixed in the approval letter. “Body registering the industry”
shall provide the information of refusal in permission made by board within 7 days of receipt of
decision from the board.
Following are the Industries mentioned in Schedule-1 of the Industrial Enterprises Act:
i) Arms and ammunitions manufacturer
ii) Explosive materials manufacturer
iii) Security Printing, Currency & Coins manufacturer
iv) Cigarette, Bidi, khaini, cigar and products utilizing tobacco as basic raw materials
manufacturer
v) Bear & Liquor manufacturer
vi) Mining of Stones, Gravel & Sands (medium and large industries)
vii) Radio and telecommunication equipment manufacturer
viii) Mining of precious materials and petroleum
ix) Others industries requiring permission according to the prevailing law
Monitoring: Sub-section (1) of Section 10 of the Act has empowered the registering authority
or office to carry on continuous monitoring in regular basis over the industry in operation after
getting registered from it whether or not the terms and conditions provided under the certificate
are fulfilled. As per Sub-section (2) the authority or office may ask any detail or information
while monitoring the industry and it shall be the duty of the concerned industry to furnish such
details or information. Further, from such details or information if there is any problem to run the
industry, the registering authority or office may provide necessary assistance in consultation with
the industry.
Cancellation of registration: If the industry cannot be run because of any reason, an application
may be filed to the registering authority or office under Sub-section (1) of Section 14 of the Act
along with the prescribed documents. When such application filed to the industry registering
authority as per Sub-section (2) may cancel the registration of the industry if it has been found that
the industry has paid its liabilities and reasonable.

3. Formation of Industry and Investment Promotion Board
General notes
Expansion and development of industrial activities are top most essential for the economic
development of each and every country at this present period of time. Industrial activities are
expanded if there is a favorable and conducive business environment and that can be maintained
by the government through its various institutions. The Industrial Enterprises Act, 2073 has
provided the provision for the establishment of a high rank government institution in the name of
Industry and Investment Promotion Board under the chairmanship of minister of industry. With
a view to accelerate the industrialization by promotion, establishment, increment of investment,
protection and expansion of industry the board has been formed to make policy level decision
including coordination and facilitation in the industrial sector. For that purpose, the Act has
provided various functions, duties and powers to the board.
Formation of Industry and Investment Promotion Board

Section 18 of the Act has provided the provisions for the formation of the Industry and Investment
Promotion Board consisting of the following members:

1. Minister or State Minister for Industries 1 Chairperson
2. State Minister for Industries (when minister for industries 1 Member
is chairman)
3. Assistant Minister for Industries 1 Member
4. Member (looking after industries), National 1 Member
Planning commission
5 Governor, Nepal Rastra Bank 1 Member
6 Secretary, Ministry of Industry 1 Member
7 Secretary, Ministry of Finance 1 Member
8 Secretary, Labour and Employment 1
9 Secretary, Ministry of Commerce 1 Member
10 Secretary, Ministry of Agriculture Development 1 Member
11 Secretary, Ministry of Information and Communication 1 Member
12 Secretary, Ministry of Energy 1 Member
13 Secretary, Ministry of Forest and Land Conservation 1 Member
14 Secretary, Ministry of Culture, Tourism and Civil 1 Member
Aviation
15 Chief Executive Officer, Nepal Investment Board 1 Member
16 Director General, Department of Cottage 1 Member
and Small Industries


17 Joint Secretary, Industrial Promotion Division, Ministry 1 Member
of Industries
18 Chairperson, Federation of Nepal Chamber 1 Member
of Commerce and Industry
19 Chairperson, Confederation of Nepalese Industries 1 Member
20 Chairperson, Federation of Nepal Cottage and Small 1 Member
Industry
21 Chairperson, Federation of Women Entrepreneur's 1 Member
Association Nepal
22 Two Persons nominated by Government of Nepal, 2 Member
At least one woman from among the persons of high
distinction in the field industry.
23 The Director General, Depart of Industries 1 Member-
Secretary
Functions, Duties and Powers of the Board

Industrial sector can be enhanced and expanded only in the conducive environment. The industrial
environment is the combined effect of law, government agencies, market and the human resources.
The government is a key factor for the development and expansion of industries and in general
government agencies play such role by promoting, supporting and controlling the industries in a
country. Hence, the Act has formed the Industrial Promotion Board to fulfill this primary objective.
The Board has the authority to formulate the policies for the industrial development through its
promotion and protection by resolving the hindrances causing obstacles for the rapid growth of
industrial sectors. Further, the Board makes necessary recommendations to the government after
examining the country's industrial situation, foreign investment ratio and environmental issues
and the consumer's interests. It is the policy level institution to advise the government to make and
take necessary steps and arrangements for the industrial development of the country. In one hand,
it facilitates the industrial sector and on the other hand, it acts like a regulating body by issuing
various directives necessary for the development of the industries, protection of the proprietary
interests of investors native or foreign and assurance of the healthy environment in the market
with fair competition for the benefit of the customers. Section 19 of the Act has provided the
function, duties and powers of the Board which are as follows:
 To decide policies related to industrial promotion, investment protection related to

enhancement of industrialization.
 To resolve obstacles and confusions in respect of enforcement and implementation of
law of industry.

 To observe and examine regularly country’s overall industrial policy, legal structure and
their system and to recommend GON for necessary reformation.
 To decide policy matters on the basis of existing law regarding foreign investment and
technology transfer.
 To decide policy relating to the prevention of the Environmental pollution.
 To recommend GON regarding examination and evaluation of position of industrial
development in the country.
 To resolve any difficulties or obstacles regarding the services, facilities by the industries
to be provided to the industries under this Act.
 To give direction to the concern authorities resolving problem or cause to resolve by
going through the complaint of the entrepreneurs.
 To recommend GON in respect of level and classification nature of the industries.
 To recommend GON relating to the promotion and encouragement of promotion of
investment through research and survey of them.
 To decide policy for ensuring the quality of the goods product.
 To advise GON relating to the enforcement of integrated industrial management
information.
 To do or cause to do for the development of effective competitive and coordinated
performance between the public, private and cooperative sectors.
 To do or cause to do act to gain speed of industrialization in the country.
 To give directives to the concern authorities to provide facilities and on receipt of the
complaint in this regard.
 To perform or cause to perform other acts as prescribed.
If we analyse these functions and powers under the Act, it is obvious that the Industrial Promotion
Board can play a decisive role to improve and promote the overall industrial environment in
the country by assuring proper laws and regulations, implementing the policy so determined in
effective manner and protecting the consumers rights by ensuring the quality of the goods and
services provided by the industries.

4. Facilities, Concession and Rebate
General notes
Industrial or commercial activities are some of the major concern of each and every state as they
are the basis of economic development of a country. For the balanced development of different
field of trade and industry, the government as the controller, facilitator and promoter creates a
favourable environment of business by enacting the various laws or rules and regulation and
enforcing them through the proper mechanisms. One of such techniques is the provision of fiscal
facilities, concession and rebate to be provided to the industries which the government thinks
appropriate and necessary to promote the selective industries with a view to achieve the national
goal. The priority areas may differ time to time and such facilities or concessions provided to
the industries may change. If the government intends to improve infrastructure facilities, it
may provide incentives to those industries involving in development of infrastructures. If the
generation of energy gets priority then the special provisions are made to give incentives to these
industries. Hence, the terms of facilities, concession, rebate or incentives are given to the industries
as per the national requirement which fixed by considering the overall national development
indicators. To fulfill this objective and to have an intended result in the economic sector through
the industrial development, the Industrial Enterprises Act, 2073, under chapter 5, has provided
various concessions to the industries.
Concessions, rebate and facilities to the industries

Chapter 5 of the Industrial Enterprise Act, 2073 has provided the various concessions, rebate and
facilities under different headings which are stated as follows.
A. Income tax concessions (Section 22)

Industry Concessions
20% exemption on the rate of tax imposed on the
Manufacturing Industries
income earned from such industries.
Industries investing in construction of
roads, bridge, tunnel, Ropeway, Railway, 40% exemption on the rate of tax imposed
Tram, Trolleybus, Airport, Industrial on the income earned from operation of such
Structure and Infrastructural Complex and infrastructures.
bringing such constructions into operation
Manufacturing industries except those
90%, 80% and 70% exemption on rate of the income
producing fruits based cider, brandy or
tax for up to 10 years from the date of commencement
wine established in Under Developed,
of commercial production or transaction
Undeveloped and Less Developed Region
Manufacturing industries producing fruit
40% exemption on the income tax for up to 10 years
based cider, brandy or wine established in
from the date of commencement of business
any Under Developed Region

100% income tax exemption for first five years from

the date of commencement of business.
Manufacturing Industries set up with the 50% exemption on the income tax for next 3 years.
investment of at least 1 billion rupees and Industries already in operation are entitled to the
providing direct employment to more than above stated exemption in case such industries
500 individuals throughout the year enhance their installed capacity by at least 25%,
increase investment to 1 billion and provide direct
employment to 500 individuals throughout the year.
100% income tax exemption for first 10 years
50% income tax exemption for next 5 years.
Individuals or entities obtaining approval Such exemption is entitled to Solar, Wind and Bio
to commercially generate transmit or Mass energy as well.
distribute Hydroelectricity by mid-April In case of industries that have already begun
2024 AD (Chaitra 2080 BS) commercial production at the time of commencement
of this Act, the exemptions applicable at the time of
receiving approval would be applicable.
Industries conducting research and
excavation of natural gas and fuel 100% Income tax exemption for first 7 years from
commercially, if commence the commercial the date of commencement of transaction;
transaction by mid April 2019 AD (Chaitra 50% exemption on the income tax for next 3 years..
2075 BS)
100% Income tax exemption for the first 5 years from
the date of commencement of commercial transaction
50% exemption on rate of Income Tax for next 3
Industries relating to Tourism Sector
years
established with the investment of above 2
Such Industries already in operation are entitled to
billion rupees
the above stated exemption in case such industries
enhance their installed capacity by 25%, increase
investment to 2 billion.
100% Income tax exemption for the first 5 years
Tourism Industry including hotel, resort
from the date of commencement of commercial
etc. established outside the metropolitan or
transaction
sub-metropolitan area with the investment
50% exemption on rate of Income Tax for next 3
of more than 50 million
years
Industries related to software development,
data processing, cyber café and digital
mapping established inside technology park, 50% exemption on tax imposed on income of such
bio-tech park and information technology industries
park specified by Nepal Government by
publishing notice in Nepal Gazette.

15% exemption on tax imposed on income of such

Manufacturing Industries and Information
industries on that year (Additional 15% exemption
and Communication Technology
on income tax on that year in case the industry
Industries employing 300 or more Nepalese
has 50% of its employees from among Women,
throughout the years
Scheduled Caste and Disabled person)
25% exemption on tax imposed on income of such
Manufacturing Industries and Information
industries on that year (Additional 15% exemption
and Communication Technology
on income tax on that year in case the industry
Industries employing 1200 or more
has 50% of its employees from among Women,
Nepalese throughout the year
Scheduled Caste and Disabled person)
Manufacturing Industries exporting goods 25% exemption on the rate of tax imposed on the
or commodities produced income earned.
Expenses made by industries for long term welfare
and benefit of employees or workers such as housing,
life insurance, health facility, education and training,
child care, sports etc. can be deducted for purpose of
income tax.
Expenses made for equipment & technology used to
reduce or control the pollution or re-processing or
reuse of wastages can be deducted up to 50% of the
adjusted taxable income of the same fiscal year.
In case the expenses cannot be deducted in full
the remaining amount is allowed to capitalize
the depreciation on which may be claimed in the
subsequent fiscal year.
All industries Expenses incurred for the machine or equipment used
for reducing power consumption can be deducted for
the purpose income tax.
The costs incurred for increasing entrepreneurship,
research and development and creation of new
technology for enhancing the productivity of the
industry can be deducted while calculating taxable
income for an income year from business provided that
such deduction does not exceed 50% of the adjusted
taxable income from all business of the industry.
In case the expenses cannot be deducted in full
the remaining amount is allowed to capitalize
the depreciation on which may be claimed in the
subsequent fiscal year.

Costs incurred in market promotion, survey and

advertisement relating to the business can be
deducted for the purpose of income tax.
Costs incurred for the security of the physical assets
as prescribed and actual premium paid for insurance
can be deducted for the purpose of income tax.
Costs incurred for the protection of industrial
property in Nepal which is registered in Nepal can
be deducted for the purpose of income tax.
25% exemption on the rate of income tax on royalty
received from export of Intellectual Property created
and registered in Nepal.
50% exemption on the rate of income tax on income
earned from transfer or sale of intellectual property
created by the industry.
Government of Nepal may reimburse the
registration fee paid to register the intellectual
property in foreign country for its protection in the
manner as prescribed by Nepal Government.
Gifts or donations given to tax exempted
organization can be deducted up to Rs. 100,000
or 5% of adjusted taxable income of the industry,
whichever is less
The Government of Nepal may also provide other
exemptions by publishing a notice in Nepal Gazette.
Industries established inside Industrial Local Taxes including Unified Property Tax is not
Estate levied
 However, it is provided under Sub-section (2) of Section 22 that the industries based on
tobacco, liquor and kachha or kattha are not entitled to any of the exemptions or facilities
listed above. However, such industries may deduct actual expenses incurred in business
promotion activities including long-term welfare and benefit of employees or workers, in
reducing or controlling pollution, re-processing of waste materials, in technologies and
devices used reducing environment effects, in machine or equipment used for reducing
power consumption, research and development expenses.
 Similarly, Sub-section (3) of Section 22 clarifies that in case an industry qualifies for
more than one exemption in respect to similar income from among those listed above,
the industry is only entitled to one exemption. Such industry is entitled to select the
applicable exemption.

B. VAT Exemptions (Section 23)

Industry Benefits
VAT imposed on production is reimbursed if such goods are
All Industries
exported, based on the quantity of export.
C. Customs Duty Exemptions (Section 23)

Industry Benefits
The Government of Nepal may refund the amount of Duty
Industries not having Bonded Draw Back in export of goods after determining the aggregate
Warehouse or Passbook facility of costs incurred in import (Samadar) as prescribed in Nepal
Gazette.
Raw materials or auxiliary raw materials as well as packaging
materials that are not produced in Nepal can be imported
by furnishing the required guarantees under prescribed
Industries not having Bonded
conditions and procedures.
Warehouse approval exporting
However, in case of packaging materials not produced in
goods through existing Banking
Nepal, a recommendation is required from IRD to enjoy
Channel or Letter of Credit or
stated benefit.
selling such goods in domestic
The Custom Duty levied in the import of such raw materials,
market in convertible currency
auxiliary raw materials and packaging materials required
for production shall be one level below the existing Custom
Duty rate in import of finished goods using such materials.
Custom Duty is levied in the minimum rate for the import
Laboratories for Quality of machinery and scientific devices that re being imported
Assurance to ensure quality as well as such machinery and equipment
imported by industries for research and development.
Custom duty is levied in the minimum rate on import of
machinery, transformers, generators having a capacity of
All Industries
10 Kilowatt and other industrial devices imported by an
industry for commercial purpose.
D. Exemptions for micro industries (Section 24)

Industry Exemption
No fees or charges is levied on registration of
Micro industry on registration
micro industry pursuant to this Act.
Micro Industries already under operation at 100% income tax exemption for at least 5 years
the time of commencement of this Act from the date of commencement of this Act.
100% income tax exemption for at least 5 years
Micro Industries registered and operating
from the date of commencement of commercial
pursuant to this Act
transaction.

E. Additional benefits for Female Entrepreneurs (Section 25)

Industries registered under the ownership of Female Entrepreneurs only are entitled to fol-
lowing additional benefits and concessions:
Headings Benefits
35% exemption in existing Industry
Industry Registration Fees
Registration Fees
Registration of Industrial property used
20% exemption in existing rate of registration
inside the industries
Female entrepreneur shall be prioritized while
Areas inside Industrial Estate
allocating the areas inside Industrial Estate
Export loan will be provided to the industry
Loan for exporting produced goods depending upon the financial status of the
transaction of the industry.
F. Other Exemptions and facilities

The other exemptions, concessions and facilities may be provided to the industries apart from
those exemptions, concessions and facilities provided under Section 22, 23, 24 of the Act to
the following industries-
 Industries based on forest products can be given possessory right pursuant to existing
laws over forest in any region through lease or other promissory guarantee under pre-
scribed conditions.
 No fees or royalty pursuant to the existing laws shall be applicable in electricity pro-
duced by industry for its own consumption.
 Such industry willing to sell surplus electricity to any other industry, may sell so pursu-
ant to existing laws in the rate agreed upon by both parties.
 Government of Nepal may provide additional exemptions and facilities to export based
industries and prescribed industries established inside Special Economic Zone or inside
Government or Private Industrial Estate by publishing notice in Nepal Gazette.
 Government of Nepal may provide additional exemptions and facilities by publishing
a notice in Nepal Gazette to National Priority Industries or industry making optimum
use of domestic raw materials, labor or skill or industries established by inventing new
technology or goods inside Nepal upon recommendation of Industries and Investment
Promotion Board.
 Government of Nepal may provide exemptions in Demand Charge added in Electricity
cost under prescribed conditions and procedures.
 Government of Nepal may provide aid assistance as seed capital to cooperatives, micro
industry, small and cottage industries to establish industries inside Under Developed
Region under prescribed conditions.

 Industries operating under Foreign Investment may be given approval to import goods
produced by the head office located in foreign countries for production, market develop-
ment and promotion of new goods for a prescribed period under prescribed terms and
conditions.
Misuse of Facilities and Concessions: No Misuse of the facilities and concessions to be enjoyed by
any industry under this Act shall be allowed other than the purpose for which it is provided.
5. One Stop Service Centre
General notes
Act prescribes the provision regarding the establishment of one point service centre to provide
smooth services related to the establishment of industrial firms and operation through one door
system. The Centre is authorised to provide permits to firms, approve MOU and agreements,
allow investments and facilitates other related works. The Centre is designed to cut hassles for
investors by providing a range of services at one place and save them the trouble of visiting various
government offices to get paperwork done. Different services as to registration, environment
compliance, foreign currency exchange, vise matters, infrastructure, land administration customs
and revenue and administration and law are provided through the same Centre at the same place.
Establishment of One Stop Service Centre

Section 35 of the Act provided the provisions for the establishment of one stop service Centre.
Sub-section (1) has stated the object of the Centre and provided that the Government of Nepal
may establish and run One Stop Service Centre by publishing a notice in the Nepal Gazette with
a view to provide exemption, concession and facilities to be available to the industries as per the
Act and other prevailing law and to provide infrastructure related services required to industries
in the simple and easy manner from the single place. While publishing the notice, apart from other
matters, it shall provide the place of Centre, service provided by the Centre, its units and service
operation committee.
Further, under Sub-section (4) of Section 35 of the Act, for the purpose of providing exemptions,
concessions and facilities to the Micro industry, Cottage industry and Small industry from the
local level, the One Stop Service Centre shall be established in the provincial or local level.
Function, duties and powers of one stop service committee

One stop service center shall be established to provide smooth services to investors as well as
make available the incentives and concessions to be enjoyed by any industry from a single place.
Pursuant to Sub-section (1) of Section 36 of the Act, the one stop service committee shall exercise
the following function, duties and powers:-

a) To implement or cause to implement the decision to provide exemptions, concessions

and facilities available to the industries as per this Act.
b) To perform acts delegated by the Board under its function, duties and powers.
c) To decide and implement for the timely arrangement of infrastructure service, like,
electricity, water supply, communication equipment, land and road to the industries.
d) To do other works as prescribed.
The authority of the committee may be delegate by forming other sub-committee as per the
necessity and the decision made by the committee shall be followed by the other government
offices.
6. Sick Industries and Other Provisions
General notes
The Act has defined Sick Industry as the industry which has, after minimum five years of its
operation, been continuously running under 30% capacity utilization and bearing loss for the
last three years, because of the situation out of its control. The act has made some provisions for
revival of such sick industry. Industry can hire a foreign national for a maximum period of seven
years, in a high level managerial position, where no Nepalese national can be hired because of the
lack of skill and expertise, and recommended by the Department of Industry with the permission
from the Department of Labor. A foreign national may repatriate his/her salaries, allowances,
emoluments, etc. in convertible foreign currency as prescribed. Similarly, the Act has provided the
provisions for the industrial's corporate social responsibility as a new legal framework making it
compulsory obligation of the industries. Further, by providing the provisions of punishment, the
Act intended to implement the law in a forceful manner where the concerned authority has got
power to investigate and impose fine and finally, to cancel the registration of such industry.
Sick industries
The Industrial Enterprises Act, 2073 has provided the grounds or conditions where an industry
can be declared as sick industry. Declaring an industry as sick industry is not only to identify
an industry as sick industry but the fundamental objective is to provide assistance from the
government to revive of such industry by considering its necessity and its contribution in the past.
Sub-section (1) of Section 37 of the Act has defined the nature of sick industries. It defines that if
any industry is being operated for a consecutive period of five years and in loss its production
level is thirty percent or less than thirty percent of the total production capacity, in the last three
years, without any default on the part of the management, Government of Nepal may, if it deems
necessary, declare it a sick industry by notification published in the Nepal Gazette.

Under Section 38, the sick industry can be classified on the basis of prescribed standard as Fully
sick industry, sick and Likely to be sick for their appropriate arrangement. After considering the
contribution of such sick industry before being sick to the foreign currency earnings, employment
generation, substitution of import and promotion of export, the government may make necessary
arrangement for the revival of such sick industry. Further, no duty, fee and tax of any kind shall be
levied on the machinery imported by any industry necessary for the extension and diversification
of such industry. Similarly, other exemption, concession, facilities or rebate can be provided to
such industries for their revival, reconstruction and management.
Supply of industrial human resource: (Section 44)

Human resources required for the industry are to be fulfilled from Nepalese citizens only.
Notwithstanding anything contained in Sub-section (1), if a Nepalese citizen could not be available
even after publishing an advertisement in national level public newspapers for any specific skilled
post or for high level management post. Department of Labour may provide approval on the
recommendation of Department of Industry to work for maximum period of 5 years to appoint a
non-Nepalese citizen.
Following are the matters to be inquired before obtaining approval:-
a) That the industry had attempted to appoint such human resource from Nepali citizen or
not;
b) Such skilled manpower is required or not;
c) Such human resource is available in Nepal or not;
Department of Industry shall make a recommendation to labour department for approval, if such
human resource is required for the industry and not available within Nepal.
On obtaining approval from department of labour such human resources can be re-appointed for
additional 2 years, if such appointed foreign human resource is of specialized skilled technical
post and such human resource is not available in Nepal. Foreign national who is working in any
industry above and who is from a country wherein convertible foreign currency is in circulation,
then he may repatriate his salaries, allowances, emoluments, etc., in convertible foreign currency
in an amount not exceeding 75% of such salaries, allowances and emoluments.
Provision of special economic zone: (Section 43)

For the promotion of export with proper management and operation of the industries GON may
declare Special Economic Zone to any place or region for the establishment and promotion of
export oriented industries or tourism industries. In this respect GON may declare some places as
Industrial corridor, or industrial village and Industrial cluster.

Corporate Social Responsibility: (Section 48)

Corporate social responsibility (CSR) is a form of corporate self-regulation, integrated into a
business model. CSR policy functions as a self-regulatory mechanism whereby a business monitors
and ensures its active compliance with the spirit of the law, ethical standards and national or
international norms. Corporate Social Responsibility measure is applicable to every Medium or
Large industries or Cottage or Small industries having annual turnover of more than 15 crores.
Such industries shall allocate for every year at least 1% of the annual profit to be utilized for
corporate social responsibility (“CSR Requirement”). The fund allocated for CSR shall be utilized
by making annual plans and programs in the areas as may be prescribed.
Following are the documents and report to be submitted within 3 months of end of financial year
to the body registering the industry:-
a) Transaction amount of every financial year;
b) The progress status of plans and programs for CSR measure carried on by the organization;
and
c) Plans & programs for CSR measure to be carried in current financial year.

Test Questions
1. Highlight the features of the Industrial Enterprises Act, 2073.
2. State the different types of industries as classified under the Industrial Enterprises Act, 2073.
3. Write the registration process of an industry the Industrial Enterprises Act, 2073.
4. State the legal provisions on the formation of the Industry and Investment Promotion Board.
5. Write a note on monitoring and cancellation of registration of an industry under the Industrial
Enterprises Act, 2073.
6. State the Functions, duties and powers of the Industry and Investment Promotion Board.
7. State the income tax concessions given to the industries under the Industrial Enterprises Act,
2073.
8. Which industries can get customs duty exemption?
9. What are the exemptions for the micro-industries?
10. State the additional benefits for the female entrepreneurs under the Industrial Enterprises
Act, 2073.
11. State the legal provisions for the establishment of One Stop Service Centre.
12. What are the functions, duties and powers of the One Stop Service Committee?
13. What is sick industry? State the benefits provided to the sick industries as per the Industrial
Enterprises Act, 2073?
14. Write short note on industrial human resource and special economic zone.
15. Classify the industries on the basis of business nature of the industry.

CHAPER 6 : BONUS ACT, 2030 (AMENDED 2074)
CHAPTER 6
BONUS ACT, 2030 (AMENDED 2074)

Bonus Act, 2030 (Amended 2074)
General notes
The fundamental objective of a company or business organisation or industry is to earn profit and
distribute the profit to its shareholders or investors. Investment in a business has been provided by
a person or group of person, therefore, it is private matter but the goods and services provided by
the company or business is not private in nature. A business is the byproduct of a combine effort
of investors, creditors, employees or workers and consumers and other stakeholders who are
directly or indirectly concerned with the business activities of the company or industry. Hence, the
employees or workers are one of the business components without their effort and contribution a
company or an industry cannot operate.
The modern concept of social justice and labour jurisprudence states that apart from investment
or money supply of the owners, the role of workers is significant as they are contributed their
time, effort, labour, skill and life to make a company success, therefore, they should be honoured
or their labour recognised by the owner or manager of company in terms of financial incentives
along with their salaries. This recognition or respect is reflected by way of bonus to be provided
to the works of an industry or business association. The concept of bonus, therefore, is straight
forward that if the business organisation has been earning money and getting profit because of the
precise efforts of workers, the organisation has to allocate and provide certain portion of profit to
the workers.
In one hand, it encourages the employees to dedicate to their works and on the other hand, the
workers may feel a sense of ownership and responsibility to the business institution and their
employer. To fulfill such objective and to provide for the legal provisions for distribution of bonus
to the workers and the personnel working in the enterprises, the Bonus Act, 2030 has been enacted.
Under the Bonus Act, 2030, the various legal provisions like, the amount of bonus to be distributed,
terms and eligibility for bonus distribution and its limitation and dispute settlement mechanism
etc. are provided by the Act.
Calculation and distribution of bonus

Bonus is paid out of profit earned by an enterprise in a fiscal year. It is not the right of employees
as like their salaries. The management of each enterprise under Section 4 of the Act shall prepare
the balance-sheet and the statement of profit and loss of such enterprise pursuant to Company
Act, 2063 and submit it to the Labour Office within six months of the completion of fiscal year.
If a complaint is registered along with the evidence that the balance-sheet and the statement of
profit and loss submitted pursuant to Subsection (1) is false, the Labour Office may exercise all
remarking and checking powers conferred to the concerned department pursuant to Company
Act, 2063 (2006) as if such powers were conferred to it equally. For the purpose of computation of
bonus under to this act, the branches or sub-branches of any enterprise situated in various places
shall be treated as the parts of the enterprise.

Each profit making enterprise shall have to allocate an amount equivalent to Ten percent of its net
income of one fiscal year for bonus to the employees. After distribution of the bonus under this Act
and other statement of accounts shall have to maintain in such manner as may be prescribed and
submit the details in the form of the format as prescribed to the Labour Office within Seven days
from the date of completion of bonus distribution.
The bonus, to be distributed pursuant to this Act shall be paid in cash and it shall have to distribute
within a period of eight months from the close of the fiscal year. However, under Sub-section
(3) of Section 9 of the Act, if an application, specifying reasons of not being able to distribute the
bonus within the period of 8 months is submitted to the Labour Office by any Management, the
Labour Office may, if the reasons are found genuine, extend the time for a period of three months
at maximum for distribution of bonus or may allow to distribute the bonuses of two years at a time
in the next fiscal year.
Sub-section (2) of Section 5 of the Bonus Act, 2030 has laid down that the following amounts shall
have to deduct from the net income assessed pursuant to Income Tax Act, 2058 while assessing the
net income of any enterprise derived in any one fiscal year:-
 The bonus amount distributed excessively under subsection (3) of Section 11.
Eligibility for bonus

Under Section 6 of the Act, an employee who has worked for of the half period to be worked
in a fiscal year, shall be entitled to obtain bonus under to this Act. Provided that, no employee
shall be entitled to obtain Bonus who has worked casually or in a shift basis. For the purpose of
distributing bonus under this Act, the following periods shall also be computed as a period where
an employee has worked.
 A period kept on reserve under any contract or under Section 15 of the Labour Act, 2074.
 A period under which an employee is on any leave with salary.
 A period of disablement caused by accident arising in course of business of the enter-
prise.
Bonus amount and its calculation

It is the obligation of the management of an enterprise or company to assess the percentage of
bonus amount to be obtained by any employee in a fiscal year. Section 7 under Sub-section (2)
has provided the method of assessment of bonus to be obtained by the employees. It states that
while computing bonus amount to be received by the employee, the amount so separated for the
distribution of bonus by the enterprise for the particular fiscal year shall be multiplied by a sum
of One Hundred and the amount so calculated shall be divided by the pay or wage amount of the
employee so entitled to receive the bonus and the amount so calculated shall be the percentage of
the bonus amount. Provided that the bonus to be obtained by an employee shall not exceed the
following amounts:

 An amount equivalent to the salary or wage of 8 months to an employee, who obtains up

to two times of minimum salary or wages as prescribed by government of Nepal.
 An amount equivalent to the salary or wage of 6 months to an employee, who obtains
salary or wages more than two times of minimum salary or wages.
 The minimum bonus amount to be obtained under Clause (b) shall not be less than the
maximum bonus amount to be obtained under Clause (a).
Restriction on payment of bonus: Section 8 of the Act has listed the various grounds where an
employee shall not be entitled to obtain bonus under this Act, if he/she is punished or dismissed
from service for committing any act as follows:
 Theft of the property of the enterprise or any damage to such property.

 Illegal strike or abetment to other for such strike.
 Riots or breaching of discipline.
Provided that, this Section shall not be deemed to be prejudiced to obtain in the case of the bonus
for a period before committing such a punishable act.
Payment of bonus in advance

The general rule is that the bonus is distributed at the end of the fiscal year after computation of
loss and profit and it is provided out of the profit of an enterprise to the employees. The theory
implied behind the bonus is that the enterprise has to share its earnings among the employees
because the profit would not be possible without their great efforts and devotion to the work
or business of the enterprise. Section 11 of the Bonus Act, 2030 has authorised an enterprise to
distribute bonus in advance and provided the provisions thereof.
As per Sub-section (1), if any enterprise fails to submit the balance-sheet and statement of profit
and loss of such enterprise within the time limit as provided in Sub-section (1) of Section 4, or
if bonus could not be distributed within the time limit of Section 9 by the reasons of inquiry
or examination conducted by the concerned Labour Office on the balance sheet and statement
of profit and loss submitted pursuant to Sub-section (2) of Section 4, the management of such
enterprise, after making tentative calculation may distribute at least five percent of the net income
as bonus in advance.
Sub-section (2) states that after preparation of balance-sheet and statement of profit and loss or
after final assessment is made in this matter, if the amount of bonus distributed pursuant to the
Sub-section (1) is found less than the amount to be distributed as bonus, the difference amount
shall have to be redistributed to the employees proportionately having considered previously
distributed amount.
Further, under Sub-section (3) if the amount, distributed as bonus is found excess to the amount
assessed for distribution of bonus under Sub-section (2), the excess amount, whatever may be,

shall be deducted for recovery it, while assessing the net income of the enterprise in the next fiscal
year.
Payment of bonus to other than the employee

The employees who have worked in an enterprise shall have right to receive the bonus. In some
exceptional cases the Bonus may be provided to the employee's agent or to a member of the Family.
In general, an employee who cannot be present to receive bonus may authorize any person, with
a letter of consent to receive the bonus payable to him/her.
Under Sub-section (2) of Section 10 of the Bonus Act, 2030 shall be given to the nominee, where the
nominee has been appointed and to the relatives in accordance with the law of inheritance, where
nominee has not been appointed or appointed nominee is not alive.
Further, a person who dissatisfied with the bonus distributed pursuant to Sub-section (2), may file
a complaint in the Labour Court within thirty five days of such distribution and in such a case, the
decision of the Labour Court shall be final.
Settlement of dispute of bonus

If the managers of an enterprise treated bonus as their burden to the profit of the enterprise and
reluctant in distribution of bonus to the employees, it causes anxiety in the enterprise, hence,
dispute between the directors/managers and employees. The dispute whatever its nature and
cause definitely affects the operation system of that enterprise. Therefore, the Bonus Act, 2030
has provided an amicable method of dispute settlement process under Section 16. The dispute
settlement process under the Act can be stated as under:
 By mutual negotiation: Under Sub-section (1) of Section 16 provides that if any dispute
arises between employee and management with respect to the bonus to be payable un-
der this Act, the Labour Office shall resolve such dispute by negotiations having invited
both the parties.
 Labour Office: Sub-section (2) states that if the dispute could not be resolved by negotia-
tions, the Labour Office shall ask to the concerned Enterprise and employees to produce
necessary documents and statements of accounts and shall give a decision on the basis of
such documents and statements.
 Labour Court: Pursuant to Sub-section (3), the party who is dissatisfied with the decision
made by the Labour Office, may appeal to the Labour Court within thirty five days of
receipt of such notice and the decision made by the Labour Court shall be final.
 Penalty and Appeal: The Department of Labour may fine with up to Rs. 5000/- to a per-
son who contravenes this Act or the order issued pursuant to the Rules framed hereun-
der. The party who is dissatisfied with the order of fine made by the Labour Department
pursuant to Section 20 of this Act may appeal in the High Court within 35 days of receipt
of the notice of such order.

Welfare fund and its operation

It is an important legal provision of the Bonus Act, 2030 in favour of the employees' welfare
and interest. The workers being human and integral part of an enterprise, they are to be treated
with high respect and the enterprise shall have to incur some expenses for their wellbeing by
establishing the welfare fund which shall be operated in participation of the employees as well.
As per subsection (1) of section 13 of the act, 70% of residual amount after distribution of bonus
shall be transferred to welfare fund established pursuant to prevailing law and remaining 30% of
residual amount shall be transferred to National level welfare established by GON for the benefit
of enterprise employees. Notwithstanding anything mention in subsection (1) of section 13 of the
act, those entities owned by government of Nepal, 20% of residual amount after distribution of
bonus shall be transferred to welfare fund established pursuant to prevailing law and remaining
80% of residual amount shall be transferred to National level welfare established by GON for the
benefit of enterprise employees.
Welfare fund shall be used for the interest of the employees of the enterprise and the operation of
the welfare fund shall be done in participation of the employees.
Bonus of Government Owned Establishment

However, the percentage of bonus and other matter relating to bonus which is to be distributed
by the Government owned enterprises shall be as determined by Government of Nepal.
Notwithstanding anything contained in section 5(1) & 5(3), non-profit making entity owned
by Government of Nepal cannot distribute bonus to its employees. Notwithstanding anything
contained in section 5(1) & 5(3), entity owned by government owned establishment can distribute
bonus only in following circumstances:
a) Expenses booked on accrual basis in earlier financial year should be paid in next financial
year;
b) The amount of contingent liabilities should be determined for each financial year and
separate fund must be created for such amount;
c) Loan taken from Nepal government or on the guarantee of Nepal government as

mentioned in loan deed should be paid according to repayment schedule.
Any other matters relating to distribution of bonus other than mentioned in this act and rules shall
be as decided by Nepal Government.
Every establishment owned by Government of Nepal with the objective of making profit, shall
be required to allocate 5% of the net profit made in every fiscal year as bonus. However, in case
of establishment owned by government of Nepal with the objective of making profit established
on a monopoly basis in areas/sector specified by the government, shall be required to allocate as
bonus 1% of the net profit made in every fiscal year.

Before distributing bonus by enterprise owned by government of Nepal should obtain approval
from Ministry of Finance and information should be provided to the labour office after obtaining
such approval. Establishment owned by the Government, established for the regulation, promotion
and protection of any sectors without any profit motive shall not allocate bonus amount. Where
any entity owned by government of Nepal distribute bonus contrary to the provision prescribed
in the rules, in such a case personnel making such decision shall be personally liable.
Test Questions
1. What is the jurisprudential basis of distribution of bonus to the employees?
2. How the bonus is calculated and distributed to the employees?
3. Who are eligible for bonus under the Bonus Act, 2030?
4. State the limit imposed by the Bonus Act, 2030 to be distributed to the employees.
5. When an employee is prohibited from receiving the bonus from the enterprises under the
Bonus Act, 2030?
6. Can bonus be paid in advance? State the relevant legal provisions on it provided under the
Bonus Act, 2030.
7. Can bonus be paid other person than the employee? Examine.
8. To whom the bonus is paid in case the employee dies without nominee?
9. State the legal mechanism for the settlement of bonus disputes under the Bonus Act, 2030.
10. Write short note on the Welfare Fund and its operational provisions.


CHAPER 7 : INSURANCE ACT, 2049
CHAPTER 7
INSURANCE ACT, 2049

1. Meaning and Nature of Insurance
General notes
The insurance industry today transacts a vast amount of business which are unlimited. Protection
or security of life and property against the future contingency is the main concern of every human
being and the insurance assures that the loss or destruction caused from such future risk shall be
protected or minimised under the insurance business. In this sense, the insurance is a cooperative
device to spread the risk among number of people who are exposed to it and agreed to be the
member of cooperation by way of making economic contribution and at the same time be agreed
to share the loss. On the other hand, it is the means of collecting the money in the terms of premium
from the large number of people or insured that can be used as the public financing for benefit of
the insured which proves as an instrumental of development of economy or trade and commerce
of a country. It is a contract under which one party called insured pay the premium and other
party called insurer agrees to pay the loss upon occurrence due to stipulated peril. It is a principle
based business.
A contract of insurance is a contract whereby one Person, called the insurer, assures or underwrite,
undertakes to make good the loss of another, called the insured or assured by Payment of money
to him on the happening of a specified event. A contact of insurance is a species of the general
contract. It must have like other contracts, all the essential elements of a contract. However in
addition to these, a contract of insurance has some special characteristics, such as insurable interest,
indemnity interest good faith cause proxima, contribution, subrogation, double insurance, re-
insurance, average clause etc.
Life insurance is a contract big which the insurer, in the person for whose benefit the insurance is
taken a certain sum of money on the death of the person whose life is insured, or on the expiry of
a certain period whichever is earlier.
Historical development of insurance in Nepal

The History of financial system in Nepal began in 1881 with the establishment of Tejarath Adda
(The National Treasury Office) in initiation of the Prime Minister Ranodeep Singh, which was
used as the government and public bank and Ministry of Finance at that time. Before this, Kumari
Chowk Adda was the main treasury office but not organized well. Later, in initiation of Nepalese
Ambassador to UK, Nepal Bank Limited as the first commercial bank, was established in 1937
with technical help of British Indian commercial banks. In these days, foreign (mostly Indian)
insurance companies met the insurance need of Nepal. In eve of Rana Regime, Nepal Insurance and
Transport Company (later as Nepal Insurance Company) was established in 1947 as a subsidiary
company of Nepal Bank Ltd. It was the only national insurance concern before establishment of
Rastriya Beema Sansthan (RBS) in 1968.

After the establishment of RBS, the then main business holder of life portfolio, Life Insurance
Corporation of India transferred the business to RBS and closed its office in Nepal in 1972.
Nonetheless, non life companies were in operation till to date. In 1968 Rastriya Beema Sansthan
(RBS) was established under Company Act, 2024 and was converted into Corporation in the
following year under Rastriya Beema Sansthan Act, 1969. This is a government owned organization
even now, and has been operating both life and non-life insurance business.
Prior to the enactment of Insurance Act, 1968 there was no regulatory body that supervises
insurance business in the country. Under the Insurance Act, 1968, Beema Samiti (Insurance Board)
was formulated as the insurance supervisory Authority. In 1986, a new experiment was done
in Nepalese insurance scenario by licensing a joint venture insurance company to operate both
life and non life business. But the real expansion of the insurance industry in Nepal took place
during the 1990s following the financial sector reform and liberalization of the economy by the
government. The new policy gave emphasis to the involvement and growth of insurance business
in the private sector. As a result, many companies established in the private sector including
foreign equity. Even branches of Indian and US companies are working in the field.
International Cooperation for Insurance Regulation

International cooperation among insurance regulator was advanced greatly by the formation
of International Association of Insurance Supervisors known IAIS. Since its formation, IAIS has
issued a number of document aimed at standardizing the international approach to insurance
regulation and to enhancing international cooperation.
The key document of IAIS is Insurance Core Principles. It has replaced the insurance supervisory
principles. The core principle which follow the broad style the core principles of international
banking regulator, reflect an attempt to harmonize regulatory approaches and method around the
world. It has provided very useful guidance as to internationally accept best practice.
IAIS principles require that the regulator be organized so as to be effective. This means that it
should be independent and accountable, have adequate power and skilled staff, and be transparent
in its operation.
Meaning of insurance
Insurance is a form of risk management in which the insured transfers the cost of potential loss to
another entity in exchange for monetary compensation known as the premium. Insurance allows
individuals, businesses and other entities to protect themselves against significant potential
losses and financial hardship at a reasonably affordable rate. Insurance is a contract between two
parties- the insured and the insurer. Insured is the person whose life or property is insured with
the insurer. The person whose risks are insured is called insured. It is a contract in which the
insurance company undertakes to indemnify the insured on the happening of certain event for a
payment of consideration or the insurer undertakes to compensate the insured for the loss arising
from the risk insured against.

According to McGill :“Insurance is a process in which uncertainties are made certain”.
In the words of Jon Megi : “Insurance is a plan wherein persons collectively share the losses of
risks”.
Thus, insurance is a device by which a loss likely to be caused by uncertain event is spread over a
large number of persons who are exposed to it and who voluntarily join themselves against such
an event.
Requirement of insurance contract

Insurance contracts are special types of contract applying in the insurance business containing a
common element of assurance. Hence, insurance contracts involve a promise to pay compensation
for loss caused to the insured by reason of the specified event covered. An insurance contract
requires the following elements for its validity and successful operation.
A large number of homogeneous exposure units

The vast majority of insurance policies are provided for individual members of very large classes.
The existence of a large number of homogeneous exposure units allows insurers to benefit from
the so-called “law of large numbers,” which in effect states that as the number of exposure units
increases, the actual results are increasingly likely to become close to expected results.
Definite Loss
The event that gives rise to the loss that is subject to insurance should, at least in principle, take
place at a known time, in a known place, and from a known cause. The classic example is death of
an insured on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily
meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for
instance, may involve prolonged exposure to injurious conditions where no specific time, place
or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a
reasonable person, with sufficient information, could objectively verify all three elements.
Accidental Loss
The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control
of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an
event for which there is only the opportunity for cost. Events that contain speculative elements,
such as ordinary business risks, are generally not considered insurable.
Large Loss
The size of the loss must be meaningful from the perspective of the insured. Insurance premiums
need to cover both the expected cost of losses, plus the cost of issuing and administering the
policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer
will be able to pay claims. For small losses these latter costs may be several times the size of the

expected cost of losses. There is little point in paying such costs unless the protection offered has
real value to a buyer.
Affordable Premium
If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting
premium is large relative to the amount of protection offered, it is not likely that anyone will buy
insurance, even if on offer. Further, as the accounting profession formally recognizes in financial
accounting standards, the premium cannot be so large that there is not a reasonable chance of a
significant loss to the insurer. If there is no such chance of loss, the transaction may have the form
of insurance, but not the substance.
Calculable Loss
There are two elements that must be at least estimable, if not formally calculable: the probability
of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has
more to do with the ability of a reasonable person in possession of a copy of the insurance policy
and a proof of loss associated with a claim presented under that policy to make a reasonably
definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
Limited risk of catastrophically large losses

Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion
of their capital base, Where the loss can be aggregated, or an individual policy could produce
exceptionally large claims, the capital constraint will restrict an insurers appetite for additional
policyholders. The classic example is earthquake insurance, where the ability of an underwriter to
issue a new policy depends on the number and size of the policies that it has already underwritten
Feature of insurance contract

Though all contracts share fundamental concepts and basic elements, insurance contracts typically
possess a number of characteristics not widely found in other types of contractual agreements. The
most common of these features are listed here:
Aleatory contract
If one party to a contract might receive considerably more in value than he or she gives up under
the terms of the agreement, the contract is said to be aleatory. This type of contract execution or
performance is contingent upon the occurrence of a particular event or contingency or an uncertain
event beyond the control of either party. Insurance contracts are of this type because, depending
upon chance or any number of uncertain outcomes, the insured (or his or her beneficiaries) may
receive substantially more in claim proceeds than was paid to the insurance company in premium
dollars. On the other hand, the insurer could ultimately receive significantly more dollars than the
insured party if a claim is never filed.

Contract of adhesion
In a contract of adhesion, one party draws up the contract in its entirety and presents it to the other
party on a 'take it or leave it' basis; the receiving party does not have the option of negotiating,
revising, or deleting any part or provision of the document. Insurance contracts are of this type,
because the insurer writes the contract and the insured either 'adheres' to it or is denied coverage.
In a court of law, when legal determinations must be made because of ambiguity in a contract
of adhesion, the court will render its interpretation against the party that wrote the contract.
Typically, the court will grant any reasonable expectation on the part of the insured (or his or her
beneficiaries) arising from an insurer-prepared contract.
Utmost Good Faith

Although all contracts ideally should be executed in good faith, insurance contracts are held to an
even higher standard, requiring the utmost of this quality between the parties. Due to the nature of
an insurance agreement, each party needs and is legally entitled to rely upon the representations
and declarations of the other. Each party must have a reasonable expectation that the other party
is not attempting to defraud, mislead, or conceal information and is indeed conducting themselves
in good faith. In a contract of utmost good faith, each party has a duty to reveal all material information
(that is, information that would likely influence a party's decision to either enter into or decline
the contract), and if any such data is not disclosed, the other party will usually have the right to
void the agreement.
Executory contract
An executory contract is one in which the covenants of one or more parties to the contract remain
partially or completely unfulfilled. Insurance contracts necessarily fall under this strict definition;
of course, it's stated in the insurance and agreement that the insurer will only perform its obligation
after certain events take place (in other words, losses occur).
Unilateral contract
A contract may either be bilateral or unilateral. In a bilateral contract, each party exchanges a
promise for a promise. However, in a unilateral contract, the promise of one party is exchanged
for a specific act of the other party. Insurance contracts are unilateral; the insured performs the act
of paying the policy premium, and the insurer promises to reimburse the insured for any covered
losses that may occur. It must be noted that once the insured has paid the policy premium, nothing
else is required on his or her part; no other promises of performance were made. Only the insurer
has covenanted any further action, and only the insurer can be held liable for breach of contract.
Conditional contract
A condition is a provision of a contract which limits the rights provided by the contract. In addition
to being executory, aleatory, adhesive, and of the utmost good faith, insurance contracts are also
conditional. Even when a loss is suffered, certain conditions must be met before the contract can

be legally enforced. For example, the insured individual or beneficiary must satisfy the condition
of submitting to the insurance company sufficient proof of loss, or prove that he or she has an
insurable interest in the person insured.
Personal contract
Insurance contracts are usually personal agreements between the insurance company and the
insured individual, and are not transferable to another person without the insurer's consent.
(Life insurance and some maritime insurance policies are notable exceptions to this standard.)
As an illustration, if the owner of a car sells the vehicle and no provision is made for the buyer to
continue the existing car insurance (which, in actuality, would simply be the writing of the new
policy), then coverage will cease with the transfer of title to the new owner.
Fundamental principles of insurance

Insurance is a principle based business. Its formation, implementation or enforcement and benefits
and remedies are determined and interpreted in the light of various principles which are widely
accepted in the insurance business. The principles can be summed up as follows-
 Principle of nature of contract
Nature of contract is a fundamental principle of an insurance contract. An insurance contract

comes into existence when one party makes a proposal of a contract and the other party
accepts the proposal. A contract should be simple to be a valid contract. The person who is
entering into a contract should enter with his free consent.
 Principle of utmost good faith:
An insurance contract is based on the principle of utmost good faith. Under this insurance
contract both the parties should have faith over each other. They must behave or act in ut-
most good faith. As a client, it is the duty of the insured person to disclose all the facts to the
insurance company. Any fraud or misrepresentation of facts can result in cancellation of the
contract.
Example: 'A' insured his car in an insurance company which was already damaged in an
accident by last night. Next day, he informed the accident and loss of property
and apply for the claim. The accident is verified and surveyor determined the loss
and accordingly amount paid. After six months, it came to the knowledge of the
insurance company that the insurance of the car was made by concealing the true
fact, i.e., damage in the car before insurance. The insurance company may bring an
action against A for fraud and recover all the amount paid from A.

 Principle of insurable interest
Under this principle of insurance, the insured must have an interest in the subject matter of
the insurance. In the absence of insurable interest, no one can get a property insured and can
claim the compensation of loss from the insurance company by destroying property.
Example: 'A' purchased a car for Rs. 50 Lakh and he is using it but he registered the car in
the name of 'B,' his servant. He insured the car in an insurance company where
policy amount is paid by him. After three years, the car got accident and destroyed.
All the papers and installment payment slips are with him. He cannot claim the
compensation in his name against the insurance company as the car is registered
in the name of 'B' who is the legal owner of the car and the B only can claim
compensation in his name.
 Principle of indemnity
The principle of indemnity states that the insurer agrees to pay no more than the actual amount
of loss. Indemnity is the security or compensation against loss or damage. The principle of
indemnity is such principle of insurance stating that an insured may not be compensated by
the insurance company in an amount exceeding the insured’s economic loss.
Example: A car insured by 'A' in an insurance company got accident and the actual loss is Rs.
5 Lakh. He cannot claim more than Rs. 5 Lakh, the actual loss occurred.
If 'A' had insured his car with B, C and D different insurance companies. When
loss occurred and calculated to Rs. 5 Lakh, he cannot claim Rs. 5 Lakh to each
companies. If could so, he would able to receive Rs. 15 Lakh from three companies
which exceeds the actual loss.
 Principal of mitigation
According to this principle, insured should try to minimize the loss as far as possible when
the incident takes place. It is the duty of the insurer to make every effort and to take all pos-
sible steps to minimize the loss in the event of the accident, fire, blast, theft etc. The insured
must not neglect and behave irresponsibly during such events just because the property is
insured.
 Double insurance
Double insurance denotes the insurance of same subject matter with two different companies
or with the same company under two different policies. A double insurance policy is adopted
where the financial position of the insurer is doubtful. Here, the insured cannot recover more
than the actual loss and cannot claim the whole amount from both the insurers.

 Principle of proximate cause
The Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is
applicable when the loss is the result of two or more causes. The proximate cause means; the
most dominant and most effective cause of loss. To find out whether the insurer is liable for
the loss or not, the proximate (closest) and not the remote must be looked into. In general in-
surance there are numerous policies on vehicle insurance, property insurance, fire insurance,
burglary insurance, etc., each policy offers protection from the risks that are mentioned in the
policy. No policy covers all types of risks. The insurance company is liable to indemnify only
against the insured risks only.
 Principle of subrogation
This principle of subrogation strongly supports the principle of indemnity. Subrogation

means substitution of the insurer in place of the insured for the purpose of claiming from the
third person for a loss covered by insurance.
Subrogation is the right of the insurer to enforce for their own benefit all the rights and remedies
which the insured possesses against third parties in respect of the subject-matter. Subrogation
is, thus, the substitution of one person in place of another in relation to the claim, its rights,
remedies or securities. After satisfying the claim of the insured, the insurers stand in his place.
For instance, a ship called 'Surya' is insured for Rs 30,00,000 and it is lost through collision
with another ship called 'Vikram'. If the owners of 'Surya' received from the underwriters
compensation of Rs 30,00,000 as per the policy, then the underwriters acquire a right to recover
this amount from the owner of 'Vkram' if it can be proved that the collision was due to the
negligence of the captain of 'Vikram'. The insurance company can take this action to recover
money in the name of the owner of 'Surya'. The right of subrogation does not arise until the
insurers have admitted their liability to the assured and have paid him the amount of the
loss. It is available whether the third party is liable to the assured on the basis of contract, or
on the basis of a tort. The insurers, however, have only the rights, which the insured himself
has. In the words of Lord Cairns, "the right of the underwriters is merely to make such claim
for damages as the assured himself could have been made and... it cannot of course be made
against the assured himself."
Example: In the case of an auto accident, subrogation stops an insured from collecting
payment from two insurance companies for the same loss, places responsibility for
the accident on the third party and gives an insurance company the legal right to
demand recovery.
A car insured by 'A' with an insurance company got accident and full insurance
claim paid the company. After the payment in full, the ownership of the car
transfers to the company. The company stands in A's place and as an owner can
exercise all the powers available to an owner of a property.

 Principle of contribution
The principle of Contribution allows insurance companies to share the cost of claims and
prevents an insured from collecting in full on more than one policy. The main purpose of the
principle is to compensate only the actual loss in a proportionate way by the insurers. If one
insurer pays the claim in full, the insurer can then recover a percentage of the payment from
the other insurers.
Functions of insurance
The function of insurance is to spread the loss over a large number of persons who are agreed to co-
operate each other at the time of loss. The risk cannot be averted but loss occurring due to a certain
risk can be distributed amongst the agreed persons. It assures for the financial compensation
against the loss or destruction in the life and property, hence reduces the risks. It encourages
to saving in case of life insurance and the collected of huge amount of money is available for
investment in the business or industrial activities. This investment in one hand helps to bring
economic stability in the country and on the other hand, it creates employment opportunities. The
functions of insurance can be listed as under-
Primary functions
Primary functions of insurance includes-
Protection
The main function of the insurance is to provide protection against the probable chances of loss.
The insurance guarantees the payment of loss and thus protects the assured from sufferings.
Certainty
Insurance provides certainty of payment at the uncertainty of loss. The uncertainty of loss can be
reduced by better planning and administration.
Risk-Sharing
The risk is uncertain, and therefore, the loss arising from the risk is also uncertain. When risk takes
place, the loss is shared by all the persons who are exposed to the risk.
Secondary functions
Secondary functions of insurance may be sated as under-
Prevents loss
The insurance joins hands with those institutions which are engaged in preventing the losses of
the society.

Provides capital
The insurance provides capital to the society and the business community. The accumulated funds
are invested in productive channel. This help to boost the national economy by expanding the
trade and industry in the country.
Improves efficiency: The insurance eliminates worries and miseries of losses at death and
destruction of property. It improves not only his efficiency, but the efficiencies of the masses are
also advanced.
Helps economic progress: The insurance by protecting the society from huge losses of damage,
destruction and death, provides an initiative to work hard for the betterment of the masses.
Disadvantages of insurance
Apart from the functions of insurance helping in different ways the people in their life, there are
few disadvantages of insurance. They are as follows-
 Insurance leads to negligence as the insured feels that he/she can be compensated for
any loss or damage.
 Insurance companies do not make the compensation promptly on maturity of the policy
or for the financial losses as the expectation of the insured.
 It may lead to the crimes in the society as the beneficiaries of the policy may be tempted
to commit crimes to receive the insured amount.
 Although insurance encourages savings, it does not provide the facilities that are pro-
vided by bank.
Types of insurance
Broadly speaking, insurance can be divided either as life insurance or general or non-life insurance.
All other types of insurance have some relation to the life or non-life insurance. Thus, insurance
can be classified on the various basis as under-
1. Business Point of View

Life Insurance
Life Insurance is different from other insurance in the sense that, here, the subject matter of
insurance is life of human being. The insurer will pay the fixed amount of insurance at the
time of death or at the expiry of certain period. At present, life insurance enjoys maximum
scope because the life is the most important property of the society or an individual. It pro-
vides protection to the family at the premature death or gives adequate amount at the old age
when earning capacities are reduced.

General Insurance
The general insurance includes property insurance, liability insurance, guarantee insurance
and other forms of insurance. Fire and marine insurances are strictly called property insur-
ance. The strictest form of liability insurance is fidelity insurance, whereby the insurer com-
pensates the loss to the insured when he is under the liability of payment to the third par-
ty. The liability insurance may be re-insurance, workman compensation insurance, public
liability insurance, professional liability insurance, third party liability of motor, aircraft etc.
Further, the guarantee insurance includes the fidelity insurance, credit insurance or hire pur-
chase guarantee insurance
Social Insurance
The social insurance is to provide protection to the weaker section of the society who is un-
able to pay the premium for adequate insurance. Pension plans, disability benefits, unem-
ployment benefits, sickness insurance and industrial insurance are the various forms of social
insurance. With the increase of the socialistic ideas, the social insurance is an obligatory duty
of the nation. The Government of a country must provide social insurance.
2. Risk Point of View

Property Insurance
Under the property insurance property of person/persons are insured against a certain speci-
fied risk. The risk may be fire or marine perils, theft of property or goods, damage to property
at accident. It includes- fire insurance, marine insurance, crop insurance, animal or Live stock
insurance, theft and Dacoit insurance, machinery insurance, aircraft insurance, automobile
insurance etc.
Marine Insurance
Marine insurance provides protection against loss of marine perils. The marine perils are col-
lision with rock, or ship attacks by enemies, fire and capture by pirates, etc.
Life Insurance
It is also known as personal insurance. Accident insurance, health insurance etc. come under
it. It generally includes whole life, endowment life and term life insurance. Further, insur-
ance may be disablement insurance or old age insurance etc.
According to Nepalese Insurance Act, 1992 the word. "Insurance" refers to Life, Non Life and
it also refers to Reinsurance. However, we can classified Insurance parts General or Non-Life
Insurance and Life Insurance. The Rule 3 of Insurance Regulation 1993 it has classified Insurance
into three main headings:

 Life Insurance business

 Non-Life Insurance business
 Re-insurance business
It has also clarified that Nepal Government can classified Insurance in other types after taking
suggestion from Insurance Board.
Life Insurance business

The Insurer may operate the following Insurance Business under the Life Insurance Business:-
(a) Whole Life Insurance,
(b) Endowment Life Insurance,
(c) Term Life Insurance.
The Board may prescribe other categories of the Life Insurance Business as required. The conditions
and privileges of the Life Insurance Policy to be executed pursuant to this Rule shall be as specified
by the Board.
Non-Life Insurance business

The Insurer may operate the following Insurance Business under the Non-Life Insurance Business:
(a) Fire Insurance,
(b) Motor Insurance,
(c) Marine Insurance,
(d) Engineering and Contractor's Risk Insurance,
(e) Aviation Insurance,
(f) Miscellaneous Insurance.
The Board may prescribe other categories of Non-Life Insurance Business as required. The
conditions and privileges of the Non-Life Insurance Policy to be executed pursuant to this rule
shall be as specified by the Board.
Re-insurance business
The Insurer may re-insure the risks which are in excess from the risks assumed by it. The Categories
of Re-insurance Business to be made and other arrangement shall be as specified by the Board.

2. Insurance Board
General notes
Insurance regulation provide the insurance market with direction, management, control and
correction or insurance regulation means the rules of insurance market place ,as established by
law, administered by governmental agencies and interpreted by court ,all for the purpose of
promoting and protecting the interest of the policyholders. It is globally agreed that the need to
regulate the business of insurer on frequent basis- to assure continued solvency of insurer, balance
the interest of weaker customer, determine the adequate rate of premium and to make insurance
available. Keeping those thing in mind, firstly, Insurance Act, 1968 made a provision of Beema
Samiti (Insurance Board), as a sole authority empowering with various powers and authorities
to regulate the insurance activities within Nepal. During 1990s, Nepalese government adopted
economic liberalization policy. The policy results in the rapid expansion of the Nepalese Insurance
business in terms of number of companies working in the field and also, total premium income. In
the mean time existing Insurance Act, 1968 and Insurance Rules 1969 was repealed by Insurance
Act, 1992 and Insurance Regulation 1993 respectively. The main aim of the Insurance Act, 1992 is to
establish Insurance Board to systematize, regularize, develop and regulate the Insurance Business
in Nepal. At present, policy holders’ protection has become main focal point. The Board shall be
an autonomous and corporate body having perpetual succession. The Board shall have a separate
seal for its business. The Board may deal as a person to acquire, possess, dispose or otherwise
manage the movable and immovable property. Further, the Board may sue as a person by its own
name and the Board also may be sued in its name. However, the independence of regulatory body
is still handicapped by the existing law. This is among reasons why the Insurance Act of Nepal
should be amended in an appropriate manner.
Formation of Insurance Board

Pursuant to Sub-section (2) of Section 3 of the Act, the Board shall consists of five members which
shall be as follows:

1. Person nominated or designated by the Nepal 1 Chairperson
Government
2. Representative, Ministry of Law, Justice and 1 Member
Parliamentary Affairs
3. Representative, Ministry of Finance 1 Member
4. Person nominated by the Nepal Government from 1 Member
among the persons having the special knowledge in the
Insurance Business
5. Person nominated by the Nepal Government from 1 Member
among the Insured

An employee designated by the Board shall perform the duty as a Secretary of the Board. The
Nepal Government may make alteration of the Members of the Board by publishing a notification
in the Nepal Gazette, if it deems necessary. If it is deemed necessary, the Board may invite any
national or
foreign experts in the meeting of the Board as an observer. The tenure of the nominated Members
of the Board shall be four years. They may be re-nominated up to twice after the expiry of their
tenure. The Head office of the Board shall be located in Kathmandu
Meeting and decision of the Board

Section 5 of the Act has provided the provisions relating to the meeting and decision making
process of the board. The meeting of the board shall be held on the date, time and venue as
prescribed by the Chairperson of the board. According to Sub-section (2), the meeting of the board
shall be held at least eight times per year and not less than twice within three months. The meeting
of the board shall be presided by the Chairperson. In the case of his/her absence, the meeting shall
be presided by the person selected from among the members themselves.
Quorum: The quorum for the meeting of the board shall be fulfilled in the presence of fifty percent
member of the total members of the Board. The opinion of majority shall prevail in the meeting
of the board and in case of tie, the chair person may cast decisive vote. The decision of the Board
shall be certified by the Secretary. Other procedures relating to the meeting of the Board shall be
as determined by the Board itself.

In principle, there are two fundamentally different models of regulatory structure based on
institutional framework and functional framework. Traditional approach to regulation is found to
be institutional assigning the separate agencies for specialized market such as banking, insurance,
security transactions etc. Nepal has been following the traditional model by setting up Nepal
Rastra Bank, Insurance Board and Security Transaction Board etc. This model has undergone
challenged specially due to the technological innovation and globalization. Hence integrated
regulatory model has started to operate.
As discussed Nepal has adopted traditional model of regulation and Beema Samiti is the specialized
insurance regulator financed by insurance industry. It is established to systematize, regularize,
develop and regulate the insurance business as autonomous body and empowered to carry out
the number of functions. To make enable the board to achieve the objectives as defined by the Act,
Section 8 of the Act has provided provisions about the functions to be done, duties to be observed
and powers to be exercised of the board shall be as follows :
 To provide necessary suggestions to the Nepal Government to frame the Policy regard-
ing to systematize, regularize, develop and regulate the insurance business.

 To frame a policy for the investment of the amount received from the insurance and to
prescribe the priority sectors.
 To register and renew the Insurer, Insurance Agent, Surveyor or Broker and to cancel or
cause to cancel such registration.
 To arbitrate in the dispute which arises between the Insurer and the Insured.
 To make decision on the complaints filed by the Insured against the Insurer regarding to
the settlement of liability of the insurance.
 To issue necessary directives to the Insurer from time to time regarding to the insurance
business.
 To formulate necessary basis for the protection of interests of the insured, and
 To do or cause to do other necessary functions regarding to the insurance business.
3. Registration and Cancellation of Insurer
General notes
Insurance sector is highly regularised business sector where the insurer, i.e., insurance company,
plays a vital role. To formalize the activities of an insurer and guide and regulate its business
transactions for the public interest, the Insurance Act, 2049 has provided the provisions of
registration of an institution as a public limited company, hence, no person shall operate or cause
to operate the insurance business without obtaining a certificate pursuant to this Act. After getting
registered, the insurer company must obtained license to run insurance business from the board by
fulfilling all the terms and conditions and requisites as fixed by the law. The insurance board may
decide whether or not license shall be issued to such insurer by taking consideration of various
factors. Once the license is issued and the insurer commences its business, it has to follow up the
rules and directives as prescribed by the insurance board and if found otherwise the license or the
registration of such insurer may be cancelled by the board. Further, if any directives or policies
were issued by the insurance board, all the insurer are bound to follow them. Therefore, under
the provisions of registration, renewal and cancellation of insurer, the Act has intended to provide
formal legal framework to the insurance company, regulation and control over the insurance
activities and make responsible to those who were operating the insurance business.
Registration and renewal of insurer

It is made compulsory provision under Section 10 of the Insurance Act, 2049 that without obtaining
a certificate no person shall operate or cause to operate the insurance business. Under Sub-section
(2) of Section 10 of the Act, any national or foreign corporate body desirous to operate an insurance
business shall submit an application to the office of the Board in the prescribed form along with
the following documents and prescribed fees for the registration of its name as an insurer :

 Memorandum of association of the corporate body.

 Articles of association of the corporate body.
 Insurance business to be operated and its policies and terms and conditions.
 If life Insurance business to be operated, documents displaying calculations of the premi-
ums to be received in operating such business and liability.
 The documents regarding the methods of utilizing the amounts to be received from the
insurance.
 Other necessary documents as prescribed by the Insurance Board.
After receiving the application, the Board shall make necessary investigation upon the application
and shall make an inquiry with the applicant, if necessary, and shall register the name of such
applicant in the prescribed register-book by mentioning the types of the insurance business to be
operated by the applicant and shall provide the registration certificate of Insurer to the applicant
in the form as prescribed. In case there is any reasonable ground for not registering the name, the
insurance board shall inform the concerned applicant accordingly.
However, in the case of the life insurance, the Board shall, with the approval of the Nepal
Government, issue a certificate to operate the business, based on the fulfillment of the criteria
which it has fixed, from time to time, in respect of the operation of the insurance business.
Grounds of refusal of registration

Pursuant to Section 12 of the Act, the insurance board may refuse to register an insurer in the
following circumstances:
 If the name of an Insurer to be registered is identical to the name of another Insurer

which has been already registered in the office of the Board.
 If any Insurer wants to be registered for operating Life Insurance and Non-Life Insurance
Business.
Provided that, the registered Insurer who is operating the Life Insurance and Non-Life
Insurance Business before the commencement of this Act, shall operate the business through
a separate organization for Life and Non-Life insurance business as prescribed from the date
specified by the Board.
 If the paid-up capital does not amount to at least 2 billion rupees for the Life insurance
business and to at least one billion rupees for the Non-life Insurance Business. (As per
decision of Beema Samiti dated 31st March 2017)
 In the event that the Board has made a decision to ban to register to additional corporate
body as an Insurer to operate insurance business on the basis of the report, regarding to
the study, research and evaluation of the insurance business market.

Renewal of registration of the Insurer

The certificate of an insurer must be renewed in every year. Under Sub-section (1) of Section 11 of
the Act, it has been provided that the insurer shall have to submit an application in the prescribed
form to the office of the insurance board up to the last day of Chaitra of each year for the renewal
of the certificate of registration along with the prescribed fees. Upon the receipt of the application
above, the insurance board shall have to renew the certificate of registration.
Similarly, Sub-section (3) has provided that in case any Insurer submits an application to the
Board within thirty days from the date of expiry of the time-limit pursuant to Sub-section (1),
mentioning the reason for its failure to submit an application for the renewal of the certificate of
registration within the aforesaid time-limit, the insurance board may, if it considers the reasons to
be appropriate, renew the certificate of registration of such Insurer.
Circumstances on which certificate cannot be renewed

Under Section 11A, the insurance board shall not renew the certificate of registration of the insurer
in any of the following circumstances :
 If the balance-sheet has not submitted pursuant to Section 23.

 If the statement of income has not submitted pursuant to Section 24.
 If the audit report has not submitted pursuant to Section 25.
 If the report of Actuary has not submitted pursuant to Section 26.
 If the service-charge has not paid pursuant to Section 40.
 If it has been prohibited to operate the Insurance Business pursuant to Section 12A.
Further, if the insurer has submitted an application to the insurance board within 15 days from
the date of receiving notice, stating reasonable grounds for not performing the liabilities to be
performed pursuant to Section 23, 24, 25, 26 and 40, the board may provide an additional time-
limit of up to one month to perform such liabilities if it considers the reasons to be appropriate.
Ban on the insurance business

The Insurance Act, 2049 under Sub-section (1) of Section 12A has provided the various grounds
on which the insurance board may impose a ban entirely or partially or may cancel any type of
business being operated by the Insurer under the Insurance Business. They are as follows:
 If the directives provided by the Board time to time regarding the procedures to be fol-
lowed by the Insurer during the operation of the Insurance Business has been violated.
 If the Insurer provides loan to any corporate body in which any of its Directors or his/
her family is working as a Managing Agent or partner or provides guarantee or security
of any kind for any loan provided to him/her by others by violating Section 14.

 If the Insurer does not provide information to the Board to be provided pursuant to
Section 15.
 If the Insurer does not maintain the accounts and record, to be maintained pursuant to
Section 19.
 If the Insurer does not maintain separate accounts and records to be maintained sepa-
rately pursuant to Section 20.
 If the Insurer does not maintain the fund to be maintained by it pursuant to Section 21 or
bears liability of one Insurance Business from the fund maintained for another business.
 If the Insurer does not maintain the compulsory reserve fund to be maintained by it
pursuant to Section 22.
 If the Insurer accepts the insurance risk without receiving the insurance premium pur-
suant to Section 27.
 If the Insurer does not re-insure pursuant to Section 28.
Time of clarification: Before imposing a ban on the insurance business of an insurer under the
ground stated as above, the Board shall provide a reasonable time-limit to submit clarification to
the concerned Insurer clearly stating the reasons for imposing the ban on its Insurance Business.
Notice of ban: If the concerned insurer does not submit its clarification within the time-limit or
the clarification submitted by it is not found to be satisfactory, the Board may impose a ban on the
insurance business of the concerned insurer and shall publish a notice in two major newspapers to
be published in Nepal for the information of public in general. During the time period of a ban on
the insurance business, such insurer shall make payment of claims of compensation filed against
it as prescribed.
Lifting the ban: If the ban is imposed in the Insurance Business of any Insurer under this section,
the Board may, if it finds the evidence submitted by the Insurer within the time-limit by stating
that the circumstances for imposing the ban on its business existed no longer to be satisfactory,
impose a fine as prescribed and lift the ban.
Study of Circumstances of Ban on Insurance Business

No loan, guarantee, and security to directors (Section 14): No Insurer shall provide loans to its
Director or his family or any corporate body where he is a Managing Agent or partner; and no
guarantee or surety of any type shall be provided to such person when any person provides loan
to him.
Provided that, this Section shall not prevail to loans supplied to the extent of the surrender value
of the Insurance Policy issued by the Insurer.

Notification on dealing with related party (Section 15): If the Insurer has made any dealing
regarding the Insurance Business with its Director or his family or any corporate body where he is
a Managing Agent or partner. It shall provide a notice to the Board within 35 days.
Maintenance of accounts and records (Section 19): The Insurer shall maintain its accounts and
records according to Rules. The situation of actual activity of the Insurer and every item of income
and expenditure of the Insurer along with the detail particulars of its assets and liabilities shall be
comprehensively mentioned on the accounts and records.
Carrying more than one Insurance Business (Section 20): If any Insurer operates any other
business along with the Insurance Business, such Insurer shall maintain a separate accounts and
records of its Insurance Business. The Insurer who deals with more than one Insurance Business
shall maintain separate accounts and records for each types of Insurance Business. Insurer shall
maintain its accounts and records.
Insurance Fund (Section 21): An Insurer shall maintain separate fund for each types of Insurance
Business and the amount to be received from each Insurance Business shall be deposited in the
concerned fund. The fund maintained for one category of Insurance Business shall not be utilized
to bear the liabilities relating to other category of Insurance Business.
Maintenance of Fund (Section 22): Every Insurer shall maintain a reserve fund as specified by the
Board to meet the liability relating to its Insurance Business inside the Nepal.
Payment of Insurance Premium before holding Risk (Section 27): No Insurer shall hold the
insurance risk of any category of Insurance Business until it receives the premium of the Insurance
to be obtained by it.
It shall be deemed that the Insurer has undertaken the Insurance Business only after receiving the
Insurance premium by it for holding the risk. Provided that, if any practical difficulty arises due
to any reason, relating to the payment of outstanding amount within specified period, this Section
shall not be deemed to be prohibited to issue an Insurance Policy on the guarantee of a Bank or
Nepal Government.
Reinsuring Risk (Section 28): The Insurer shall have to re-insured the risk exceeding the limit of
the risk to be held by it in manner specified by the Board.
Cancellation of registration
The registration of an insurer issued by the insurance board may cancelled if such circumstances
exist. The Insurance Act, 2049 under Sub-section (1) of Section 13 has provided the different
circumstances where the insurance board may cancel the registration of an insurer by providing
a written notice with effect from the date prescribed in the same notice. The circumstances for the
cancellation of registration of an insurer are as follows:

 If the Insurance Business is not started within six months from the date of obtaining the
certificate.
 If it is felt that the liability of the Insurer exceeds its assets within Nepal.
 If the Insurer could not fulfill the liability pursuant to the decision within three months
from the date of final decision of the court in the case filed under the Insurance Policy
issued within Nepal.
 If the head office of the Insurance Business of any foreign Insurer is situated outside
Nepal and in case it is felt that Nepalese Insurer has not obtained equal facilities there
which are enjoyed by the foreign Insurer pursuant to the prevailing law of such country.
 If the Insurer does not open its office inside Nepal.
 If the Insurer does not perform the functions to be performed or has performed any func-
tions which is not to be performed pursuant to this Act or the Rules made under this Act.
The insurance board shall provide a reasonable time-limit to submit clarification to the concerned
Insurer, stating the reasons for canceling its registration before canceling the registration of an
Insurer. Further, if the concerned Insurer does not submit its clarification within the time period
or in case the clarification submitted by it is found not to be satisfactory, the Board shall cancel the
registration of such Insurer and shall publish a notice in two major newspapers to be published
Nepal for the information public in general. However, the cancellation of the registration of
an Insurer pursuant to this Section shall not make any effect to the rights and liabilities of the
concerned Insurer regarding to any action taken or functions performed before the cancellation.
Payment of insurance claims after cancellation

If an Insurer is dissolved because of the cancellation of its registration pursuant to Section 13,
it shall refund the amount received by it for insurance to the person, organization or the Board
within the period and method specified by the Board. It shall refund the principal amount along
with bonus as specified by the Board in the case of life insurance and the principal amount as
specified by the Board on a proportional basis in the case of non-life insurance.
Surveillance
In addition to establishing rules of behaviours, regulator needs to monitor the insurer's compliance
with the rules. There are three basic methods for monitoring compliance namely complaint
mechanism, off-site monitoring and on-site inspection.
 Complaint mechanism
The least intrusive and least costly approach to surveillance is to rely on direct complaint by
customers. This approach is appropriate where the more intrusive forms of surveillance are
prohibitively expensively. In many cases, this method is sufficient to identify the regulatory
breaches.

 Off-site Monitoring:
Off-site monitoring involves statistical and other review of data provided by regulated in-
stitution. Market integrity regulator often uses it to assess the compliance with disclosure
requirement. General objective of off-site analysis is to detect deterioration in an institution's
financial position by comparing its current position to its historical experience and to that of
its peer group.
 Inspection
Onsite Inspections are a time and resource intensive way of testing an institution's compli-
ance with regulations. These are mostly preserving of prudential regulators. There are two
methods in this inspection. Firstly to inspect with the large team of inspectors spending long
period of time shifting through an comprehensive review of most areas of regulatory compli-
ance. Secondly to inspect with a small team spending relatively a short period of time review-
ing specific issues identified by the off-site analysis. On site inspection can be particularly
helpful in identifying areas in which reported information is inadequate or misleading. It is
also important in testing the extent to which regulated institution implement the governance
and conduct with principles laid down by regulators.
Section 39(1) of the Act mandates the Insurance Board to conduct inquiry or investigation or
cause to make an inquiry or investigation, as per necessity, in the interests of the Insurance
Policy Holder or for any other reasonable cause, to any Insurer or Insurance Agent or Sur-
veyor or Broker or Insured as well as including all other related persons or corporate bodies,
regarding the Insurance Business and also regarding the other business dealt by any Insurer
if it has undertaken any other business.
It is the duty of an Insurer, all employees of the Insurer whether they are in service or
retired, Insurance Agent, Surveyor or Broker, Insured and all other related persons or cor-
porate bodies, to assist, by providing the accounts, records, registers, book accounts, or
any other documents, information and replies, to questions asked during the inquiries or
investigation.
The expenses incurred for conducting inquiries or investigations pursuant to sub-section (1)
shall be borne by the concerned Insurer.

4. Insurance Intermediaries
General notes
The basis of insurance business is a contract concluded between two parties, viz., an insurer and
client. It requires awareness towards the need and importance of insurance and a proper network
to expand its coverage to each and every person through the large varieties of insurance schemes.
To establish business relation between the insurer and clients and facilitate the business as well
as discharging the insurer's liability or obligation, there requires various persons providing their
professional services. These persons are the insurance agent, surveyor and broker. They are called
as insurance intermediaries. Considering their role in the insurance business, the insurance Act,
2049 and the Insurance Rules, 2049 have made provisions for their registration, license and its
cancellation, renewal, qualification and other related provisions.
Insurance agent
Insurance Agent means a person other than a salaried employee of an Insurer who has obtained a
license pursuant to Section 30, to work on behalf of the Insurer on the basis of commission.
Registration of insurance agent: Section 30 the Insurance Act, 2049 has provided the provisions of
registration of the insurance agent and license thereof. Hence, any person desirous to work as an
Insurance Agent possessing a qualification as prescribed shall submit an application to the Board
along with the recommendation of the concerned Insurer. After receiving an application, the
Board shall make necessary inquiry upon the application, and if he is qualified to get the license,
the Board shall provide a license of an Insurance Agent to the applicant in the form as prescribed
by receiving the fees as prescribed. If there is any reason for not providing the license, the Board
shall provide its information to the concerned applicant.
Qualification of an insurance agent: Any person desirous to submit an application for the
Insurance Agent's License shall be qualified as follows:
 Having passed at least SLC or the equivalent examination, and

 Having received a certificate being a participant and completed the training for the In-
surance Agent conducted by the Board or an organization recognized by the Board.
 Where an applicant desirous making an application for the License of Insurance Agent
is a corporate body, any one director of that corporate body shall have possessed the
qualification as referred above.
Commission amount of the insurance agent: Under Rule 23 of the Insurance Regulations, 2049 no
commission amount shall be provided to any Insurance Agent in excess of the following amount
from the Premium amount to be paid by the Insured:-

 The commission amount mentioned in Schedule - 11 regarding the Life Insurance,

 The commission amount as specified by the Board regarding the Non-life Insurance.
 Other incentive bonus provided by the insurer to the agent in addition to the commission
amount.
Surveyor
Surveyor means a person who has obtained a license pursuant to Section 30A of the Insurance Act,
2049 to make a financial valuation of the destroyed property and the word includes an adjuster
and a person who makes a valuation of losses.
Registration of the Surveyor: Pursuant to Sub-section of (1) of the Insurance Act, 2049 any person
desirous to work as a Surveyor possessing a qualification as prescribed may submit an application
to the Board. After receiving an application, the Board shall make necessary inquiry upon the
application, it he is qualified to get the license, the Board shall provide a license of a Surveyor to
the applicant in the form as prescribed by receiving the fees as prescribed. If there is any reason
for not providing the license, the Board shall provide its information to the concerned applicant.
Qualifications of a Surveyor: An applicant desirous of making an application for the Surveyor's

License shall have possessed any one of the following qualifications :
 Having gained at least ten years of work experiences on the Insurance Business, holding
an officer level post at the office of any Insurer; or
 Having possessed at least a Bachelor Degree in Engineering subject; or
 Having possessed at least a Bachelor Degree in Insurance subject from a Chartered In-
surance Institute of international standard or from an organization recognized by such
institute; or
 Having passed the Chartered Accountancy Examination.
Note: Before obtaining the certificate the surveyor’s should have participated & completed the
surveyor training conducted by the Board.
Classification of the Surveyor: Under Rule 28A of the Insurance Regulations, 2049, the Surveyors
who have been working as Surveyors after having obtained the Surveyor's license and completed
the following period shall be classified as follows and provided with the Surveyor's License, after
the commencement of this Regulation :-
 Class "A": A Surveyor who has regularly worked as a Surveyor for a period more than
15 years.
 Class "B": A Surveyor who has regularly worked as a Surveyor for a period from 10 to
15 years.

 Class "C": A Surveyor who has regularly worked as a Surveyor for a period From 5 to
10 years.
 Class "D": A Surveyor who has regularly worked as a Surveyor for a period of 5 years.
Insurance Broker
Broker means a person, i.e., a body corporate who has obtained license pursuant to Section 30B,
to work as an intermediary between an Insurer and Insurer relating to the insurance business.
Hence, the broker links two insurers and establishes business relation between them by bringing
the insurer on to a negotiation table.
Registration of the Broker: As per Section 30B any person desirous to work as a Broker possessing
a qualification as prescribed shall have to submit an application to the Board. After receiving an
application, the Board shall make necessary inquiry upon the application, if he is qualified to get
the license the Board shall provide a license of a Broker to the applicant in the form as prescribed by
receiving the fees as prescribed. If there is any reason for not providing the license, the Board shall
provide its information to the concerned applicant. The Board may make restriction by refusing
to provide the Broker's License to any person for the particular period to deal as an intermediary
between an Insurer and Insurer on the basis of the report relating to the study, research and
evaluation of the Insurance Business market.
Qualifications of a broker: The Insurance Regulation, 2049 has provided the required qualification
of a broker. Hence, any person submitting an application for the Broker's License shall fulfill the
following terms and conditions:
 Shall have to be recognized as a corporate body pursuant to prevailing law,

 The authorized capital of the corporate body shall be as specified by the Board,
 Twenty five percent of the authorized capital of the corporate body shall be deposited in
the fixed deposit account of any commercial bank,
 The person working in the capacity of the General Manager of the corporate body shall
have a fifteen year's experience regarding the Insurance Business,
 Shall have to fulfill the other conditions as specified by the Board.
Term and renewal of the license

Section 31 of the Insurance Act, 2049 has provided the provision relating to the renewal of license
of an insurance agent or surveyor or broker in yearly basis. Sub-section (1) reads that the Insurance
Agent, Surveyor or Broker shall submit an application to the office of the Board in the format as
prescribed along with the fees as prescribed by up to the last day of Chaitra of each year for the
renewal of his license. After receiving an application, the Board shall make the renewal of the
license of the Insurance Agent, Surveyor of Broker.

Under Sub-section (3), if any Insurance Agent, Surveyor or Broker has submitted an application to
the Board stating the ground for his inability to submit an application for the renewal of the license
within the period pursuant to sub-section (1), and if the Board feels that ground is reasonable the
Board may extend the time-limit for a maximum period of six months by receiving the additional
fees as prescribed.
Disqualification of the insurance agent, surveyor or broker

Under Section 32 of the Act, no person shall become an Insurance Agent, Surveyor or Broker in the
following circumstances:
 If he has not attained the age of sixteen years.

 If he is of unsound mind.
 If he is an insolvent.
 If he has been convicted and sentenced to punishment by a court in the offense involving
any type of theft, fraud or misappropriation or embezzlement of the property entrusted
to him.
 If he has done anything in the course of work regarding to the Insurance Business caus-
ing loss or damage to the Insurer or Insurance Policy Holder.
Cancellation of license
License issued to the insurance agent or surveyor or broker can be cancelled by the Board under
the various grounds as provided under Section 33 of the Insurance Act, 2049. Before canceling
the license, the Board shall provide a reasonable time-limit to him to submit his clarification
in respect to the charge leveled against him. The license may be cancelled under the following
grounds:
 If any Insurance Agent, Surveyor or Broker does not renew his license pursuant to Sec-
tion 31 or
 If action has been made against the right and interests of Insurance Policy Holder; or
 If action has been committed contrary to this Act or the Rules made under this Act.

5. Provision relating to payment of Insurance Claim
Process of payment against Life Insurance Claim (Rule 31)

The Insurer shall issue a discharge voucher in the name of the Insured who has already paid the
last installment of the Life Insurance Premium, requesting him to come to claim the payment
along with the Insurance Policy and other documents required for making payment against such
Life Insurance claim within 15 days from the date of payment of such installment. If the insured
submits the Insurance Policy and other documents along with discharge voucher, the Insurer
shall conduct an inquiry as required and make a payment against the Life Insurance claim within
7 days from the date of expiry of the period of the Life Insurance Policy. In case any person who
has taken up an Insurance Policy dies before the expiry of the period of the Insurance Policy, the
person designated by him, if any; and in case no person has been designated the nearest heir from
among the persons mentioned in sub-section (1) of Section 38 of the Act.
The person making claim shall submit an application for the payment against the claim to the
Insurer to receive the amount of the Life Insurance stating the details as follows:-
(a) The details relating to the claim,
(b) A Certificate of death of the insured,
(c) In case the insured has died in an accident and if such risk is covered by the Life Insurance,
the postmortem report of the government physician relating to the cause of death, and if
there is no such report, a report of the police,
(d) A certificate of relationship with the insured,
(e) The documents regarding the age certification in case the age has not been certified,
(f) Other details specified by the Board.
After the receipt of the application the Insurer shall make an inquiry into the details including the
documents submitted regarding to the claim of Life Insurance, and shall examine other matters
also if necessary, and shall determine the liability within 15 days from the date of receipt of such
documents by it, and shall issue the discharge voucher in the name of the applicant requesting him
to come to collect the payment against the claim.
The Insurer shall make the payment against the Insurance claim within 15 days from the date of
receipt of the discharge voucher from the applicant. If it is found that the Insurance claim needs not
to be paid by determining the liability, while making an inquiry into the details and documents,
the Insurer shall provide written information to the applicant clearly stating the reasons thereof.

Process of payment against Non-Life Insurance Claim (Rule 32)

If any claim has to be made under the Insurance Policy by an Insured who has taken up a Non-
Life Insurance Policy, the Insured shall submit an application to the Insurer stating all the details
relating to it. On receipt of an application of the Insured for the payment against the Insurance claim
of the Non-Life Insurance, the Insurer shall immediately designate a Surveyor to make inquiry, if
necessary. The Surveyor deputed shall make necessary inquiry and determine the liability of the
Insurer within 15 days. Surveyor shall submit a report to the Insurer including the comprehensive
details and inform the insured relating to it, by mentioning the amount to be received by the
Insured subject to the terms and conditions and facilities of the Insurance Policy. The Insurer shall
determine the liability and shall provide the payment against the claim of the Non-Life Insurance
to the Insured generally within 35 days from the submission of the report by the surveyor.
Complaint against the determination of liability (Rule 33)

Insured may file a complaint to the board in following circumstances:-
 If an Insurer does not determine the liability pursuant to Rule 31 and 32; or
 If the Insurer determines the liability causing loss to the Insured.
Following are the procedure to be taken by the board against the complaint:
 After receiving the complaint, the Board may issue an order to the concerned Insurer to
submit a written response stating the reasons within 15 days,
 If a written response is submitted to the Board --- it shall make an inquiry into it and may
examine other matters with the Insurer or Insured or may issue an order to submit other
document and details, if necessary,
 If no written response or the necessary documents or the details has been submitted
--- the Board shall make one-sided decision upon the complaint and shall give its infor-
mation to the concerned Insurer.
While making an inquiry into the complaint filed, if it is found that the liability is not determined
by the Insurer to be determined by it. The Board may issue an order to the Insurer to determine or
re-determine the liability.
Responsibility or Liability of Insurer (Section 17)

As per sub section (1) of section 17, the Insurer shall pay the compensation for any loss due to any
actions against the rights and interests of the Insurance Policy holders by the insurer, employees
of the insurer, insurance agents or surveyors. The Insured may submit a complaint to the Board
as prescribed in Rule 33, if the liability on the compensation for insurance claim is not assessed
within the prescribed period of time or if the liability is assessed to the disadvantage of insured or
if the insurer does not pay the compensation pursuant to Sub-section (1).

The Board shall make necessary investigation into the complaint received and shall provide a
reasonable opportunity to the concerned Insurer to submit clarification upon such complaint. I f
the clarification is reasonable the Board may cancel such complaint by mentioning its ground. If the
clarification is not reasonable the Board shall make a decision to pay the reasonable compensation
to the complainant. If the Board decides to give compensation to the complainant, the Insurer shall
pay such amount as compensation to the concerned Insured.
If an appeal is made, against the decision made by the Board to pay compensation to the complaint
and the decision of the Board is upheld, the concerned Insurer shall promptly pay the compensation
plus the interest on the amount of compensation to be set at the rate as prescribed for the period
from the date of original decision to the date of final settlement of the case.
Payment of insurance policy

The Insurance Act, 2049 under Section 38 has provisioned about the payment of amount under the
insurance policy other than the insured in the event of his/her her in case of life insurance. It has
been provided that if any Life Insurance Policy Holder dies before the expiry of the term of his/
her policy, the amount mentioned in such Insurance Policy shall be paid to the person designated
by him/her therein. If he/she has not designated any person or if the designee has already died,
payment shall be made to any of his/her surviving related dependents as follows in the following
order and if there are more than one surviving related persons in same order with amount shall
be distributed or equal share:
 Husband or wife of the joint family.

 Son, sister and widow daughter-in-law of the joint family.
 Father, mother (in case of the married woman father-in-law, mother-in-law.
 Grandfather, grandmother who have to be taken care of by him/herself and grandson,
granddaughter in the line of the son.
 Husband, wife who is living separate.
 Unmarried daughter, son, widow daughter-in-law who is living separate .
 Father, mother who is living separate.
 Step son, step daughter of the joint family.
 Brother, sister of the joint family.
 Father-in-law, mother-in-law living separate in the case of married woman.
 Grandson, unmarried grand daughter who living separate.
 Step mother who is living separate.
 Step son, unmarried step daughter who is living separate.

 Husband's elder brother, elder brother's wife, younger brother of the husband, wife of
the husband's younger brother in case of married woman.
 Nephew, niece of joint family.
 Uncle, widow aunty, elder brother's wife, and daughter-in-law of the joint family.
 Brother and sister who is living separate,
 Grandfather, grandmother, grand daughter-in-law, nephew, niece living separately.
 Person living together with in insured person up to the last stage.
If the person designated dies or if the Insurance Policy Holder wants to replace him, he/she shall
write to the concerned Insurer for designating another person. The Insurer also shall have to alter
the designated person according to the request of the Insurance Policy Holder and shall provide
the written notice thereof to the concerned Insurance Policy Holder.
Order of Settlement of Claims (Section 41B)

Liquidation of insurance company means existence of company is in the process of end. As per
Section 18, liquidator of insurance company shall be appointed by Government of Nepal. After
the completion of liquidation process, perpetual succession of the company and separate legal
existence comes to an end.
If any Insurer is dissolved due to the cancellation of its registration pursuant to Section 13, the
liabilities shall be settled in the following order of priority :-
 The expenses incurred for the dissolution,

 The amount to be paid against the insurance claims to the Insured pursuant to Section 16,
 The remuneration and other outstanding amounts to be obtained by the employees of
the Insurer,
 Loan amounts,
 The amount to be paid to the Board,
 The amount to be paid to the Government of Nepal.

6. Insurance offence and Other Provisions
General notes
When an act is treated as undesirable to a particular function, system or process, it is prohibited
and punishment is imposed to those found in guilty of such acts. For the better enforcement
of laws and to save or protect the interests of common people in a society associated with the
various sectors, certain acts are defined as offence and punishment imposed to the wrong doers.
The Insurance Act, 2049, with a view to protect the interests of the shareholders, clients or other
stakeholders has defined various acts as offence and provided the provisions for the punishment
including compensation and penalties. Similarly, to maintain the financial morality and standard
of the officials of insurance companies, the Act has provided the provisions for the audit,
investigation and inquiry to the insurance activities and the method of settlement of claims. These
provisions have great significant in the proper and effective operation of the insurance business.
The Insurance Board plays a vital role to make inspection and take action against the insurers and
other related parties of insurance business with powers to impose punishment in case of violation
of the legal rules and standards.
Insurance offence and punishment

The acts causing adverse effects to the interest of the insurance company itself and the its clients and
defined as insurance offence and the Insurance can impose the different punishments including
imposition of fine and imprisonment in jail to those in default. Some crimes are recognized by
statutes are specific to insurance, while other are relevant to the insurance law because they are
crimes committed to obtain funds illegally from insurance companies. Few examples of crime are -
 Rebating: Passing of commission/incentives by agent to perspective insured to pur-

chase the insurance policy.
 Twisting: Inducing an individual to terminate life insurance policy in order to buy an-
other to the disadvantage of the insured.
 Filing of false claim: Attempt to collect money from an insurance company when there
is no loss or the padding or inflation of claim by procuring excessive and fraudulent
estimates of damages.
 Unlicensed insurance activities: As per the existing law, an insurance company cannot
carry on both insurance business life and non-life. Similarly, an insurance company ob-
taining license for non-life cannot carry on life insurance business and vice-versa.
 Defamation: Publication of material that might tend to lesson public confidence in the
institution of insurance.
 Arson: Felonious burning of property of another to defraud an insurance company.

 Homicide: when a beneficiary of a life insurance policy swindles the insured for obtain-
ing the proceeds of the policy or otherwise.
 Breach of trust: Agents using or mingling the client's insurance premiums with their
own funds.
 Unfair determination: Charging of different rates by single insurance company for sim-
ilar kind of risk.
 Conspiracy: dishonest agents conspire with his client to defraud the insurance company
by misrepresentation, by filing false claim or falsifying documents.
The offences and punishment thereof provided under Section 36 of the Insurance Act, 2049 are as
under-
S. No. Person Type of offence Punishment

1 Insurer or the Violation of this Act or the Fine ranging from Rs. 3000 to
Director of the Rules made under this Act or Rs. 10000. If such offense has
Insurer, employee order or directives or does not been made frequently, he will
or Surveyor, Broker perform any function to be be fined at the rate of extra
or Insurance Agent. performed or does any act not Rs. 500 for each subsequent
to be done. offense.
2 Insurer or Insurance Insurance Business without Fine up to Rs. 10000.

Agent or Broker following the procedures to be
followed pursuant to this Act.
3 Any person Has not maintained, prepared, Fine up to Rs. 30000 or

formed or submitted in time imprisonment up to 2 years
by knowingly or with malafide or with both.
intention or has maintained or
submitted the false details or
documents.
Appeal: The provision of appeal as against the decision made by the Board has been provided
by the Act under Section 37. It is provided that any person or corporate body dissatisfied with
the decision made by the Board pursuant to this Act, may make an appeal in the concerned High
Court within thirty five days from the date of such decision.
Reserve Fund
The Insurer shall deposit the following amounts in the reserve fund for the liabilities of its
Insurance Business within the Federal Democratic Republic of Nepal:

(a) In case of Life Insurance Business, an amount not less than the total liability as specified
by the actuary on the basis of the insurance policies published by the insurer within
Nepal.
(b) An amount not less than 50% of the net non-life insurance premium shown in the income
and expenditure of the Non-Life Insurance Business.
(c) 50% of the profit earned until the amount equals the paid-up capital of the Insurer
operating the Non-Life Insurance Business.
Provided that, in the case of Marine Insurance, the amount to be deposited to the reserve fund
for at least 3 years shall not be considered to be profit.
(d) An amount of 115% of the remaining amounts of the payment against the claim made by
the Insurer before the expiry of each fiscal year. Section 34 of the Act has provided the
provisions relating to the fund of the
Fund and audit
Fund of the Board: Section 34 of the Act has provided the provisions relating to the fund of the
Insurance Board and All the expenses to be incurred on behalf of the Board shall be borne from the
amount credited to the fund of the Board. It states that the Board shall have a separate fund of its
own and the following amounts shall consist in the fund :
 The amount received from the Nepal Government.

 The amount received from any foreign government or international organization or as-
sociation.
 The amount received as name registration and renewed fees etc. from the Insurer, Insur-
ance Agent or Surveyor.
 The amount received from service charge.
 The amount received from any other sources.
Accounts and Audit: The insurer shall have to kept and maintain the records or books and accounts
of the Board reflecting its true and fair business and position and these accounts must be audited
by the Auditor General's Department. Under Sub-section (1) of Section 35 of the Insurance Act,
2049, the Board shall accurately maintain the accounts and records of its financial transactions.
Such accounts shall so indicate, inter alia, the financial transactions, statement of each and every
income and expenditure, procurement and sale of goods and detail statements of the assets and
liabilities of the Board that the actual situation of the Board is clearly reflected. Further, if the Nepal
Government wishes, may examine or cause to examine the documents relating to the accounts and
records of the Board as well as its cash and kinds at any time.

Special provisions relating to audit of Insurer: Pursuant to Sub-section (1) of Section 39A of the
Act, if the Insurer fails to submit the audit report to the Board within the period of time as referred
to in Section 25 or if such report has a reasonable ground to confirm an irregularity committed
in the Insurance Business or if a complaint is filed with the Board alleging that the accounts and
records of the Insurance Business carried on by the Insurer suffer from irregularity, the Board may
audit or re-audit, or cause to be audited or re-audited, the Insurance Business of the Insurer. The
Insurer himself has to bear all the expenses incurred in the performance of audit or re-audit.
Insurance Tariff Advisory Committee

As per section 41 of Insurance Act 2049, Nepal Government may constitute an Insurance Tariff
Advisory Committee to provide necessary advice and recommendation to the Board relating to
the determination of the tariff of the Insurance Business consisting the members as follows:
(a) Chairperson, Insurance Board - Chairperson
(b) 3 persons from among the Chief of Insurers as nominated by the Nepal Government
- Member
(c) Secretary, Insurance Board - Member-Secretary
As per Rule 34 of Insurance Regulation 2049, the functions, duties and powers, of the Advisory
Board shall be as follows:
(a) To determine necessary policy relating to the fixation of the Insurance tariff,
(b) To conduct various seminars, symposiums and conferences relating to the determination
of necessary policies for making uniformity in the Insurance tariff,
(c) To inspect, supervise and evaluate as to whether or not the fixed Insurance tariffs are
being executed and to submit appropriate suggestions to the Board as required,
(d) To provide necessary suggestions to the Board for the transparent operation and
development of the Insurance Business.
Insurance disputes and adjudication process

There is a mechanism under the legal framework that all disputes should be settled in or mediated
up before reaching to the regular court of law. Since insurance contracts are specialized technical
contract and to be construed accordingly. Hence it is framed outside the scope of legal remedy as
determined by contract laws. It is to be justified that the disputes might cause injustice or might
prejudice the interest of policyholder. If it is left to the regular court for settlement of such disputes
that situation will not be in favour of policyholder due to lengthy legal procedure of the court,
time consuming and by nature of the contract where one party knows everything of substance
of contract and other knows nothing keeping this view in mind adjudication of the insurance
disputes are left to the insurance regulator. The objective is to settle the dispute in informal manner
fairly and promptly.

Section 8 of the insurance Act 2049, empower to the insurance board to decide the case in case
of filed by insured under the insurance policy against insurer. At the same time it entitles to the
board to mediate the disputes between insurer and insured. Intellectually there was inconvenience
on the exercise of judicial power by the insurance board because of the hostile of all legislative,
judicial and executive power. However court settled this issue when it arose in Supreme Court of
Nepal. Now it is been well settled and all types of insurance claim are to be heard by insurance
board as court of first instance.
Who can claim?

As determined by law that the insurance companies are responsible for any action prejudicing
the interest of policyholder or causing harm or loss to the policy holder either by insurer or by
employee of the insurer, agent and surveyor. In this situation insured can file a case to the insurance
board in case of non indemnification or not determination of the liability under the policy upon
claim within stipulated time or in case of inconvenience of insured upon determination.
Rules 31 and 32 of insurance regulation entitle to the policyholder or the person competent for
claim to file an application in case of not determining liabilities upon claim within stipulated time
or in case of inconvenience of insured on determination.
Adjudication procedure
Upon receiving an application by claimant, adjudication proceeds by issuing a written show
cause notice in form of letter asking to furnish all the details of evidences to defend the case. At
the first time fifteen days time is given. In case of not furnishing documents /evidences or any
inconvenience or any concealment or misrepresentation are found upon scrutinizing the produced
documents board shall further demand all policy dacoit and other evidences to correspond the
case by giving seven days notice.
In case of non cooperation or ignorance by the insurer case will be decided in favour of insured
disclosing reason there under. Board will pass an order under section 17(4) of the Insurance Act
and Rule 33(1Ga) to compensate the insured in the name of insurer disclosing reasons and giving
an opportunity for appeal.
Provision of appeal
Appeal against the decision of the insurance board lies to the concerned High Court under section
37 of the insurance Act.
The decision of the High Court shall further be appealed in the Supreme Court in case of supersede
by High Court and will be reviewed in case of ratification at the supreme court and the decision
of Supreme Court will be final.

Test Questions
1. Explain what is meant by a contract of insurance.
2. State the features of insurance contract.
3. What are the essentials of insurance?
4. Outline the history of insurance law in Nepal
5. Explain with illustrations the principles of insurance.
6. Explain the doctrine of subrogation. How does it differ from the principle of contribution?
7. "Insurable interest must exist in all contracts of insurance". Comment.
8. Distinguish between re-insurance and double insurance.
9. State the various functions of insurance.
10. Explain the various types of insurance.
11. State the legal provisions for the formation of Insurance Board.
12. List out the functions, duties and powers of the insurance board.
13. How an insurance company is registered in Nepal?
14. When insurance board can refuse to renew license of an insurer?
15. When insurance board can impose ban on insurance business?
16. What are the grounds for the cancellation of registration of insurer?
17. "Insurance contracts are based on utmost good faith". Discuss.
18. Examine if the contract of life insurance is a contract of indemnity.
19. Is the validity of a contract of insurance affected by the fact that the assured ceases to have an
insurable interest in life on which the contract is made before the happening of event insured
against?
20. Is the consent of the insurer necessary for an assignment of a life policy?
21. Examine the role of insurance board in regulation of insurance business in Nepal.
22. Who is Surveyor? When a person cannot be a surveyor?
23. Who is insurance agent? State his qualifications.
24. Who is insurance broker? State the qualifications of an insurance broker.
25. State the various insurance offence and punishment therefor.
26. Write short note on fund of insurance and its audit.
27. State the circumstances where a ban may be imposed on insurance business by the Insurance
Board pursuant to the Insurance Act, 2049.

CHAPER 8 : NEGOTIABLE INSTRUMENT ACT, 2034
CHAPTER 8
NEGOTIABLE INSTRUMENT ACT, 2034

1. Meaning and Feature of Negotiable Instruments
General notes
The law relating to negotiable instruments is contained in the Negotiable Instruments Acts, 2034
which deals with promissory notes, bills of exchange and cheques. Negotiable instruments are
special class of contract. Negotiable instruments are those documents which are freely used
in the commercial transactions and monetary dealings accompanied with certain conditions
and qualifications. These documents are treated not money but substitute of money. The word
'Negotiable' means transferable from one person to another in return for consideration and
'Instrument' means a written documents by which a right can be created in favour of some person.
Thus, a negotiable instrument is a document which entitles a person to a sum of money and which
is transferable from one person to another by mere delivery or by endorsement and delivery. The
negotiable instruments, on one hand, make payment system most safe and secure and on the
other hand reduce the efforts to carry the bank notes and possibility of loss or destruction of them
while carrying from one place to another. There certain features or characteristics of negotiable
instruments which make them meaningful and important and valid as well.
Meaning of negotiable instrument

The tern negotiable instrument as such is not defined in the Negotiable Instrument Acts, 2034.
Section 2 (e) states that Negotiable Instruments means a promissory Note, and Bill of Exchange.
Section 2(ii) of the Bank and Financial Institutions Act, 2063, however, defines by including the
cheque as a negotiable instrument and reads that 'Negotiable Instrument means promissory notes,
bills of exchange or cheque'. The statutory definitions only include three types of Negotiable
Instruments and any other instrument, which satisfy the conditions of negotiability and be
included to the list of negotiable instruments.
Justice Willis: Negotiable instrument is one the property in which is acquired by anyone. Who
takes it bona fide and for value notwithstanding any defect of title in the person from whom he
took it.
Thomas: A negotiable instrument is one which is, by a legally recognized custom of trade or by
law:
 Transferable by delivery or by endorsement and delivery.

 With notice to the party liable, in such a way that the holder of it for the time being may
sue upon it in his own name, and
 The property in it passes to a bona-fide transferee for value free form equities and free
from any defect in the title of the person from whom he obtained it.
The definition implies that a person taking an instrument (1) bona fide, (2) for value and (3) before
its maturity, known as holder in due course, gets a good title even though the title of the transferor

may be defective. A rough and ready test of negotiability in case of a bearer instruments is: Can a
good title be a acquired through a thief? If yes, the instrument is a negotiable instrument.
Features of negotiable instruments

The features or characteristics of negotiable instruments include:
 Freely Transferable: A negotiable instrument is freely transferable which means that it

can be transferred from one person to another easily and no legal formalities are neces-
sary to be complied with a transfer. Usually, when we transfer any property to some-
body, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But,
such formalities are not required while transferring a negotiable instrument. The owner-
ship is changed by mere delivery (when payable to the bearer) or by valid endorsement
and delivery (when payable to order). Further, while transferring, it is also not required
to give a notice to the previous holder.
Example: S draws a bill on T as, "Pay to T Rs.80000." It is a valid negotiable

instrument which is freely transferable from A to B.
 Rights of the Holder: The holder of a negotiable instrument has the right to file a suit
in his name for payment from all or any of the concerned parties. Holder in due course
can sue in his own name without giving notice to the debtor (drawer) of his becoming
holder. All prior parties are liable to him. A holder in due course can recover the full
amount of the instrument.
Example: C signs a negotiable instrument "I promise to B or order Rs. 100,000." It is

a valid negotiable instrument where B has the right to recover Rs.100,000 from C.
 Better Title: This means that the title of holder is free from all defects and a person who
receives a negotiable instrument has a clear and undisputable title to the instrument.
However, the title of the receiver will be absolute, only if he has got the instrument in
good faith and for a consideration. Also the receiver should have no knowledge of the
previous holder having any defect in his title. Such a person is known as holder in due
course.
Example: Mr. X sold goods to Mr. Y worth Rs. 100,000 and received a promissory note
in return from him. Afterwards B refused to honour promissory note claiming that
the goods were not of agreed quality.
 If Mr. X sues Mr. Y on the pro-note, Mr. Y's defence is good.

 If Mr. X negotiates pro-note to Mr. Z (who is holder in due course), Mr. Y's defence
will be of no avail.
 Unconditional Promise or Order: Promise or Order to pay must be unconditional which
means that it contains an unconditional promise or order to pay. Negotiable instruments
are payable to order which is expressed to a particular person. An instrument which

does not restrict its transferability expressly is negotiable whether the word 'order' is
mentioned or not. The word 'order' or 'bearer' is no longer necessary to render an instru-
ment negotiable.
Example: Mr. A signs a negotiable instrument as "I promise to pay Mr. B or order
Rs.100,000."
 Certain Amount: Payment must be in specific sum of money. This characteristic of nego-
tiable instrument means that the person liable to pay on the instrument has to pay that
sum of money mentioned in the instrument and nothing else than that and payment can
be asked in currency but not in goods, etc.
Example: Mr. P signs a note to Mr. Q, "I promise to pay Mr. Q Rs. 100,000 on
1 January next" is a valid note.
st
 In Writing: A negotiable instrument needs to be in written form and an oral promise or

order is not considered as a negotiable instrument.
Example: A draws a bill on B as, "Pay Rs.50000 to Z or order." (in writing)
 Presumptions: Certain presumptions apply to all negotiable instruments.

 Consideration Present: Every Negotiable instrument is made, or drawn accepted, en-
dorsed, negotiated or transferred for consideration.
 Date Drawn: Date mentioned on the instrument is the date on which it was made or
drawn.
 Time of Acceptance: Every accepted bill of exchange was accepted within a reasonable
time after its date and before its maturity.
 Time of Transfer: Every transfer of a negotiable instrument was made before maturity.
 Order of Endorsement: Endorsements appearing on the negotiable instrument were
made in the order in which they appear thereon.
 Stamp Duty: A lost or destroyed instrument was duly stamped and the stamp was duly
cancelled.
 Proof of Protest: The proof of protest is evidence of dishonour.
 Holder: The holder of negotiable instrument is a holder in due course.
Provided that, the burden of proving that the Holder is a Holder in due Course lies upon him/
her in the following conditions:-
 Where the Negotiable Instrument has been obtained from its lawful owner or from any
person in lawful custody thereof by means of an offence or fraud,

 Where the Negotiable Instrument has been obtained from the maker, Drawer or acceptor
thereof by means of an offence or fraud, or for unlawful consideration.
The above presumptions are rebuttable by evidence. If anyone challenges any of these
presumptions, he has to prove his allegation. Again, these presumptions would not arise where
an instrument has been obtained by any offence, fraud or unlawful consideration and he himself
is not a party to it.
Types of negotiable instruments

Negotiable instrument can broadly classified into two divisions.
1. Recognized by a statute or law: Negotiable instruments which are recognised by the

statute or law in force are the statutory or legal instruments. The law or statute provides the
rules of endorsement, negotiability, noting and protesting and discharge of the negotiable
instruments. It includes-
 Promissory note
 Bills of exchange
 Cheque
2. Recognized by a legally recognized customs or usages of trade: It includes the various

instruments which are in character of a negotiable instrument and are used in monetary
dealings by the business communities as a valid custom or usage of trade. The list of negotiable
instruments is not a closed chapter. With the growth of commerce, new kinds of securities
may claim recognition as negotiable instruments. Some examples of the instruments which
are used in the commercial world are as follows:
 Hundis
 Share warrants, Dividend warrants and Bearer debentures
 Banker's drafts
 circular notes
 Railways receipts, Bills of ladings or Delivery order.

2. Promissory note, Bill of exchange and Cheque
General notes
The Negotiable Instruments Act, 2034 has provided the provisions for only three types of negotiable
instruments, i.e., Promissory note, Bill of exchange and Cheque. The promissory note includes two
parties- maker and payee where the maker of the instrument promises to pay a certain sum of
money payable to the payee or his order. It is commonly used by the traders when one is indebted
to another person. In case of Bill of exchange, there are three parties, namely, drawer, drawee and
payee where an order to pay a certain sum of money is given to the drawee to pay that amount
to the payee or his order or bearer of the instruments and when the instrument is accepted by
the drawee, he is legally bound to pay the amount stated in the bill to the payee. It is the oldest
form of negotiable instrument used by the merchants and vendors of central Europe early of the
11th century. Similarly, the cheque is a species bill of exchange and used in the banking business
where an order is given by the drawer of a cheque to the specified bank to pay the amount stated
thereon. It is the latest form of instrument used by the business community after the development
and expansion of banking facilities.
Promissory note
Section 2 (f) of the Negotiable Instrument Act, 2034 has defined that a promissory note means an
instrument in writing except government or bank note containing an unconditional under taking,
signed by the maker, to pay a certain sum of money to, or to order of, a certain person, or to the
bearer of the instrument. The person who makes the promissory note and undertakes obligations
to pay a certain sum of money mentioned thereon is called Maker. And the person to whom the
payment is to be made is called Payee.
Example: A signs instrument in the following terms:
 'I promise to pay B or order Rs. 1,000.'

 'I acknowledge myself to be indebted to B in Rs. 10,000 to be paid on demand for value
received.'
 'Three months after I promise to pay B or order the some of the Rs. 5,000 for value re-
ceived.'
Essential Elements
For an instrument to become a promissory note, it must have the following essentials elements:
 It must be in writing: The promissory note must be in writing. Mere verbal promise to
pay is not enough. Writing includes print, typewriting, hand writing or it may also be in
pencil or ink.

 It must contain a promise to pay: The instrument must contain an express promise to
pay. A mere acknowledgement of indebtness or implied undertaking is not sufficient
and it cannot be a valid promissory note.
 It must be definite and unconditional: The promise must be definite and unconditional
and when it is certain or conditional, the instrument is valid. The promise to pay must
not depend upon the happening or non-happening of some future event or the fulfill-
ment of a condition. If there is a condition and the condition accordingly fulfills, the
instrument is still valid.
 It must be signed by the maker: It must be signed by the maker, otherwise it is incom-
plete and of not affective though it is written by the maker himself and his name is ap-
pears in the body of the instrument. Signature means the writing or otherwise affixing a
person's name or a mark to represent his name, by himself or by his authority with the
intention of authenticating a document.
 Parties of the instrument must be certain: The instrument itself must indicate with cer-
tainty as to who the maker of it is and who the payee is. Where the maker and payee
cannot be identified with the certainty from the instrument itself, the instrument is not a
promissory note. It has been held that the payee may sometimes be misnamed or desig-
nated by description only. In such a case, the note is valid if the payee can be ascertained
by evidence. For example, a promissory note payable to the manager of a certain compa-
ny is payable to a certain person.
 The sum payable must be certain: For a valid promissory note, it is essential that the
sum payable to the payee must be certain and definite. For example, A signs instrument
in the terms that 'I promise to pay B Rs. 5000 and all other sums which shall be due to
him. It is not valid and gives no right to the payee for such amount stated thereon.
 There must be a promise to pay money only: The payment to be made under the in-
strument must be in the Nepalese currency. Hence, an instrument containing a promise
to pay a certain sum of foreign money or to deliver a certain quantity of goods is not a
promissory note. Therefore, an instrument signed by A, saying 'I promise to pay B Rs.
2,000 and deliver one ton of paddy on 15 July 2015 is not a valid promissory note.
 Formalities are to be fulfilled: Formalities like number, date, place, consideration, etc.
are usually found in an instrument although they are not essential in law. The absence
of words 'for value received' or date is not essential but it must be affixed with the neces-
sary stamp as per the prevailing law.
Bill of exchange
Section 2 (g) defines the bill of exchange thus "Bill of exchange means an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to pay a certain
sum of money to, or to the order of a certain person or to the bearer of the instrument in a certain
date or after certain period of time or on the demand. There are three parties to a bill of exchange-

Drawer: The person giving order in writing to pay money or who makes the bill.
Drawee: The person to whom such direction is given to pay a certain sum of money to payee.
When the drawee accepts the bill he is called as acceptor.
Payee: The party to whom the payment is to be made, i.e., the receiver or beneficiary of the amount
stated on the instrument.
The drawer or the payee who is in possession of the bill called the holder of the instrument and the
holder must present the bill to the drawee for his acceptance.
Essential elements of bill of exchange

Bills of exchange being a negotiable instrument as like a promissory note, some of the elements
are common to the promissory note, which we have already discussed. The essentials elements of
a bill of exchange can be mentioned as under:
 It must be in writing.
 It must contain an order to pay. There must be an order but not a request to pay. Hence,
if it contains a request, it cannot be a bill of exchange.
 The order must be unconditional. The acceptance by the drawee cannot be amounted to
a condition.
 It requires three parties, i.e., drawer, drawee and payee.
 Parties must be certain.
 The drawer/ maker and payee may be the same and a single person.
 It must be signed by the drawer/ maker.
 The sum payable must be certain.
 It must contain an order to pay money only.
 It as originally drawn cannot be made payable to bearer on demand.
 The formalities relating to number, date, place and consideration are not essential in law.
But it must be affixed with necessary stamp.

Difference between a Promissory note and a bill of exchange
Basis of Difference Promissory Note Bill of Exchange
1. Number of parties There are two parties. There are three parties.
2. Maker and payee Maker and payee cannot be Maker/ drawer and payee can be the
the same and single person. same and single person.
3. Promise and order There is a promise to pay a There is an order to pay a sum of
sum of money. money.
4. Acceptance Acceptance is not required Acceptance is necessary by the
as it is signed by the person drawee before it can be presented for
liable to pay on it. payment.
5. Nature of liability Liability of the maker of a Liability of the maker of a bill is
promissory note is primary. secondary.
6. Payable to bearer It cannot be drawn payable It can be drawn payable to bearer but
to bearer. not payable to bearer on demand.
7. Notice of dishonour No notice is to provided to Notice is dishonour must be given to
the maker. all prior parties.
8. Maker's position Maker is in immediate Drawer is not in immediate relation
relation with the payee. with the payee.
9. Instrument in set It cannot be drawn in set. It can be drawn in set.
10. Proof of protest No protest is required in the Foreign bills must be protested for
case of a promissory note. dishonour when such protest is
required by law.
Types of bills
Bills are of different kinds. Some of these are: Inland Bills; Foreign Bills; Trade and accommodation
bills; Time Bills; Demand Bills; Clean Bills and Documentary Bills. Here we will discuss about the
foreign bills including the inland bills as under-
Inland bills: An Inland bill or instrument is defined as 'a promissory note, bill of exchange or
cheque drawn or made in India and payable in or drawn upon any person resident in India. On
analysis of the above definition it follows that an inland bill. (a) must be drawn or made in India
and made payable in India, or (b) must be drawn in India upon a person resident in India although
it may be payable outside India.
Examples: (i) A of Delhi draws a bill on B of Kathmandu payable at Pokhara.
(ii) A of Kathmandu draws a bill on I of Pokhara payable at New York.

In example (i) the bill is drawn in Nepal and is payable in Nepal and, therefore, is an Inland bill. In
example (ii) the bill is drawn in Nepal on a person resident in Nepal, though it is payable outside
Nepal, it is again an Inland bill.
Foreign bills: A foreign bill is a negotiable instrument which is not an inland instrument, as defined
above. Thus, a foreign bill of exchange is (a) drawn in India upon a person resident outside India
and made payable outside Nepal, or (b) drawn outside India and payable in Nepal.
Examples: (i) X of Janakpur draws a bill of exchange on Y of Delhi payable at Delhi.

(ii) A of London draws a bill of exchange on B of Butwal payable at Nepalgunj.
Foreign bills are generally drawn in sets of three, each of which is called a 'via'. It is only one of
these three 'vias' that have to be accepted and paid for. With the acceptance and payment of any
of them the others become inoperative. If, however, any person endorses different parts of a bill
in favour of different persons he and all the subsequent endorsers of each part are liable on such
part as if it were a separate bill. However, as between holders in due course of different parts of
the same set, he who first acquired title to his part is entitled to the other parts and the money
represented by the bill Drawee in case of need.
In case of foreign bills particularly, the drawer mentions another person, besides drawee, who may
be approached for acceptance or/and payment in case the need arises. For instance, the drawee
may either refuse to accept or pay or may not be available at the given address. Such a person
whose name is mentioned as an alternative drawee is called a 'drawee in case of need'. In English
Law, he is called 'reference in case of need'. He is so called because primarily the Payee is expected
to approach the drawee and it is only in case there is a problem (e.g., either the payee has refused
or is not available and the likes) that the drawee in case of need would be contacted.
Cheque
Section 2 (h) of the Negotiable Instrument Act, 2034 defines that cheque means a bill of exchange
drawn on a certain bank payable on demand. A cheque is a species of a bill of exchange, but it has
the following two additional characteristics. These are;
 It is always drawn on a specified bank

 It is always payable on demand.
Therefore, all cheques are bills of exchange but all bills of exchange are not cheques. Along with
the above requisites, a cheque must have all the essentials elements of a bill of exchange.

Difference between a bill of exchange and Cheque
Basis of Difference Bill of Exchange Cheque

1. Drawee It can be drawn on any person It is always drawn on a banker
including a banker. only.
2. Acceptance Acceptance is required before No prior acceptance is required.
presented for payment.
3. Days of grace It entitled to two days grace. It is not entitled to any days of
grace.
4. Payable on demand It may be payable on demand It is always payable on demand.
or after the expiry of a certain
period after date or sight.
5. Crossed cheque Bill cannot be crossed. Cheque may be crossed.
6. Stamp It is necessary to be affixed with Stamp is not necessary to be
necessary stamp. affixed on it.
7. Proof of protest It may be noted or protested for It is not required to be noted or
dishonour. protested for dishonoured.
Holder and Holder in due course

Section 2 (i) of the Negotiable Instrument Act, 2034, reads thus, the Holder means a person entitled
in his own name to be the possession of a Negotiable Instrument and to receive the amount due on
it. It implies that if a person entitled in his own name:
 To be the possession of the instrument, and

 To receive or recover the amount due thereon from the parties thereto.
In order to be entitled to the instrument in his own name, the holder must named there in as
the payee or the endorsee in case the instrument is payable to order, or he must be the bearer
thereof in case the instrument is payable to bearer. Therefore, where a person obtained possession
of an instrument by theft or as a finder of lost goods, he is not a holder as he cannot obtain or
recover the payment of the instrument. If he transfers the instrument to a transferee receiving if
for consideration and bona-fide, the transferee becomes the holder.
Holder in due Course: Clause (o) of Section 2 of the Negotiable Instrument Act, 2034 provides
thus, the Holder in due course means a person having entitlement upon the Negotiable Instrument
according to law, in the case of a Negotiable Instrument payable to a bearer and the payee or a
endorsee in the case for a Negotiable Instrument payable to the ordered person.
The essential qualifications of a holder in due course may, therefore, be summed up as follows:
 He must be a holder for valuable consideration.

 He must have become a holder (possessor) before the date of maturity of a negotiable
instrument.
 He must have become holder of the negotiable instrument in good faith.
 He should take the instrument without any negligence on his part. Hence, a reasonable
care on the part of the holder necessary before he acquires title of the negotiable
instrument.
 A holder in due course must take the instrument complete and regular on the face of it.
A holder of a Negotiable Instrument will not be a holder in due course if:
 He has obtained the instrument by gift or for an unlawful consideration or by some

illegal method.
 He has obtained the instrument after its maturity,
 He has obtained instrument mala fide, i.e., not in good faith.
Privileges of a Holder in due course

A holder in due course gets title to a negotiable instrument free from equities. Certain defences
which can be set up against a person claiming on a negotiable instrument cannot be set up against
a holder in due course. The special privileges of a holder in due course are as follows:
1. Instrument cleansed of all defect: A holder in due course who gets the instrument in good
faith in the course of its journey is not only himself protect against all defects of title of the
person form whom he has received it, but also serves, as a channel to protect all subsequent
holders. A holder in due course can recover the amount of the instrument from all prior
parties although, as a matter of fact, no consideration was paid by some of the previous
parties to the instrument or there was a defect of title in the party from whom he took it.
Once an instrument passes through the hands of a holder in due course, it is cleansed of all
defects provided the holder was himself not a party to a fraud or illegality which affected the
instrument in some stage of its journey.
A thief obtains a blank stamped Promissory Note signed by the maker. He fills it up for Rs. 2,
00,000 and delivered it to Auto Haven before its maturity against the car maintenance charge
who has received it in good faith. When the Note was presented to the maker, he refused
to pay on it as it was the lost instrument. The Auto Haven can recover the amount from the
maker. The instruments get cleansed of all defects.
2. Right not affected in case of an inchoate instrument: The right of a holder in due course to
recover money is not at all affected even though the instrument was originally an inchoate
stamped instrument and the transferor completed the instrument for a sum greater than what
was intended by the maker where instrument is forget it is void.

'A' signs as maker a blank stamped paper and gives it to 'B', and authorizes him to fill it as a
note for Rs. 100,000, to secure an advance which C is to make to B. B fraudulently fills it up as
a note for Rs. 500,000 payable to C who has in good faith advanced Rs. 500,000. C can recover
Rs. 500,000 from A.
3. All prior parties liable: All prior parties to the instrument (the maker or drawer, acceptor
and endorsers or transferors) continue to remain liable to the holder in due course until the
instrument is duly satisfied. The holder in due course can file a suit against all the parties
liable to pay in his own name though the instrument was not drawn in his name.
4. Can enforce payment of a fictitious bill: Where both the drawer and payee of a bill are
fictitious persons, the acceptor is liable on the bill to a holder in due course. If the latter can
show that the signature of the supposed drawer and the first endorser are in the same hand,
for the bill payable to the drawer's order the fictitious drawer must endorse the bill before he
can negotiate it. The acceptor is not relieved from liability to any holder in due course, on the
plea that drawer is fictitious, i.e., the acceptor of a bill cannot say, as against the holder in due
course, that the other parties to the bill were fictitious.
5. No effect of conditional delivery: Where a negotiable instrument is delivered conditionally

or for a special purpose and is negotiated to a holder in due course, a valid delivery of it is
conclusively presumed and he acquired good title to it.
6. No effect of absence of consideration or presence of an unlawful consideration: The plea

of absence of or unlawful consideration is not available against the holder in due course. The
party responsible shall have to make payment.
7. Estoppel against denying capacity of payee to endorsee: No maker of a note and no acceptor
of a bill payable to order shall, in a suit therein by a holder in due course, be permitted to
resist the claim of the holder in due course on the plea that the payee had not the capacity to
endorse the instrument on the date of the note as he was a minor or insane or that he had no
legal existence.
8. Estoppel against denying the original validity of instrument: The plea of original validity
of the instrument cannot be put forth, against the holder in due course by the drawer of a bill
of exchange or cheque, or the maker of a note. But where the instrument is void on the face
of it, e.g. promissory note made payable to 'bearer', even the holder induce course cannot
recover the money. Minors are free from the liability and there is no liability if the signatures
are forged.
9. Every holder is a holder in due course: Unless otherwise proved by the facts, every holder is
presumed to be a holder in due course.

3. Negotiation and Endorsement of Instruments
General notes
Negotiability is one of the most essential features of negotiable instrument by which the right
in the instrument can be transferred in the name of transferee. The transfer of an instrument by
one party to another so as to constitute the transferee a holder thereof is called a negotiation.
A negotiable instrument is freely transferable which means that it can be transferred from one
person to another easily and no legal formalities are necessary to be complied with a transfer.
Usually, when we transfer any property to somebody, we are required to make a transfer deed,
get it registered, pay stamp duty, etc. But, such formalities are not required while transferring a
negotiable instrument. This character of negotiable instrument makes them possible in monetary
dealings. A bearer instrument is transferable by mere delivery. An instrument payable to order can
be transferred by endorsement and delivery. On the other hand, a negotiable instrument may be
transferred by assignment where the assignee has only those rights, which the assignor possessed.
Negotiation and Assignment

The negotiation of an instrument should be distinguished from assignment. When a person
transfers his right to receive the payment of a debt is called "assignment of the debt". Where, for
example, the holder of a life insurance policy takes a loan from a bank, he transfers the right to
receive the Payment under the Policy to the bank is an assignment. Where the holder of a note, bill
or cheque transfers the same to another, he in essence, gives his right to receive the payment of the
instrument to the transferee. Thus, both the assignment and negotiation involve the transfer of the
right to receive the payment of debt. However, the rights, which the transferee of an instrument
by negotiation acquires, are substantially superior to those of an assignee. When a negotiable
instrument is transferred by negotiation, its transferee, if a holder in due course, sets a better
title than its transferor. On the other hand, when the transfer is made by way of assignment, the
assignee has only those rights which the assignor possesses.
Negotiation by mere delivery

The function of making, acceptance or endorsement of a Negotiable Instrument shall be regarded
to be completed only after its delivery. Section 29 of the Negotiable Instrument Act, 2034 provides
that a Negotiable Instrument payable to bearer is negotiable by delivery thereof. If the Negotiable
Instrument is payable to the person written on the instrument or to one ordered by him/her, such
instrument should be indorsed by the Holder. A cheque which is originally drawn payable to
bearer remains bearer even though it is subsequently endorsed in full. The rule is once a bearer
cheque always a bearer cheque, or where the payee is a fictitious person. In case of negotiation by
mere delivery, the transferor incurs no obligation to any party other than the immediate transferee.
The transferee becomes the holder of the instrument. Thus, a thief or finder of an instrument

cannot be termed as holder. However, if the thief or the finder negotiates the same to another
person, bonafide, then that other person does become the holder of the instrument.
Negotiation by endorsement and delivery

According to Section 34, every party of the Negotiable Instrument can indorse or negotiate such
instrument. The instruments payable to a specified person or to the order of a specified person can
be negotiated only by endorsement and delivery or a negotiable instrument payable otherwise
than to bearer can be negotiated only by endorsement and delivery. When the maker or holder of a
negotiable instrument signs the same otherwise than as such maker, for the purpose of negotiation,
on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose
a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the
same and is called the endorser". The person to whom the instrument is endorsed is called the
endorsee. Usually, the endorsement is on the back of the instrument; though it may be even on
the face of it. Where no space is left on the instrument, the endorsement may be made on a slip of
paper attached to it.
Effect of endorsement: Under Section 30 of the Act, the right shall be transferred after the
endorsement of a Negotiable Instrument followed by delivery. The Holder may give such
instrument to any other by indorsing it or receive payment by himself. It means that an
unconditional endorsement of a negotiable instrument followed by its unconditional delivery
has the effect of transferring the property therein to the endorsee. The endorsee acquires a right
to negotiate the instrument to anyone he likes and to sue all parties whose names appear on it.
Further, the endorsee can indorse by clearly stating the matter that his liability shall not persist on
the negotiable instrument.
However, Section 32 of the Act has laid down the restriction on indorse. It provides that while
indorsing the Negotiable Instrument, restriction can be imposed in the right of the Holder to
indorse in a way that such instrument cannot be re-indorsed or to be done only according to as
mentioned in the endorsement but such restriction cannot be imposed in the case of a Negotiable
Instrument payable to bearer.
Forged endorsement: In case an instrument is endorsed in full, it cannot be endorsed or negotiated

except by an endorsement signed by the person to whom or to whose order the instrument is
payable. Thus, if such an instrument is negotiated by way of a forged endorsement, the endorsee
will acquire no title even though he be a purchaser for value and in good faith, because the
endorsement is nullity. But where the instrument has been endorsed in blank, it can be negotiated
by mere delivery and the holder derives his title independent of the forged endorsement and can
claim the amount from any of the parties to the instrument.

4. Presentment and Dishonour of Instruments
General notes
Presentment of a negotiable instrument is made for two purposes firstly, for acceptance and
secondly, for payment. For both acceptance and payment the instrument must be presented to
the maker in case of promissory note and drawee in case of bill of exchange or cheque. If the
payee fails to present the instrument in time, the maker or drawee is not bound to pay the amount
stated therein. Similarly, if the maker of a promissory note or acceptor drawee of bill of exchange
refuses or fails or becomes unable to pay the amount of the instrument it is called by dishonour.
It is a breach of contract; hence, the injured party of the instrument because of dishonour of the
instrument may bring an action as against the party in default. For this the instrument must be
presented before its maturity and the process of notice of dishonour and protest thereof must be
fulfilled as fixed under the law.
Presentment for acceptance

Under Section 40 of the Negotiable Instrument Act, 2034, a Bill of Exchange payable after
presentment must be presented to the drawee thereof for acceptance, in business hours on a
business day. If no time or place is specified therein for presentment of bill of exchange it must be
presented to the drawee thereof for acceptance, if he/she can, after reasonable search, be found,
by a person entitled to demand acceptance, within a reasonable time and in business hours on
a business day. In default of such presentment, no party thereto is liable thereon to the person
making such default. If the drawee cannot, after reasonable search, be found, the bill of exchange
is deemed to be dishonoured. The provision of time of grace has been mentioned under Section 41
of the Act and hence, the holder must, if demanded by the drawee of a Bill of Exchange presented
to him/her for acceptance, allow the drawee two days, exclusive of public holiday, to consider
whether he/she will accept it.
Presentment for payment

The Holder of a Negotiable Instrument payable on demand must present such instrument for the
payment within the reasonable time. Under Section 43 of the Act a negotiable instrument must be
presented for payment to the maker, acceptor or drawee thereof, as the case may be, by the holder
or his agent. In case of default, the parties to the instrument other than the maker, acceptor or
drawee are not liable to such holder. The presentment for payment must be made during the usual
hours of business, and at a banker's premises, during banking hours.
According to Section 44 of the Act a negotiable instrument mentioned as payable at a specified

place must be presented for payment at that place. If the place of payment is not stated by the
maker, accepter or Drawer, a Promissory Note must be presented to the maker and the bill of
exchange to its acceptor or drawee in his place of business or residence. Further, as per Section
46 If the maker, acceptor or drawee of a negotiable instrument has no fixed place of business or

residence presentment of such instrument for payment or acceptance may be made to him/her in
person wherever he/she can be found.
Presentment of Promissory Note: Section 42 of the Act provides that a Promissory Note, payable
at a certain period after sight must be presented to the maker thereof for sight by a person entitled
to demand payment, within a reasonable time after it is made and in business hours on a business
day. In default of such presentment no party thereto is liable thereon to the person making such
default.
Presentment of cheque: Section 47 of the Act provides that no person can charge the Drawer
without presentment of a Cheque at the Bank upon which it is drawn. If any damage is caused to
any person due to the reason of default of presentment of Cheque within a reasonable time, the
amount of such damage cannot be charged with the Drawee.
Presentment not require: Section 51 of the Act has listed the various circumstances where no
presentment is necessary for its payment and the instrument is deemed to be dishonoured-
 If the maker, acceptor or Drawee deliberately prevents the presentment of the Negotia-
ble Instrument.
 If the instrument being payable at the specified place, neither the payer or his Agent to
pay it attends at such place during the business hours on a business day.
 If the payer closes his/her office during the business hours on a business day.
 If the Negotiable Instrument not being payable at any specified place, the concerned
party cannot be found for the presentment after due search.
Payment and interest: As per Section 53 of the Act the payment of the amount due on a negotiable
instrument must be made to the Holder. Provided that, the Bank shall not be bound to give
payment of a Cheque or Draft drawn upon the Bank is not made presentment for its payment
within Six months from the date at which it is drawn. Further, under Section 54 of the Act if a rate
of interest is specified in the Negotiable Instrument, it will be calculated at such rate and while
computing the interest for giving compensation or recovering loss, it shall be calculated by the
maximum rate of interest to be charged by the commercial Bank in the loan extended by it.
Maturity period: Cheques are always payable on demand but other instruments like bills, notes,
etc., may be made payable on a specified date or after the specified period of time. The date on
which payment of an instrument falls due is called maturity. Therefore, most of the provisions
relating to presentment for payment are linked with the maturity of the instrument. A note or bill
' at sight' or 'on presentment' is payable on demand. It is due for payment as soon as it is issued.
Therefore, the question of maturity arises only in the case of a note or bill payable 'After sight'
or 'After date' or at a certain period after the happening of an event which is certain to happen.
Further, it adds that in calculating the maturity of a note or bill which is not payable on demand, at
sight or on presentment, two days - called the days of grace - must be added to the date on which

the instrument expressed to be payable. Thus a note or bill payable after a specified period after
date or after sight matures or falls due on the last day of the grace period and must be presented
for payment on that day and if dishonoured, suit can be filed on the next day after maturity.
Dishonour and notice

A negotiable instrument is said be dishonoured by non-payment when the maker, acceptor or
drawee, as the case may be, makes default in payment upon being duly required to pay the
same, hence, a bill of exchange may be dishonoured either by non-acceptance or by nonpayment.
According to Section 64 of the Act, a Bill of Exchange shall be deemed to be dishonoured by
non-acceptance when the Drawee, or one of several Drawee not being partners, makes default
in acceptance upon being duly required to accept the bill. If it is agreed to accept the bill with
conditions and the holder does not give his consent to such conditional acceptance or the Drawee
is incompetent to contract, the bill of exchange shall be deemed to be dishonoured.
Similarly, Section 65 provides that a Promissory Note, Bill of Exchange or Cheque shall be deemed
to be dishonoured by non-payment when the maker of the note, acceptor of the bill or Drawee
of the Cheque makes default in payment upon being duly required to pay the same. The effect
of dishonour of a negotiable instrument whether by non-acceptance or nonpayment is to render
the drawer and all the endorsers liable to the holder. However, their liability can be invoked only
if the holder gives them notice of such dishonour. The drawer is liable only if the instrument
is dishonoured by non-payment. As per Section 66 of the Act, when a negotiable instrument is
dishonoured by non-acceptance or nonpayment, the holder must give notice of dishonour to the
drawer and all other parties whom he seeks to make liable. If any party among them has not been
noticed, such party shall not be liable to that instrument. Notice of dishonour is not necessary to
be given to the maker of the Promissory Note, acceptor of the Bill of Exchange or the drawee of
the Cheque.
Notice of Dishonour is unnecessary: Under Section 70 of the Act no notice of dishonour is

necessary in the following conditions:-
 When it is dispensed with by the party entitled thereto,

 When the Drawer has countermanded payment,
 When the party has not suffered damage for want of notice,
 When the acceptor is also a Drawer,
 In the case of a Promissory Note which is not negotiable.
 When the party entitled to notice cannot after due search be found, or the party bound
to give notice, is for any other reason, unable without any fault of his/her own to give it,
When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount
due on the Negotiable Instrument

Noting and protesting

Noting is a convenient method of authenticating the fact of dishonour. Recording the fact of
dishonour of a negotiable instrument on the negotiable instrument itself is called as Noting. The
advantage of both noting and protesting is that it constitutes prima facie evidence in the court that
instrument has been dishonored. Any bill or document which has been noted can be protested any
time thereafter for taking legal action against the parties. Section 66 of the Act has provided that
where an instrument is dishonoured, the holder, besides giving the notice as referred to above,
should get the bill or promissory note 'noted' by the notary public. The notary public presents the
instrument, notes down in his register the date of its dishonour and the reason, if any, given by
the acceptor. If the instrument has been expressly dishonoured, the reason why the holder treats
it as dishonoured, and the notary's charges should be mentioned. 'Noting' must be made within a
reasonable time after dishonour. The holder may cause such dishonour to be noted by the notary
public upon the instrument or upon a paper attached thereto or partly upon each. Every notary
is required to have and use a seal, and an act can only be deemed a notaries act if it is done by a
notary under his signature and official seal. However, noting is not compulsory in the case of an
inland bill or note, but foreign bills must be protested, if so required by the law of the place where
drawn.
Procedures of Noting: The dishonoured bill is handed over to a Notary Public. Notary Public
presents it again for acceptance or payment to the drawee or acceptor. If the drawee or acceptor
refuges to accept or pay the bill, the Notary Public records the facts of dishonour on the bill.
Section 71 of the Act states that when a Negotiable Instrument has been dishonoured by
nonpayment or non-acceptance, the Holder may complain such dishonour to the Notary Public
within a reasonable time and may cause to be noted the particulars of dishonour by the Notary
Public upon the instrument, or upon a paper attached thereto. The date of dishonour and the
reason assigned for such dishonour must be specified while causing to note and if the instrument
has not been expressly dishonoured, the reason why the Holder treats it as dishonoured also shall
have to be expressed clearly. The Holder may take the facts of dishonour to be certified by the
Notary public after it is noted pursuant to Section 71.
Protesting: When an instrument is dishonored, the holder may cause the fact not only to be noted,
but also to be certified by a Notary Public that the bill has been dishonored. Such a certificate is
referred to as a protesting. Therefore, the protest is the formal notarial certificate attesting the
dishonour of the bill and based upon the noting. After the noting has been made, the formal
protest may be drawn up by the notary at his leisure. When the Protest is drawn up it relates back
to the date of noting. Sometimes, a bill is protested for better security. This may happen when the
acceptor of a bill has become insolvent, or has suspended payment or his credit has been publicly
impeached before the maturity of the bill. Thus, Section 73 of the Negotiable Instrument Act, 2034
states that when the acceptor of a Bill of Exchange has become insolvent, before the Maturity of

the Bill of Exchange, the Holder may, within ta reasonable time, cause a Notary Public to demand
additional security of the acceptor and on its being refused may, within a reasonable time, cause
such facts to be noted and certified. It should, however, be noted that the acceptor is not bound
to give such security, nor can the holder sue the endorsers or drawers before maturity in spite of
protest.
Contents of Protest: As per Section 74 of the Act the protest in relation to dishonour or refusal for
additional security must contain the following particulars:-
 The Negotiable Instrument or its duplicate and of everything written or printed there-
upon,
 The name of the person for whom and against whom the instrument has been protested,
 A statement that payment or acceptance, or additional security, as the case may be, has
been demanded of such person by the Notary Public, the terms of his answer, if any, or
a statement that he gave no answer, or that he could not be found,
 When the Negotiable Instrument has been dishonoured, the place and time of dishon-
our, and when additional security has been refused, the place and time of refusal.
Notice of protest: When a Negotiable Instrument is required to be protested by any prevailing

law, then, the notice of such protest must be given instead of notice of dishonour. Such notice may
also be given by the Notary Public who makes the protest (Section, 75).
Place of protest: Bills of Exchange may be protested for non-payment in the place specified for
the payment to be payable at place other than the place of residence of the Drawee, which are
dishonored by non-acceptance without further presentment to the Drawee (Section, 76).
Protest of Foreign Bills of Exchange: Under Section 77 of the Act, the foreign Bills of exchange
must be protested for dishonour when such protest is required by the law of the country where
they are drawn; the protest of dishonour of such Bills of Exchange also must be caused by the
Notary Public.

5. Discharge from Liability
General notes
The term discharge is used as to the negotiable instrument in two ways, firstly, the discharge of
the instrument, and secondly, the discharge of one or more of the parties from liability thereon. An
instrument is said to be discharged when all rights of action under it are completely extinguished
and when it ceases to be negotiable. This would happen when the party who is ultimately liable
on the instrument is discharged from liability. An instrument may be discharge by payment in due
course or by party primarily liable becoming the holder or by express waiver or by cancellation
and by discharge as a simple contract. On the other hand, if one or more of the parties is/are
discharged from liability, is the discharge of one or more of the parties from liability thereon. And
the instrument continues to be negotiable and the other parties continue to be liable on it. The
discharge of one or more of the parties to a bill or note does not discharge the instrument.
Discharge of parties from liability

The nature of obligation of the parties of a negotiable instrument is contractual. The parties of a
negotiable instrument, thus, becomes free from their obligation or discharge from liability when
they perform their duties under it, i.e., payment in due course to the holder of the instrument.
Apart from payment, the parties of a negotiable instrument may be discharge under various
grounds. The different circumstances where parties of an instrument may be discharge or becomes
free from his obligation are as follows.
 By payment in due course: If the Negotiable Instrument is payable to bearer or has been in-
dorsed in blank and such Drawer, acceptor or endorser makes payment in due Course of the
amount due thereon is discharged to all concerned parties thereto related with such Negotia-
ble Instrument (Clause (c) of Sec. 56).
Under Section 58 of the Negotiable Instrument Act, 2034 the Drawee shall be discharged from
his/her liability in the case of a bearer's Cheque by Payment in due Course to the bearers
thereof, notwithstanding any endorsement on the back side of the Cheque and in the case of
a Cheque payable to order purports to be indorsed by or on behalf of the Payee, by Payment
in due Course.
Further, Section 59 has provided that when a Draft drawn by one office of a Bank upon
another office of the same Bank for a sum of money payable to order on demand, purports to
be indorsed by or on behalf of the Payee, the Bank is discharged by Payment in due Course.
 By payment of altered instrument: Pursuant to Section 62 of the Act when a Negotiable

Instrument has been materially scratched and erased or altered but does not appear to have
been such things or crossing does not appear in a cross Cheque, Payment in due Course shall
discharge such person or Bank from his/her or its liability thereon.

 By cancellation/release of the parties: Clause (a) of Section 56 of the Act provides that the
drawer, acceptor or endorser of a Negotiable Instrument shall be discharged from his/her
liability if the Holder intentionally cancels the name of the acceptor or endorser with intent to
discharge him/her to such Holder and all parties claiming through such Holder. If a Holder
thereof who otherwise discharges such acceptor or endorser or drawer and to all parties
deriving title under such Holder after notice of such discharge.
 By physical destruction: When a negotiable instrument is negotiated and the holder of
it destroys intentionally by crossing on the face of it or tearing into pieces or burning the
instrument etc., the all prior parties to the instrument are discharge from their liability. Where
the instrument has been cancelled by physical destruction but if one joins the pieces in such a
manner it looks as if it was not destroyed and transfers to a bonafide holder in due course, the
instrument becomes valid and the holder in due course can recover the amount.
A, signs as maker a promissory note and gives it to B who delivers it to C as a gift. C, with a
view of cancelling the note makes two pieces and throws it to a container. D, who was in service
of cleaning roads, finds the pieces of note and fixes them as there was no sign of tear. He passes
the note to M who has received in good faith for consideration. M can recover the amount stated
therein from A. The cancellation by C does not discharge the instrument.
 By allowing additional time for acceptance: Under Section 57 of the Act if the Holder allows
the acceptor of a Negotiable Instrument a period of more than two days, exclusive of Public
Holiday to consider whether he/she will accept the same, all prior parties not consenting to
such allowance are thereby discharged from the liability to such Holder.
 By conditional acceptance: Section 60 provisioned that if consent is given to the acceptance
with conditions made by the Holder of a Bill of Exchange all other prior parties except the
party who gave consent to such conditions, shall be discharged from the liability.
 By material alteration: Section 61 of the Act provides that if alteration or scratching and
erasing has been made in the Negotiable Instrument except any material alteration or
scratching and erasing has been made in the Negotiable Instrument by the main parties
thereon with unanimous intention, all other prior parties except the party who gave consent
to such alteration or scratching and erasing shall be discharged from the liability. Alteration
as to the date, sum of payable, the time and place of payment and the rate of interest are,
generally, considered as material alteration.
The term alteration or scratching and erasing used in the Act means the functions of alteration
or scratching and erasing in a way that another meaning in the Negotiable Instrument to be
given or the appearance of the Negotiable Instrument to be changed or the liability of the
concerned parties to be changed.
 By non-presentment of cheque: The Holder of a Negotiable Instrument payable on

demand must present such instrument for the payment within the reasonable time. Delay
in presentment for acceptance or payment is excused if the delay is caused by circumstances

beyond the control of the Holder, and not imputable to his/her misconduct, negligence or
default. According to Section 53, the Bank shall not be bound to give payment of a Cheque or
Draft drawn upon the Bank is not made presentment for its payment within Six months from
the date at which it is drawn.
 By holding the instrument by the acceptor himself: As per Section 63 if a Negotiable
Instrument which has been negotiated is, at or after maturity, held by the acceptor in his own
right, all other parties shall be discharged from the liability related with that instrument.
International Law Governing Negotiable Instruments

There are four sections dealing with the international law concerning Negotiable Instruments.
These are explained below:
 Liability on foreign negotiable instrument: Section 99
In the absence of a contract to the contrary, the liability of the maker or Drawer of a foreign
Negotiable Instrument is regulated in all essential matters by the law of the country where the
instrument was made and the respective liabilities of the acceptor and endorser by the law of
the country where the instrument is made payable. Example:
A bill is drawn by A in California, where the rate of interest is 25 per cent and accepted
by B, payable in Washington, where the rate of interest is 6 per cent. The bill is indorsed
in Nepal and is dishonoured. An action on the bill is brought against B in Nepal. He is
liable to pay interest at the rate of 6 per cent only; but if, he is as drawer, he is liable to
pay interest at the rate of 25 per cent.
 Law in respect of dishonour: Section 100
Where a Negotiable Instrument is made payable in a different country from that in which it
is made or indorsed, the law of the country where it is made payable determines what consti-
tutes dishonour and what notice of dishonour is sufficient. Example:
A bill drawn and endorsed in Nepal, but accepted payable in France, is dishonoured.
The endorsee causes it to be protested for such dishonour and gives notice thereof in
accordance with the law of France, though not in accordance with the rules contained in
of bills which are not. The notice is sufficient.
 Instrument made in foreign country according to Nepalese law: Section 101
If a Negotiable Instrument is made drawn, accepted or endorsed outside Nepal, but in ac-
cordance with Nepalese Law, the circumstance that any agreement evidenced by such in-
strument is invalid according to the law of the country wherein it was entered into does not
invalidate any subsequent acceptance or endorsement made thereon within Nepal.

 Presumption as to foreign law: Section 102
The law of any foreign country regarding Negotiable Instrument shall be presumed to be the
same as that of Nepal Law, unless and until the contrary is proved.
Test Questions
1. What do you understand by negotiable instruments'?
2. Explain the meaning of 'negotiability''
3. Name the instruments which are recognised as negotiable instruments
4. by the Negotiable instruments Act, 2034
5. Write explanatory notes on the following: i. Ambiguous instruments, ii. Inchoate instruments,
iii. Lost or stolen instruments.
6. State briefly the presumptions as to negotiable instruments under the Negotiable Instrument
Act.
7. "The capacity of a party to draw, accept, make or endorse a negotiable instrument is co-
extensive with his capacity to enter into a contract". Comment.
8. What are the essential requirements of a valid promissory note? Enumerate the different
parties to a promissory note.
9. What is a bill of exchange? State its essential characteristics. How does a promissory note
differ from a bill of exchange?
10. Distinguish between (i) inland and foreign bills; and (iv) general acceptance and qualified
acceptance.
11. When is a bill deemed to have been dishonoured by non-acceptance?
12. Define a Cheque and distinguish between a cheque and a bill of exchange.
13. What are the various requisites of a cheque? Comment.
14. 'A cheque is a bill of exchange drawn on a banker'. Comment.
15. Define the term 'holder', 'holder for value' and 'holder in due course'. Enumerate the privileges
of a 'holder in due course.
16. Explain the term 'negotiation'. Distinguish it from assignment.
17. State the essentials of a valid endorsement of a negotiable instrument.
18. What is meant by (i) dishonour for non-acceptance, (ii) dishonour for non -payment?

19. Explain the provisions relating to 'Noting' and 'Protesting' of a bill which has been dishonoured
by the acceptor.
20. Write a short note on crossed cheques.
21. Explain the effect of (i) Non-negotiable crossing (ii) "Account payee only" crossing.
22. What are the provisions of the Negotiable Instruments Act, 1881, regard international law
concerning negotiable instruments?
23. Discuss International Law concerning Negotiable Instruments in respect of (i) dishonour and
(ii) liability on foreign instruments.
24. What is discharge of negotiable instrument? State the various modes of discharge of negotiable
instruments.
25. Who is holder in due course? State his privileges under the law relating to negotiable
instruments.


CHAPER 9 : LABOUR ACT, 2074
CHAPTER 9
LABOUR ACT, 2074

1. Fundamentals of Labour Relations
General notes
One of the major components of business environment and pre-condition of the industrial activities
is the workers or labour or employees. In fact, the industrial relation is the capital-labour relation.
The capital-labour relation has been becoming more complex day by day since the industrial
revolution taken place in England in 1697 and at this age of trade and industry, the nature of
capital-labour relation has obtained different dimensions through the decisive impacts of labour
jurisprudence that explains the capital-labour relation by emphasizing the role of workers in the
field of business or industrial activities. As the labour are the living machine or driving factor of
industrial sectors, the owners of industries have to depend on their services and the workers being
human beings, they are to be treated with respect and dignity. In the human history, numbers of
movements have been taken place for the better treatment of labour on the principle that they are
not only receiving wages for their acts by the owners but they are the integral part of trade and
industry and equally important to the capital, hence, their life and livelihood must be protected
by recognising and protecting their rights and interests associated with the industrial activities.
To fulfill this objective, most of the legal systems have recognised the rights and special treatment
of the workers. In Nepal, the Labour Act, 2074 has recognised and provided those fundamentals
aspects of labour jurisprudence where the labour are treated as a party of capital-labour relation
but not as servants of the owners or employers. Further, the provisions of the Act applied all types
of enterprises irrespective of number of workers but certain types of enterprises are left beyond the
ambit of the Act by considering their special character and effects to the public interest.
Protection of the labour

The Labour Act, 2074 has envisaged the modern principles of labour jurisprudence by recognising
the fundamental rights of workers in the capital-labour relation. These general principles and
protections are as follows:
 Minimum standard
This Act shall act as a minimum standard for workers and on matters relating to the workers.
Under Sub-section (2) of Section 3 of the Act an employment contract shall be deemed to have
violated the Act and to that extent, it shall be null and void where any employment contract
between an employer and a worker is made with provisions to pay or receive remuneration
or benefits lesser than the remuneration and benefits prescribed by the Act or rules made un-
der this Act or in contravention to the conditions prescribed in the Act, such.
 Prohibition to engage in forced labour
The "forced labour, means any work or service performed by any worker against his/her
will as a result of a threat of taking any action having financial, physical or mental impact if
he/she does not perform such work. Section 4 of the Act has imposed prohibition on forced

labour, hence, a person shall not directly or indirectly employ any person in forced labour.
However, the following acts or services carried out by workers shall not constitute forced
labour:
 Any work or service to be performed as civil obligation when nation requires.

 Any work or service required to be performed by any person as a consequence of pun-
ishment given by a decision or an order of a court.
 Any work or service required to be performed in the interest of a community as its mem-
ber.
 Prohibition on employment of children
Pursuant to Section 5 of the Act the employment of children in any work by any person
against the prevailing laws is strictly prohibited.
 Protection against discrimination
According to Section 6 of the Act no employer shall discriminate any worker on the ground of
religion, colour, sex, caste, tribe, origin, language, ideological conviction or any other similar
ground. However, the following acts shall not be considered discrimination:
 To give preference to any person for employment on the basis of inherent requirement
of a job or service.
 To engage a female worker who is pregnant, in any work or service this is easier and
suitable to her condition without any reduction in the remuneration and benefits.
 To give preference to any physically challenged worker in any job responsibility suitable
to his/her physical condition.
 Equal remuneration for equal work
Sub-section (1) of Section 7 assures that workers must not be discriminated in the payment
of remuneration for equal value of work on the basis of their sex. Further, under Sub-section
(2) the nature of the related work, the time required for the performance of the work, labour,
skill and productivity shall be duly considered in determining whether the work is of equal
value or not.
 Rights relating to trade unions
Subject to the provisions of this Act and other prevailing laws, pursuant to Section 8 of the
Act every worker shall have a right to form a trade union, carry on its activities, acquire its
membership or get affiliated with or involve in other union activities. The workers, when
using their rights relating to labour pursuant to this Act or other laws, shall be dutiful and
responsible towards their employer.

 Right to remedy
It is an important that providing rights become effective only these rights can be enforced by
law and the injured party can get remedy when their rights are violated. Section 9 of the Act
has guaranteed that every worker shall have a right of remedy under this Act or any other law
in case his/her rights entitled under this Act or any other laws are violated.
Applicability of the Act

The Act is applicable to those enterprise defined under Clause (j) of Section 2 of the Labor Act, 2074
including company, private firm, partnership firm, cooperatives, association or other organization
in operation, or established, incorporated, registered or formed under prevailing laws to undertake
industry or business or provide service with or without profit motive.
Head count threshold

The Labor Act, 2074, by contrast with the earlier Act, has removed the head count requirement
for applicability. The New Labor Act is applicable to all entities regardless of number of labors
(worker/employees). Previous Act was applicable only to entity where ten (10) or more people
engaged in the work. However, the threshold of head count continues for certain arrangements
to be made in the entity such as an entity having ten (10) or more workers should constitute a
collective bargaining committee, labor relations committee etc.
Entity registered in foreign country

The Labor Act, 2074 has made provisions in relation to settlement of dispute with the entity
registered in foreign country however, undertaking sales and market activities in Nepal through
representative or hiring labor in Nepal. In accordance with the Labor Act the representative or
the labor hired by the foreign entity may file complaint before Labor Office or Labor Court if such
entity violates the terms and conditions of the employment agreement.
Domestic workers
The Labor Act also deals with domestic workers. The New Labor Act has made certain provisions
under Section 88 relating to domestic workers. For example, the Labor Act provides that the
minimum remuneration of such workers, public and weekly holidays should be as prescribed. The
employer can deduct the expenses incurred in providing food and lodging from the remuneration
if such is provided. Domestic workers should be allowed to celebrate festivals as per their culture,
religion, tradition.
Exempted Entity
Section 180 of the Act has listed the various sectors to which this Act does not apply. The Labor Act
is not applicable to civil service, armed force etc. It is also not applicable to entities incorporated
under other prevailing laws or special economic zone, provided that terms and conditions of
services in those entities have been covered in other prevailing laws. The Working Journalists

are also not governed by the Labor Act, unless the employment contract specifically provides for
the applicability of the Labor Act. However, it does not specifically provide its application to the
persons working with the foreign diplomatic missions. The foreign missions are exempt from
local laws and jurisdiction which of course may be extended to the employment matters in Nepal.
Section 180 of the Act reads as follows:
 On the following matters, it shall be as be follows-
a) In relation to Nepal Army, Nepal Police, Armed Police Force and national research, this
Act shall not be applicable.
b) In relation to the civil service, the prevailing law relating to civil service shall be
applicable.
 Where the employment conditions and benefits in relation to the service established
under special law or special economic zone are specified in the prevailing laws, such
service shall be governed by the same provisions accordingly.
 Where the prevailing laws have no provisions in relation to re-
muneration, employment conditions and benefits of any work-
er, this Act shall be applicable automatically in relation to those matters.
When giving any decision or order or judgment on inapplicability of this Act in rela-
tion to any worker, the applicable law under which such rights and benefits provided
by this Act are entitled must be stated clearly in such decision or order or judgment.
 Where any employer of an enterprise governed by Working Journalist Act, 2051,
executes any employment contract pursuant to th.is Act or any agreement between
the employer and the workers of such enterprise is executed making this Act appli-
cable, in relation to such worker, the provisions of this Act shall be effective.
2. Employment and Security of Service
General notes
The Labour Act, 2074 has successfully categorised the employment in practical basis. This
classification helps the employer to employ workers as per his requirement in one hand and on
the other hand, the Government or concerned department may make proper regulations and the
protection of workers' interest. Whatsoever the type of employment, the Act has it mandatory
that no person can employ worker without establishing a formal relationship of employer and
employee by entering into an employment agreement. Section 11 of the Act has laid down the
general aspect of employment that no employer shall employ any worker without entering into
an employment contract. However, it shall not be necessary to enter into a written employment
contract for casual employment. When executing an employment contract, remuneration, benefits,
employment conditions and other matters as prescribed shall be stated in such contract. Security

of employment is one of the basic concerns of employees as it gives a sense of stability and resulted
into the positive outputs of the enterprises. Hence, under a formal contract with terms of service
or by conduct if one person employs another, the provisions of this Act are applied and when
the employee passes through the probation period, his employment if assured. Further, in case
of interruption or haulage or suspension of employment the employer is bound to continue the
employment of the worker when the work resumes which gives the continuity of the employment
to make the stable labour market- a key factor of the business environment.
Types of employment
Under Sub-section (l) of Section 10 of the Labour Act, 2074 the employer may engage a worker in
any of the following employment:
Regular employment: It means any employment other than the task based employment, time
based employment and casual employment.
Task based employment: It means an employment in which a particular task or service specified
by the employer is required to be accomplished.
Time based employment: It means an employment in which a worker is required to provide a

service or accomplish a task within a period fixed by the employer.
Casual employment: It means an employment in which a worker is engaged for seven or less than
seven days within a period of one month to provide any service or accomplish a task given by the
employer.
Part time employment: It means an employment in which a worker is engaged by the employer for
thirty five hours or lesser than thirty five hours in a week to accomplish any work. Notwithstanding
anything mentioned in the employment contract, where a question arises as to whether the
employment relationship is regular or not, it shall be determined on the basis of the nature of the
work as prescribed.
Interns and trainees may be hired

It is the new concept of the Labour Act, 2074 where the interns and interns may be engaged in a
work as per the provisions provided by it.
Interns: Under Sub-section (1) of Section 16 of the Act any enterprise, by signing an agreement
with any educational institution, may hire any person as an intern pursuant to the requirement
of the approved syllabus of such institution. However, for the purpose of this Act, the person
so appointed shall not be considered a worker. Provided that any person hired in contravention
to the approved syllabus shall be deemed to be a worker under the regular employment
relationship.

Applicability of labour provisions: The Labour Act, 2074 has provided the provisions to be applied
to the interns. Section 17 under different Sub-sections has provided that the interns hired shall
not be required to work more than 8 hours a day and 48 hours a week. Similarly, the provisions
relating to occupational health and safety shall be applicable to interns also. Further, pursuant to
Sub-section (3) where a trainee meets with an accident during the work, unless otherwise agreed
between the enterprise and the educational institution, the enterprise shall provide medical
treatment and compensation, which a worker of such enterprise is normally entitled to under this
Act, if injured. In other cases except than the matters stated above, the agreement between the
enterprise and the educational institution shall be applicable.
Trainees: Under the Labour Act, 2074, the employer may employ any person as a trainee providing
on the job training and the training period shall not exceed more than one year period of time.
However, if a training period is prescribed for a specific nature of work under the prevailing law
or specific training period is required, a trainee may be accordingly employed for such period as
prescribed.
Section 18 of the Act has imposed obligation to the employer of an enterprise to provide, at
the minimum, the benefits equivalent to the minimum wage and other social security benefits
including sick leave, gratuity, provident fund and insurance when employing a person as a trainee.
Further, no employer shall be under compulsion to continue the employment of the trainee after
the completion of the training period and if the employment of such a trainee, after the training
period is continued by the employer, he/she shall not be kept in probation.
Security of employment or service

One of the important elements of capital labour relation is the security of the service of workers.
In one hand, it brings stability in the industry by avoiding frequent change of workers in the
employment which helps to the efficiency of the industry and on the other hand, it assures the
workers of their employment and their livelihoods that brings the industrial peace and accelerate
the productivity of the concerned enterprises. The security of service can be guaranteed by three
stages, firstly, at the time of employment of workers by fulfilling formalities of contract between the
employer and employees. Secondly, in case of change of ownership of an enterprise, by continuing
their service and thirdly, at the event of lay off, by continuing their service.
Formation of employment relationship

Under Section 12 of the Act the vary basis of employment relationship is formed between an
employer and a worker shall where an employer executes an employment contract with a worker
or employs a worker verbally or in case of casual employment, from the date or time such worker
is employed or the service is provided by such worker. Where any dispute arises with regard to
the existence of an employment relationship between an employer and a worker, such dispute
shall be settled by the Office.

For this purpose, the Office may give an order to the employer to submit any evidence or document
relating to the employment which is in his/her care and in case such evidence or document is
not produced as ordered, the employment contract between the employer and worker shall be
deemed to have been formed.
Provision relating to probation: Pursuant to Section 13 of the Act any employer when executing
an employment contract with a worker may keep him,/her in probation for a period of six months
and the contract with such worker may be terminated if his/her work is not satisfactory. The
employment contract with such worker, if not terminated, shall be deemed valid automatically
after the ending of the probation period of such worker.
Change of ownership
Section 14 of the Act has provided an important provision to bring certainty and stability in the
labour market by assuring that the employment relation between the employer and employer
continue though there is change in the management or owner of an employer Sub-section (l)
provides that where there is a change or transfer of ownership of any work or business or any
part of such work or business of any employer or hand over of the work or business to any other
person for operation or formation of a new enterprise or business as a result of merger of two or
more than two enterprises or businesses. the employment relationship of the workers working in
such enterprise or business in which the ownership has been changed or transferred or business
has been handed over for operation or the enterprise or business which has been merged shall
continue.
For the purpose of Sub-section (1), in case of liability as per the Act or the rules made under
this Act or collective agreement if it has been entered into, the employer taking the ownership
or acquiring the ownership after the handover or operating the activities or business shall be
responsible. Similarly, a new enterprise or business entity formed after the merger of enterprises
or businesses or any enterprise taking the ownership and liability in case of transfer of ownership
and liability of a project under the prevailing law relating to the private sector investment in
the infrastructure development and operation shall be responsible. Further, if any agreement
on provisional arrangement among the main employer, new employer and trade union of the
concerned enterprise has been made, the provisions in such agreement shall be applicable
accordingly.
Lay off period

During the operation of an industry, under Section 15 of the Act, the employer may stop the work
and lay off workers in case any special situation occurs because of shortage of electricity, water,
raw material or lack of fund or inability to reach the workplace or work or operate the workplace
because of any situation beyond control.

As per Sub-section (2) of Section 15 the employment relationship between the employer and
workers shall continue during the lay off period. Any employer employing ten or more than ten
workers may lay off workers for a period maximum of fifteen days. In case, there is a need to lay
off the workers for more than fifteen days, the employer shall be required to consult the authorised
trade union or labour Management Committee.
Remuneration for layoff period

The Act has provided the provision for the remuneration of the workers kept under the layoff
period. Under Section 39 of the Labour Act, 2074, the workers who are laid off pursuant to this Act,
shall be paid half of their remuneration which they are entitled to until the work is resumed by the
employer. Provided that such workers shall not be required to give attendance in the workplace
during the layoff period unless the requirement of attendance is mentioned in the notice issued
relating to the layoff.
Provisions for the part time workers

Some special provisions are made under the Act for the part time workers. Under Sub-section
(1) of Section 19, an employer may employ any worker for part time only but full time working
shall not be employed in part time work without his/her approval. The remuneration of part
time workers, normally, shall be fixed, either on the basis of working hours or on the basis of the
employment contract entered between the two parties. While determining the remuneration of
part time workers the monthly remuneration of a worker working full time in the same position
and same nature of work shall be taken as the basis for calculation. Further, where any part time
worker employed pursuant to this section is required to work overtime such worker shall be paid
remuneration at the rate of 1.5 times of his/her remuneration.
As per Section 20 of the Act there is no restriction on part time workers from working elsewhere
for others. In relation to a part time worker working for more than one employer, pursuant
to Section 21 of the Act each employer shall, on the basis of basic salary the worker is entitled
to receive, make contribution for gratuity, provident fund and other related social security
benefits.

3. Outsourcing and Foreign Workers
General notes
Out sourcing of workers is a method of employing workers without directly appointing by an
enterprise but through other person, firm, company or institution. This labour supply system is
widely accepted in the global labour market and also used by the Nepalese enterprises for a long
period of time though without proper legal framework. The Labour Act, 2074 has introduced this
concept of out sourcing as it is favoured by the industrial sector for different reasons. An industry
or enterprise may hire workers through the man power suppliers but the enterprise shall bound
by the provisions of the Act for the workers safety, health and other benefits avail to them under
the Act. On the other hand, the Act by providing the provisions of work permit for the foreign
workers has adopted the protectionism approach towards the Nepalese workers. It is obvious that
the native workers should be given opportunities to obtain employment in the enterprises running
in the country as it becomes instrumental to expand the Nepalese economy and eradicate poverty
from the country. As the same time, the Act has provided the provisions for the appointment
of foreign worker to those employments which requires the special technical knowhow and the
managerial skill which cannot be fulfilled from the Nepalese manpower. This provision of the Act
looks as like an emergency exit and temporary in nature, therefore, the Act has imposed obligation
to the enterprises employing foreign workers to train their workers and make them capable to
discharge such work in the course of business.
Outsourcing
The Previous Act has no provision for outsourcing of jobs/services. The practice of outsourcing
however, it had judicial baking and allowed to outsource certain manual works such as security
personnel, drivers, cleaning staffs, messengers etc. The New Labor Act deals with outsourcing
arrangement. It is a method of hiring of workers through an agency or intermediary that helps
the main employer in the appointment and management of the workers. The employer requiring
large number of workers cannot appoint them directly. It is unpractical also. Hence, the process of
hiring workers through agency helps the employer to fulfill the labour requirement to operate their
business. However, the outsourced laborers can be engaged in the works other than core work of
the entity. In spite of this, the main employer should hire the workers from the labour provider
having license and be assured that whether the labour provider has provided the minimum
remuneration and benefits fixed by the government or rule to the workers. If the laborers are
availed from outsourcing agency without licensed for labor supply, the laborers are deemed to be
the workers of the main employer. Similarly, the labour providers shall not act in violation of the
conditions or directions as prescribed under this Act or the rules made under this Act.
Work for Outsourcing: The Labour Act, 2074, under section 58 has provided that workers may
be hired from labour provider. The outsourced laborers can be engaged in the works other than
core work of the entity. The term "core work" means the work and other directly related activities

mentioned at the time of registration of the business. The work that can be carried out by the
outsourced laborers can be as prescribed in the Nepal Gazette. According to Sub-section (3)
of Section 58 of the Act when inviting or submitting any proposal or tender for the purpose of
supplying or causing to supply workers through any labour provider or entering into an agreement
for supply of workers, the remuneration and other employment benefits of the workers to be
supplied must not be lesser than those prescribed in this Act. Further, any call made or proposal
or tender submitted or agreement signed in contravention to Sub-section (3) shall automatically
be invalid.
Labour provider/ outsourcing Agency: Under Section 59 only the company obtaining license
from the Labor Office or Labor Department can provide manpower to another entity. The existing
manpower suppliers are required to be registered and obtained license within six (6) months
from the date of commencement of the New Labor Act. A company cannot supply manpower
for more the two works or services. The Labor Act has also restricts to avail the laborers from the
labor supplier where the main employer, his management or family members are involved. Every
license holding company shall provide details as specified either to the office the Department
depending on from where such license is acquired before the end of Poush of every year.
Responsibility of labor provider

As per Section 61 of the Act the Labor Supplier must obtain a license to operate its business.
Labour providers shall not act in violation of the conditions or directions as prescribed under this
Act or the rules made under this Act. Only after the Labor Supplier furnishes the security or bank
guarantee, the Labor Office or Department issues the license. Labor Supplier should provide the
remuneration and other facilities to such outsourced workers. The license of the Labor Supplier
can be terminated on non-payment of remuneration and other benefits. The Labor Supplier can be
fined up to Rs. 25,000 for violating any regulation or directives framed under the Nee Labor Act. In
case of liquidation of the Labor Supplier, the workers shall be paid the outstanding remuneration
and facilities within 15 days. If the Labor Supplier fails to make such payment, the payment shall
be done from the security or bank guarantee furnished.
Obligation of the Main Employer

Section 64 of the Act, the Main Employer (the person providing work to the outsourced laborers)
should obtain laborers from the licensee Labor Supplier. If the laborers are availed from outsourcing
agency without licensed for Labor Supply the laborers are deemed to be the workers of the Main
Employer. The Main Employer may engage laborers supplied by Labor Supplier entering into
agreement with the Labor Supplier. The agreement should ensure that the laborers will not be
provided the remuneration and facilities below the minimum remuneration and benefits prescribed
in the New Labor Act. The Main Employer should regularly obtain the information if the Labor
Supplier is providing such remuneration and benefits regularly. The Main Employer is required to
inform the Labor Office or Department if the Labor Supplier has not provided outsourced labors

the remuneration and benefits. Further, the Main Employer is required to adjust the increment if
the minimum remuneration and benefits are increased in accordance with the laws.
Cancellation of license, suspension or fines

Section 62 of the Act provided the provisions where the license of the labour provider can be
cancelled or suspended or fines imposed for acts done contravention to the provisions of the Act.
Under Sub-section (l) of Section 62 of the Act, the Department or Office responsible for the issuance
of license, in the following situations, may cancel the license of labour provider:
 If a labour provider files a written application for the cancellation of the license.
 If the labour provider continues to violate the conditions specified and directions issued
pursuant to this Act or the rules made under this Act in spite of fines imposed to such
labour provider.
Under Sub-section (2) an opportunity shall be provided to the concerned labour provider for the
submission of an explanation at least 7 days before the cancellation of the license pursuant to Sub-
section (1) (b). However, pursuant to Sub-section (4) the labour provider whose license has been
cancelled shall not be considered free from any financial liability it has towards the government or
any worker on the ground that the license has been cancelled.
Similarly according to Sub-section (5) the Department or office may suspend the license of any
labour provider, if such labour provider has not been complying the conditions and directions
issued pursuant to this Act or the rules made under this Act.
Fine: The Department or Office, for the first time, may impose a fine up to Rs. 25,000/- to any
labour provider, if such labour provider has not been complying the conditions and directions
issued pursuant to this Act or the rules made under this Act.
Work permit and foreign workers

To create job opportunities to the citizens is one of the top priority of the government. Industrial
sector can create jobs and these jobs should primarily offer to the citizens of the country. Hence,
the Labour Act has adopted this geocentric approach regarding the employment. By contrast
to this, the Labor Act has provided the general terms of hiring of foreign nationals by a local
entity that the foreign national can only be hired if local skill sets are not available for the job. In
additional to the general rule of hiring of the foreign nationals the Labor Act also provides certain
new provisions such as flexibility on work permit for certain entities, the language of employment
agreement, repatriation of salary and terms and condition of service etc. The provisions are briefly
summarized below.
General Provisions: Section 22 has laid down the general provisions of hiring of foreign
nationals. As per Sub-section (1), no foreign nationals can be engaged in work without having
obtained the work permit from the Department. Sub-section (2) allows the employer, to employ

foreign workers subject to the scope of this Act if the employer is unable to acquire skilled
workers from among Nepali citizens as required. In such a case under Sub-section (3) the entity
must publish an advertisement in national level Daily Newspaper to fill the vacant posts by
Nepali citizens prior to engaging a foreign national in work. On failure to receive applications
from Nepali citizens as specified in the advertisement or Nepali citizens could not be selected,
the employer may give an application along with the supporting documents for work permits
to the Department for hiring foreign workers. Upon receipt of an application, the Department
may issue work permits for the appointment of skilled foreign workers, if the application and
other supportive documents are found reasonable upon examination. Under Sub-section (5) the
employer employing foreign workers shall make arrangement for successive replacement of
foreign workers by Nepali workers. However, work permit is not necessary if such work permit
is exempted under diplomatic immunity provision or any treaty or agreement entered with the
Entity with foreign investment or operating on foreign aid: Section 24 of the Labour Act, 2074
has made special provisions regarding work permit for the workers employed in the enterprise
with foreign investment or operating on foreign aid where the work permit to the foreign nationals
hired as the chief executive may be provided by simply recording them at the Department. Under
Section 24 of the Act, the Department maintaining proper record, issue work permits to foreign
nationals working as a chief Executive and specified number of workers in an enterprise operated
with foreign investment or foreign assistance.
Work Permit for technicians for short period: Technicians engaged for less than three (3) months
to carry out repairing of any machinery or installing new technology or similar casual work may
be provided work permit simply by recording in the Labor Department.
Employment Agreement: As per Section 25 of the Labor Act, no foreign national can be engaged
in work without the employment agreement which should be entered into either in language
understandable by such foreign national or in English language. Unless otherwise provided in the
agreement, the employment agreement continues for three years.
Repatriation of Income: Pursuant to Section 26 of the Act any foreign worker with a work permit
acquired pursuant to this permitted to remit the remuneration earned by working in Nepal in
convertible foreign currency to his/her country.
Work Permit Exemption: The foreign nationals having diplomatic immunity or the foreign
nationals who are exempted from work permit under the treaty or agreement entered into with
Nepal government are exempted from work permit requirement.

4. Working hours, Leave and Remuneration
General notes
The Labour Act, 2074 has fixed the working hours in daily and weekly basis. The principle
behind the fixation of working hours is that the workers are to be treated as human beings not
machines. If the workers are engaged for a long period of time continuously, in one hand it
causes negative impact to their health and on the other hand, the workers efficiency naturally
decreases as they got tired and monotonous. Proper time for rest and entertainment is necessary
for good health, family affairs and social relationship of the workers as they are the part of
their family and society. Similarly, the holiday and leave helps the workers in different ways to
discharge and maintain their family and social duties. The leave refreshes them and provides
the means of living even they are not in work in case of pay leave. In the case of emergencies and
need, the workers can use their leaves as provided by the Labour Act. Further, the remuneration
is the right of employees as they are using their skill, providing labour, spending time or
involving mentally and physically in works and generating the profit to their employer. In fact,
the business or profit in business is the combined result of the investment and labour. When
the employers have involved the workers in their business and have earned profit, from the
prospective of natural justice, the workers are to be rewarded, hence, the provision of bonus
to be provided to the workers has been provided by the Labour Act, 2074. In this sense, the
remuneration is the right of the workers. The Labour Act, 2048 has made mandatory provisions
for the payment of remuneration to the employees for the works and if they are working extra
works, they are entitled for the extra remuneration. On the other hand, the remuneration is the
means of livelihood of the employees and their families, hence, the remuneration should be
provided in such a manner that is sufficient to maintain his living standard. The Labour Act,
2074 has provided a system to fix the minimum wages of the workers.
Working hours
Working Hours under the Labour Act shall be 8 hours a day and 48 hours a week. Overtime has
been increased to 24 hours in a week. The Act requires making arrangement for transportation
while engaging a female employee in such a way that the working period begins or ends before
the sunrise or after the sunset for the security, dignity and integrity of the female workers. Section
28 of the Act has provided that no workers shall be employed to work for more than 8 hours a day
and 48 hours a week by an employer and they shall be provided with half an hour rest after five
hours of continuous work. The rest time shall be counted within the working hours
No compulsion to work overtime: Under Section 29 of the Act, the employer shall not compel a
worker to work more than the hours as fixed under the Act, i.e., 8 hours a day and 48 hours a week.
However, workers may be made to work overtime if the non-completion of the work may have an
adverse effect on the life, health and safety of any person or serious harm or loss may be caused to
the employer or any other person or workers.

Overtime period: Under Sub-section (l) of Section 30 of the Act, the employer may engage a
worker to work not exceeding 4 hours a day and 24 hours a week. The work performed by any
worker without any arrangement for substitute leave under Section 42 shall not be deemed to be
overtime work.
Remuneration for overtime: Under Sub-section (l) of Section 31 of the Act the worker shall be paid
remuneration at a rate of 1.5 times of the basic salary that the worker receives during regular hours
of work. Sub-section (2) states that notwithstanding anything contained in sub-section (l), nothing
written in this section shall act as a constraint to provide benefits as determined by a collective
agreement or benefits as mentioned in the employment contract in case of managerial workers in
lieu of payment for overtime work performed.
Fixation of working time: If the employment contract has provision on starting and finishing
time of working hours for workers, it shall be followed accordingly or in its absence, it shall be as
determined by the employer.
Arrangement for transportation: When requiring women workers to start or finish the work
after the setting of the sun or before the sun rise, the employer shall make an arrangement for
transportation to come and go from the workplace.
Leave & holidays

There have been major changes in maternity leave, sick leave and accumulation of leave in the
New Labor Act. It also provides additional category of leave such as paternity leave which was
not there in the Previous Act. The comparison of leave is given in the following table.
Heading Section Provision of the Act

Weekly Off 40  1 day in a week
 13 days in a year
Public Holidays 41  14 days including International Women Labor Day for female
employees
 1 day for every 20 worked days
 Workers employed in educational institutions or workers who
Home Leave 43
get summer or winter holidays shall not be entitled to take home
leave.

 Fully paid up to 12 days

 Sick leave on a proportional basis for those employees who has
not completed 1 year of service
 Any worker seeking more than three days of sick leave
continuously may require to submit a medical certificate issued
Sick Leave 44
by a certified physician.
 Where there is a need to take sick leave because of sudden illness,
such worker must inform the employer or the person specified
by the employer immediately through available speedy means
of communication.
 Up to 14 weeks, with a provision to take before or after the date
of confinement for female workers. Out of 14 weeks, 60 days
shall be fully paid leave and remaining period shall be unpaid.
 At least two weeks leave before the expected date of confinement
and at least six weeks leave after the date of confinement.
Maternity Leave 45
 Where a female worker in a state of seven months pregnancy or
more gives birth to a deceased child or suffers miscarriage, the
provision relating maternity leave shall apply.
 Where a mother dies, the worker whose wife has died may take
paid maternity care leave for the remaining number of days.
Paternity Leave 45  15 days fully paid
Mourning Leave 48  13 days fully paid leave
 Home Leave- 90 days
Accumulation of
49  Sick Leave- 45 days
Leave
 Excess Accumulation- Enchased every year.
Leave not as a matter of right: All other leave except sick leave, mourning leave and maternity
leave which the workers are entitled to receive are normal facilities and shall not be claimed as a
matter of right and, therefore, the employer may refuse, withhold, reduce or alter the time of the
approved leave on the basis of the need of the work in the workplace.
Remuneration and benefits

It is the right of workers to receive remuneration of their work from the employer for whom they
have worked, hence, every worker shall be entitled to receive remuneration and benefits from
the date he/she commences the work. Under Sub-section (2) of Section 34 of the Labour Act,
2074, the remuneration and benefits that a worker is entitled to receive shall be as specified in an
employment contract ensuring that they are not lesser than what is prescribed in the Act and the
rules made under this Act. And Sub-Section (3) guarantees that except otherwise mentioned in a
collective agreement, the remuneration and benefits received regularly by a worker shall not be
decreased.

Similarly, under Section 36 of the Act, Any worker who has completed one year of employment
service shall be entitled to receive an amount equivalent to, at least, half a day salary based on
monthly basic salary every year as annual salary increment (grade).
Payment of remuneration: As per Sub-section (1) of Section 35 of the Act if the time is specified in
the employment contract, it shall followed accordingly or in its absence, it shall be paid at the time
determined by the employer and the interval between the dates for payment shall not be more
than one month. The remuneration to the following workers shall be paid as follows:
 Any worker working for less than one month shall be paid within three working days
from the date of completion of the work.
 Any worker engaged in a casual work must be paid immediately after the completion
of the work.
Festival allowance: Every worker shall be entitled to receive an amount equivalent to one month
basic salary in a year as festival allowance for celebration of any festival based on his/her own
religion, culture and tradition.
Under Sub-section (2) of Section 37 of the Act, a worker may give a written request to the employer
for the payment of the festival allowance which he/she is entitled to receive each financial year
on a major festival based on his/her religion, culture and tradition. In absence of such request, the
allowance shall be provided every year at the time of Dashain festival.
Similarly Under Sub-section (3) any worker who has not completed one year of employment
service on the day such festival allowance is distributed shall be entitled to receive such allowance
in proportion to the length of period s/he has worked.
Prohibition on deduction: As the remuneration is the right of workers, it shall be paid as per the
employment contract and amount shall be deducted from the remuneration of workers. Under
Sub-section (l) of Section 38 of the Act, the employer may deduct the following amount from the
remuneration:
 Any tax or fees levied under the existing laws.

 Any amount required to be paid for provident fund, insurance or any other social secu-
rity benefits.
 Any amount to be deducted pursuant to the order of judicial or quasi judicial body or
order of the arbitrator or decision.
 An amount for any specified service or facility provided by the employer to the worker.
 Wage for absenteeism.
 Amount equivalent to the book value of the goods lost or loss in cash or kind caused
willfully or negligently or the amount equivalent to the production cost in relation to the
manufactured goods.

 Amount as specified for deduction from remuneration in the collective agreement.

 Membership fees charged by trade unions.
 Loan or payment made in advance to the worker by employer.
Pursuant to Sub-section (2) while deducting the amount pursuant to sub-sections (c), (d), (e), (f),
(g), (h) and (i), it shall be deducted from the remaining monthly remuneration after the amount
pursuant to sub sections (a) and (b) are deducted.
As per Sub-section (4) where a worker dies or his/her service is terminated for any reason
whatsoever before the amount pursuant to this section is deducted, such amount may be recovered
from any kind of amount payable to such worker by the employer or enterprise.
Sub-section (5) provides that where the amount could not be fully recovered and the worker has
died, the employer shall give 15 days' notice to his/her legal heir for the payment of such amount.
In case the amount is not paid within 15 days, the employer under Sub-section (6) may file a case in
the court for the recovery of such amount within 35 days from the expiry of such limitation period.
5. Provident fund, Gratuity and Insurance
General notes
There have been also major changes in the terminal benefit provided to the employees such
that the benefits are provided to each laborer irrespective of length of service or nature of
employment. The Previous Labor Act provided the terminal benefits to the permanent employee
and for certain benefits such as gratuity the employee should have completed certain year of
services. The eligibility criteria have been removed by the New Labor Act. There have been
also changes in the benefits such as rate of gratuity and leave encashment etc. As the workers
have spent their life in the employment and they have no time to find another employment or
run their own business, the provision of provident fund provides the workers a means of living
at their retirement apart from the pension to be received by them. The employer and worker
contributed to the provident fund such accumulated fund is provided to the workers at the
time of termination of employment or their retirement. Similarly, the gratuity is also based on
contribution of both the employer and the worker taking the benefit of pension shall not be
entitled to receive gratuity. Further the Labour Act, 2074 has made the mandatory provisions
for the medical and accidental insurance at the cost of employer. This helps the workers to meet
the medical expenses and it compensate the bodily loss caused from accident occurred during
the employment. Indeed, the provision of provident fund, gratuity or insurance is the means of
social security as guaranteed under the legal system.

Provident fund: Section 52

Sub-section (1) of Section 52 of the Act provides that every employer shall deduct l0% of the basic
salary of each worker, add 10% amount equivalent to that and deposit the total amount for the
purpose of provident fund. The amount shall be deposited in the Social Security Fund in the name
of the concerned worker making effective from the date such worker commences his/her job.
However, until the Social Security Fund does not come into operation or the law relating to Social
Security Fund does not become effective for the concerned employer, the employer shall deposit
the amount of the provident fund
Under Sub-section (4), the employers shall contribute the amount for provident fund from the date
of the commencement of this Act for those workers for whom the provident fund contribution was
not made before this Act became effective.
Further, if the employer had contributed any amount in the retirement fund or any other similar
fund established under the prevailing laws or the amount lying under the custody of the employer
before the commencement of this Act shall be transferred to the Social Security Fund in a prescribed
manner after the commencement of this Act.
Similarly, the employer shall pay an amount equivalent to 100% of the basic salary in addition to
the actual remuneration any worker is entitled to receive, in case the amount for the provident
fund could not be deposited in the Social Security Fund.
Gratuity: Section 53
Pursuant to Sub-section (1) of Section 53 of the Act, every employer shall deduct an amount
equivalent to 8.33% of the basic salary of each worker every month and deposit it for the purpose
of gratuity and the amount shall be deposited in the Social Security Fund in the name of the
concerned worker making effective from the date such worker commences his/her job. As per
Sub-section (3), until the Social Security Fund does not come into operation or the law relating to
Social Security Fund does not become effective for the concerned employer, the employer shall
deposit the amount of the gratuity. The employers shall contribute the amount for gratuity from
the date of the commencement of this Act for those workers for whom the gratuity contribution
was not made before this Act became effective.
The amount contributed for the gratuity in the retirement fund or any other similar fund
established under the prevailing laws or the amount lying under the custody of the employer
before the commencement of this Act shall be transferred to Social Security Fund in a prescribed
manner after the commencement of this Act.
In case the amount for the gratuity could not be deposited in the Social Security Fund, the employer
shall pay an amount equivalent to 8.33% of the basic salary in addition to the actual remuneration
of the workers. Any worker taking the benefit of pension shall not be entitled to receive gratuity.

Medical insurance: Section 54

Every employer shall make a provision for annual medical insurance of at least one lakh rupees
for every worker and he premium required for the medical insurance shall be shared by both the
employer and worker equally.
Accidental insurance: Section 55

Every employer shall make a provision for accidental insurance of at least seven lakh rupees
covering all kinds of accidents for every worker and the total premium required for the accidental
insurance shall be borne by the employer.
According to Sub-section (3), if a worker dies or is completely incapacitated mentally or physically

as a result of an accident, such worker or his/her legal heir pursuant to the prevailing law shall
receive 100% amount of the insured sum as compensation. Similarly, in case a worker is injured or
incapacitated in an accident, compensation shall be provided in accordance with the percentage
prescribed in proportion to the injury or incapacity caused.
Where the employer has not subscribed insurance policy for the workers as required under this
Chapter or made serious mistake or negligence while preparing insurance policy, and the sum
insured could not be received by the concerned worker or the dependent legal heir, such employer
shall pay an amount equivalent to the sum insured to the concerned worker or the dependent legal
heir.
Further, as per Section 173 of the Labour Act, 2074 the Government of Nepal, on the increase the
medical and accidental notification in the Nepal Gazette.
Social Security Scheme: Section 57

Any employer or worker making contribution in the social security scheme for the provident fund,
gratuity and medical insurance benefits pursuant to the laws relating to Social Security Fund shall
not, to that extent, be required to make additional contribution or subscribe insurance policy
under this Chapter.
Remuneration and other benefits: Section 172

Where a worker, who is terminated from the employment, is reinstated by the
Office or Department or the order or decision of the Labour Court, such worker
shall be entitled to receive remuneration and other benefits from the employer
for the period starling from the date of termination to the date of reinstatement.
Nothing written in this Act shall act as a constraint to give a decision enabling the worker to
receive reasonable amount as compensation in addition to the amount entitled under sub section
(l) from the employer instead of reinstating such worker on the basis of the main issue of the
dispute.

6. Occupational Safety and Health
General notes
Workers are one of the key factors of industrial or business activities. As they are firstly the
human beings and the part of society they are to be treated from humanitarian perspective.
Labour jurisprudence, hence, gives focus to the wellbeing of the workers as the workers determine
the efficiency and profitability of an industry if they are safe, secure and peace and healthy
environment has been provided in the work place. It is the obligation of General Manager to
provide appropriate health and safety to its workers in the industry. To ensure the health and
safety is provided, the manager shall make arrangements for the cleaning of the institution and the
use of disinfectants, appropriate drainage, sanitation, repainting and refurbishing ensuring that
the dirt and filth do not cause any stench. Further, There should be adequate clean drinking water
facility, ventilation and light, suitable temperature in workrooms, disposal of waste, prevention
of accumulation of dust, polluted air, fumes or vapour and other contaminated matters harmful
to the safety and health in the workplace. It shall be the duty of enterprise to manage necessary
fencing and personal protective equipment to avoid any adverse impact on health from any
noise, dust, hazardous chemicals, poor infrastructure and other harmful substances. Similarly,
the workplace must be equipped with advance technology and instrument to absorbed toxic
chemicals, extinguishing fires and emergency rescue of the workers and the enterprise shall
provide further necessary facilities for the safety and health of the female workers. The Labour
Act, 2074 has provided the various provisions to protect the life and limb of the workers where the
Government through its various institutions, like Labour Office, can ensure whether these safety
measures and other arrangements for the good health of workers has been provide or not. Subject
to the provisions of this Act, the rules made under the Act and directions issued pursuant to the
Act and rules, every employer shall formulate a policy on safety and health of workers and other
persons in the workplace and implement it.
Duties of employers towards workers

It is the Duty of the responsible person to ensure whether the workplace, equipment, product or
material is or not for the concerned work. The Labour Act, 2074 under Section 69 has provided
that duties of employers towards workers in respect of occupational Safety and Health shall be as
follows:
 Ensure safe environment by making appropriate safety and health provisions at the
workplace.
 Make necessary provision for the use, operation, storing or shifting of chemical, physical
or bio-degradable material or equipment so that the safety and health of workers is not
affected adversely.

 Provide necessary information, notice or training relating to the safety and health to
workers.
 Provide necessary training and information in an appropriate language to workers
in relation to equipment and use or operation of chemical, physical or biodegradable
material for the work.
 Make proper arrangement for the safe entry and exit from the workplace.
 Provide necessary personal safety equipment to workers.
 Make other provisions as prescribed.
Similarly, as per Section 70 of the Act the employer is responsible for the safety and health towards
the non workers as follows:
 Every employer shall make necessary arrangement for the safety and health of every
person who walks in and out of the workplace or passes through such workplace.
 Where there is any possibility of causing harmful effect or any risk on the safety and
health of any person by the operating system of the workplace, the employer shall make
an arrangement for giving signal or giving or keeping information in that respect.
 Any enterprise using or manufacturing chemical products shall make provisions ensuring
flora and fauna, people and environment of the locality are not adversely affected by the
chemical substances, gases or any other thing discharged during the operation of such
enterprise.
Duties of manufacturers, importers and suppliers

Pursuant to Sub-section (l) of Section 72 of the Act the manufacturers, importers equipment or
material used in the workplace shall have to follow the following duties:
 To manufacture, import or supply equipment, products or suitable from the examination

for the operation and use in from the viewpoint of safety and health.
 To determine suitable method or process of using or operating such equipment, products
or material so that the safety and health of the concerned workers is not affected adversely.
 To identify possible risks of causing adverse effect on the safety and health of workers by
the use of such equipment, products or material.
 To conduct necessary research, experiment or test to eliminate or minimize the risks.
 To prepare a manual in order to provide all the information relating to necessary steps
required to be taken during the operation and use of equipment, products or material
from the viewpoint of safety and health.

 To ensure by giving a notice in writing that such equipment manufactured or installed

for the use of the workplace, if used properly, will not be harmful to the safety and health
of workers.
 To provide Chemical Safety Data Sheet relating to such material including other details
as prescribed to the employer.
Duties of workers
For the occupational safety and health, the workers also have to follow some duties while they
are in the workplace. Under Section 73 of the Act the duties of workers in relation to occupational
Safety and Health shall be as follows:
 Duty not to perform any act intentionally or carelessly that may cause adverse effect or
risk on his/her own safety and health or of others:
 Duty to provide necessary cooperation to the employer or any other concerned person
for the fulfillment of duties mentioned in this Chapter;
 Duty to acquire information about the manual, instruction or other matters prepared for
the operation or use of the equipment, products or material safely and cautiously in the
workplace;
 Duty to operate or use the workplace. equipment or products or material safely and
cautiously by following the manual, instruction or other matters prepared for the
operation or use of such workplace, equipment, products or material: and
 Duty to use the personal safety equipments provided by the employer compulsorily.
Safety and Health Committee: Under Sub-section (1) of Section 74 of the Act every employer,
having 20 or more workers in any enterprise, shall constitute a Safety and Healthy committee
comprising or representatives of workers in the manner as prescribed.
Powers, functions and duties of the Safety and Health Committee: The Committee formed under
the Act shall have the following powers, functions and duties:
 To give advice to the employer regularly on the kind of arrangement to be made on the
safety and health of workers and its effectiveness;
 To evaluate the arrangement made on the safety and hearth in the workplace and draw
the attention of the employer for making it more effective and if the work is not done, the
office shall be informed about it accordingly;
 To review the safety and Hearth policy every year.
 To perform other functions as prescribed.

Stoppage of work in case of immediate danger

In case of the immediate threat of any injury or adverse effect on health or damage to the devices
in the entity, the worker pursuant to Sub-section (1) of Section 76 of the Act should provide the
information thereof to the employer or any responsible person who should cause to stop the work
until the period the threat is prevented or minimized.
Under Sub-section (3) if the employer or responsible person, at that time, is not available for the
purpose of giving information the worker himself may stop the work and he shall immediately
inform the employer or the responsible person through the speedy means of communication.
Where any dispute arises between a worker and an employer in relation to the presence of
risk necessitating the stoppage of work or the sufficiency of the measures adopted for the
removal or minimization of the risk, any party under Sub-section (6) may file an application
to the Office, for the settlement of such dispute and the office, after conducting an inquiry
and hearing both the parties, shall settle the dispute. During the stoppage of work under this
section, the employer may engage the workers in some other work subject to the scope of his/
her employment terms.
Office may give direction to stop the work: Under Section 77 of the Act the Office may give
direction to the employer to stop the work immediately in the workplace if the office believes that
an immediate danger or risk has arisen in a workplace or there is a possibility of risk on the safety
and health of worker/s or any other person/s during inspection or on the basis of information
received through any other source.
When issuing the direction, if the office thinks that any equipment in the workplace is not fit
for use or operation, the Office may issue an order prohibiting the use of such equipment and
such equipment or any part of it may be sealed. The employer shall immediately stop the work
following the direction issued by the Office.
Protecting employee from disciplinary action: As per Section 75, employer shall not initiate any
disciplinary action against any worker on the following grounds:
a) For providing any information, notice or filing a complaint or assisting the act of filing a
complaint against any employer for failing to make provisions on safety and health;
b) For acting in the capacity of a member of the Safety and Health Committee formed under
Section 74; and
c) For stopping the work under Section 76 or 77 because of an immediate danger to the
safety and health of the workers.

Preventing communicable diseases: Under Section 80 of the Act, the employer should arrange
for the prevention of communicable disease in the workplace. The worker suffering from the
communicable disease can be ordered to stay in the unpaid leave or adjust with other leave and
may be restricted to come to workplace until cured.
Medical Expenses: In case any worker suffers from the work related hazardous disease, he/she
should be provided medical expenses by the enterprise and where such disease cannot be cured,
the worker should be provided with compensation as prescribed. The enterprise shall not be
required to pay the medical expense or compensation, if such expense or compensation is to be
provided from the Social Security Fund.
Inspection and directions of the Labour Office

Under Sub-section (1) of Section 83 of the Act the Labour Office may conduct a sudden or periodic
inspection to find out whether the employer has made any arrangement or not in relation to the
safety and health of workers.
During inspection, if it is found that the employer has not made any such arrangement on
safety and health in tl.re workplace required under this Act or other prevailing laws, the Office
under Sub-section (2) may issue a direction to the employer specifying a period within which
such arrangement to be made. Provided that if there is a possibility of immediate danger to the
safety and health of the workers or other persons or possibility of causing adverse effect on the
environment in absence of such arrangement, the Office may issue a direction to make such
arrangement immediately stating the reasons for the same.
Further, under Sub-section (3) the Office may give direction to provide necessary information
and details regarding any accident occurred in the workplace, occupational disease or safety and
health of workers or any other person. If any direction has been given by the office, it shall be
responsibility of the employer to follow or cause to follow the direction of the office.
7. Special Types of Enterprises and Services
General notes
The legal provisions provided under the Labour Act, 2074 are generally applied to all types of
industries and services. In spite of this generality, the Act under a separate chapter has provided
special provisions to some types of special enterprises and services considering their special
nature of business operated and services provided by them. By providing the special provisions,
the Act has intended to assert some means of special protection of the interests of those workers
employing in these special types of industries and services by imposing various duties to the
employer and on the other hand, these provisions saves the economic and financial interest of
the specified enterprises and services with some special responsibilities of the employees. Hence,
the provisions provided for the special types of industries and services shall not apply to other

types of industries and services. These special provisions shall not be a constraint for worker and
employer to enter into an agreement in relation to any work to be accomplished. The Labour Act,
2074 has provided the special provisions which are applied to the tea estate workers, transport
workers, construction workers, tourism workers, seasonal enterprises and domestic workers.
Special provisions relating to tea-estate workers: Section 84

"Tea estate" means any land used for tea plantation and it shall also include a factory and its
premises established for the processing of the tea and other related works.
"Worker of tea estate" means any person who carries out the work of digging, ploughing, leveling,
cutting, plucking, scattering, sowing, collecting, uprooting and other similar kinds of work in the
tea estate and it shall also include any person engaged in tea processing.
"Dependent family members" means the family member who lives with a tea-estate worker and
whom s/he has to take care for their livelihood.
Duties of employers towards tea-estate workers shall be as follows:
 To make an arrangement for suitable quarters within tea-estates for workers who do not
have their own houses nearby.
 To make provision for a trained medical staff, medical items including medicines and
free first aid service for the treatment of minor injuries sustained by workers and their
dependent family members.
 To make an arrangement for an easy availability of daily necessities by workers and
employees, in case there is no market near by the tea-estate.
 To make an arrangement for sports and entertainment for physical and mental develop-
ment of the workers and their dependent family members.
Special provisions relating to construction workers: Section 85

"Construction work" means the construction of building, road, bridge, canal, tunnel, internal
or interstate waterways or railways or construction of power station, telecommunication or
telegraphic stations or installation of related equipment or machines.
Duties of employers towards construction workers shall be as follows:
 To provide necessary tools and material in sufficient number and quantity required for
the construction.
 To make arrangement for temporary quarters, clean drinking water and supply of neces-
sary food items to workers who do not have houses nearby the construction site.
 To make necessary safety arrangement at the construction site.

Any person or organization taking responsibility for construction work or contract shall be
deemed to be an employer for the purpose of this section. When fixing the rate of wage and other
benefits for construction workers, representation of the concerned trade union and Contractors'
Association shall be compulsory.
Special provisions relating to transport workers: Section 86

“Transportation work” means any work relating to the transportation of people, animal or goods
from one place to another. As per Motor Vehicle and Transport Management Act, 2049, long route
means a route with a distance of 250 km or more from the point of departure for journey to that
of destination.
Duties of employers towards transport workers shall be as follows:
 To manage, at least, two drivers in the vehicles that operate in a long route with an ar-
rangement to drive turn by turn.
 To make arrangement for taking rest in different places for the drivers of vehicles oper-
ating in the long route before reaching at the final destination.
 To pay remuneration at the rate of 1.5 times of their ordinary rate of remuneration where
the workers of the transportation service are required to work more than eight hours a
day.
 Provided that, if the workers are paid any trip allowance, food allowance or any other
allowance of similar nature, they shall be entitled to receive either the overtime payment
or these allowances as per their choice.
 To pay shall fifty percent of the allowances they are entitled to receive in case where any
vehicle breaks down before reaching the final destination or is required to be stopped in
one place for any reason.
 To keep necessary medicines and medical treatment items for first aid in the vehicles.
Duty of transport workers: Workers engaged in driving shall not consume alcohol or drugs
at least twelve hours before driving the vehicle until the final destination is reached. Any act
in contravention to this shall be deemed to be misconduct and the concerned worker may be
dismissed from the job by the concerned employer. Provided an opportunity to be heard shall be
provided to the worker before dismissing him from the service.
Change in Ownership: Where it is necessary to terminate the service of any worker due to the
sale of the vehicle or change of ownership of the vehicle, the employer may do so by providing
all the benefits in accordance with this Act. Provided this provision shall not be applicable to an
enterprise operating the transportation business.

Special provisions relating to tourism workers: Section 87

Duties of employers towards tourism workers shall be as follows:
 To provide sufficient quantity of medicine and medical treatment items for first aid when
sending workers to the workplace.
 To rescue or cause to rescue any worker in case of an accident or serious health problem.
 To provide either field, food and other similar allowances or remuneration at the rate of
1.5 times of the ordinary remuneration as per his/her choice between these two benefits.
 To distribute service fees collected pursuant to collective bargaining Employers oper-

ating any hotel, motel, restaurant, jungle safari or any other similar kind of business as
prescribed.
Provisions relating to domestic workers: Section 88

Notwithstanding anything contained in this Act, provisions relating to public holiday, weekly
holiday and related matters for domestic workers shall be as prescribed. Similarly, where an
employer makes an arrangement for food and shelter at his house itself or provides financial
assistance for the education of a worker, such expense, from the remuneration of such worker,
may be deducted. Further, every domestic worker shall be allowed to celebrate festival pursuant
to his/her culture, religion or tradition by the employer. The Government of Nepal may fix
minimum wage for domestic workers separately.
Provisions relating to seasonal enterprises: Section 89

The term "seasonal enterprise" means any enterprise which can be operated in a particular season
only and it also includes an enterprise which cannot be operated for more than 180 days in a
year. The labour office shall decide as to a question whether any enterprise is a seasonal or not.
The workers of any seasonal enterprise shall be kept in reserve during the period of closure in
off season. Notwithstanding anything contained in this Act, during the closure of any seasonal
enterprise in off season, the workers in regular employment shall be paid at least 25 percent of
their remunerations which they are entitled to receive.

8. Fair Labour Practice, Misconducts and Punishments
General notes
The general principle laid down under the Labour Act, 2074 is that the employer, enterprise and
trade union, when carrying out their activities, shall observe fair labour practice in their conducts
with each other. As the success of a business or industry depends on good relation between the
employer and employees, the fair labour practice guidelines both of them to behave each other
under a defined set of rules based on the mutual coexistence and dependence. The Labour Act,
2074 under Chapter 14 has identified and listed out the various acts which are deemed as unfair
labour practice and the employer or trade union should not be involved to such unfair labour
practices for the friendly industrial relation.
On the other hand, the code of conducts helps the enterprise to keep law and order situation in
the enterprise. The workers have to observed and follow the code of conducts otherwise some
disciplinary actions can be taken by the employer. In fact, the code of conducts firstly, helps to
maintain discipline among the workers and secondly, it helps to maintain good industrial relation
which is one of the basis of industrial growth. Chapter 20 of the Labour Act, 2074 has provided
the provision of misconducts and punishments by listing out the various acts of workers as
misconducts and the punishment thereto.
The Labour Act, 2074 has adopted the balanced approach between the employer and workers by
conferring rights, protecting the life, limb and property and other interests of the workers and
by imposing various code of conducts and punishments in case of their misconducts. In case of
misconducts of workers in the work place or during the course of work, the chief executive or other
managerial level officer of the entity can decide the question what constitute misconducts and the
terms of punishment as per the provisions of the Act. It includes warning, salary deduction or
withholding promotion, suspension and dismissal.
Fair labour practice

It is the duty of employer and trade union not to perform or cause to perform any unfair labour
practice. The Labour Act, 2074 under Chapter 14 has identified and listed out the various acts
which are deemed as unfair labour practice and the employer or trade union should not be
involved to this unfair labour practice for the friendly industrial relation. Under Section 92 of the
Act, the following acts are deemed to be unfair labour practice.
Employer's unfair labour practice

Pursuant to Sub-section (2) of Section 92 of the Labour Act, 2074, any of the following acts done by
employers shall be deemed to be unfair labour practice:
 Act of not complying with the laws related to labour or cause others to do so.
 Act prohibiting the use of any of the rights conferred by the labour law.

 Intentional act of fabricating fake evidence in order to take disciplinary action against
any worker.
 Any act done with an intention to give trouble or harass a worker.
 Act of intervention or cause to intervene in the activities relating to formation, operation
and administrative functions of trade union.
 Act of continuing lock out which has been declared unlawful.
 Act of assaulting or cause to assault any worker.
 Any provocative act intended to create animosity or rift among workers.
Trade unions' unfair labour practice

Pursuant to Sub-section (3) of Section 92 of the Act, any of the following acts done by trade unions
shall be deemed to be unfair labour practice:
 Act of exerting pressure or threatening any worker to be or not to be a member of a

union,
 Act of collecting donation or any other assistance forcibly ;
 Act of picketing or surrounding private residence or enterprise of employer other than
the concerned workplace or act of causing to do so;
 Act of assaulting employer or his / her representatives or any worker or committing any
unlawful activity for fulfillment of their demands or act of causing to do so;
 Act of damaging the property of employer intentionally
Misconducts and punishments

The comparative chart of the list of misconducts and punishments under the Labour Act, 2074 has
been stated in the following table herein under.
Section Misconduct Punishment

 Absence from the work without obtaining permission
 Leaving the workplace without obtaining the permission from the
Managerial level
131 (1) Warning
 Coming late frequently without obtaining permission
 Not abiding the order of senior or employer with regard to work
 Other misconducts as prescribed in Bylaws.

 Taking the entity's property outside the entity or allowing

unauthorized person to use such without the permission of the Withholding
competent person
of Annual
 Embezzlement with the entity's transactions
Salary
 Destroying the entity's property due to negligence or recklessness
Increment
131 (3)  Preventing the supply of food and water in entity or obstructing
for 1 year or
movement in the entity
Withholding
 Abusing any items kept or arrangements made for interest, health
promotion for
and safety of the workers or employees or causing damage to
them intentionally one year
 Other misconducts as prescribed in Bylaws.
 Not accepting the letter or notice of punishment
 Participation or compelling to participate in illegal strike
 Collectively delaying in the work
Deduction
 Causing loss to the entity by reducing the production or service
131 (2) of One Day
recklessly or negligently
Remuneration
 Trying to take facilities by submitting false details
 Not using the security instruments provided by the employer
 Other similar misconducts as prescribed in Bylaws
 Causing bodily harm or injury to Proprietor, Manager or Employee
of the entity
 Accepting or offering bribe
 Stealing property of entity
 Embezzlement of property of the entity
 Causing damage to the entity's property knowingly
 Absence from entity for more than a consecutive period of 30 days Dismissal
131 (4) without getting the leave approved from the
 Causing damage to secrecy relating to special technology of the Service
entity
 Convicted on a criminal offence involving the moral turpitude
 Presenting false documents for appointment
 Consuming the psychotropic drugs or alcoholic drinks
 Having been punished twice for other misconducts within 3 years
 Other similar misconducts as prescribed in Bylaws
Dismissal
132  Sexual harassment from the
service
Automatic
134 (1)  Worker who is detained in the police custody pursuant to the law
suspension

 If it is found inappropriate to continue the employment

 If there is a possibility of destroying the evidence relating to the
Suspension
misconduct if engaged in the work continuously
134 (2) up to 3
 If there is a possibility of creating obstruction in investigation by
months
the worker for
 The punishment under section 131(4) has been proposed
Time for decision: Under Section 137 of the Act, where any worker is involved in any misconduct,
the disciplinary action proceeding shall be initiated within two months from the date of notice of
such misconduct and the decision shall be taken within three months from the date of initiation
of such proceeding.
Protection for acts done in good faith: Section 175

No legal proceeding shall be initiated against any labour inspector, occupational safety and health
inspector or any officer or employer or worker deputed in inspection, in case any loss or damage
is caused to any person as a result of any act done or attempted in good faith in the process of
fulfilling his/her duties. Provided that, such person shall be personally liable if such act is done
intentionally or with ill intention.
9. Provision relating to termination of employment
General notes
Termination of employment is an employee's departure from a job and the end of an employee's
duration with an employer. Termination may be voluntary on the employee's part, or it may be at
the hands of the employer, often in the form of dismissal (firing) or a layoff. Dismissal or firing is
typically thought to be the fault of the employee, whereas a layoff is usually done for business reasons
(for instance a business slowdown or an economic downturn) outside the employee's performance.
Employment of any worker shall not be terminated in any other condition except in accordance
with the Act, rules under this Act or by-law. Valid and sufficient reasons shall be given when
terminating from the employment.
Termination of various types of employment

Time based employment of any worker shall come to an end when the time specified in the contract
expires. Provided that, in case of project based employment, the employment shall not end if the
period of the project gets extended or the time for the completion of the work gets extended.
Task based employment of any worker shall come to an end when the specified work is completed.
Provided that, in case of project based employment, the employment shall not end if the work in
the project is increased or the work is added. Casual employment shall come to an end at the will
of the employer or worker.

Voluntary Termination from employment

Any worker may, by submitting a resignation in writing to the employer, terminate the
employment. The employer shall approve the resignation within 15 days and inform the
worker accordingly. Where the resignation is not approved by the employer within 15 days, the
resignation shall be deemed to have been approved automatically from the day after such period
expires. Notwithstanding anything contained elsewhere in this section, the resignation may be
cancelled through mutual consent between the employer and the concerned worker. If the worker
continues working in the same enterprise, even after the day his/her resignation is approved, such
resignation shall be deemed to have been cancelled.
Termination from employment for poor work performance

When evaluating the work performance of any worker pursuant to the provisions of the Act
or the rules made under this Act or by-law, if the work performance of such worker is found
unsatisfactory or poor for 3 or more than 3 years consecutively, the employment of such worker
may be terminated by the employer. The work performance evaluation must have been conducted
as prescribed under the Act or the rules made under this Act or the by-law before terminating
the employment. Before terminating the employment of any worker pursuant to this section, the
employer of any enterprise employing 10 or more than 10 workers shall be required to give 7 days
time to the concerned worker for clarification.
Termination from employment on medical grounds

The employer may, on the basis of a recommendation of a doctor, terminate the employment of
workers on following grounds:
 Where any worker becomes incapable of working as a result of physical or mental dis-
ablement or injury; or
 Probability of causing an adverse effect on the business of the employer because of long
term medical treatment of the worker.
The employer shall not terminate the employment of any worker while undergoing medical
treatment in the hospital or within one year from the date of commencement of treatment at
home. The treatment shall be carried because of an accident or occupational disease caused while
performing the work. The employer shall give full pay (100%) during the period of such treatment.
The employer shall not have right to terminate the employment of any worker for a period of 6
months, in case such worker is not able to attend to the work in the enterprise on the ground of
medical treatment because of an non-occupational disease or accident. Provided that, termination
of the employment can be made within the period of 6 months, if there is a clear recommendation
from the doctor about the inability of the worker to join the work again. The employer may also
engage the worker who is physically incapacitated or injured or disabled to any work suitable to
the condition of his/her health wherever possible.

Notice period: Section 144

Any employer or worker, while terminating an employment contract in situations other than the
termination of employment on the ground of misconducts, shall serve a written notice to each
other as follows:
 At least before one day, in case of employment for a maximum period of four weeks;
 At least before seven days, in case of employment for a period of four weeks to one year;
 At least before 30 days, in case of employment for a period of more than one year.
Where an employer terminates the employment without giving notice pursuant to sub section
(l), the equivalent amount of remuneration in lieu of notice shall be paid to the concerned
worker.
Where a worker terminates the employment without giving notice pursuant to sub section (l), the
employer may deduct an amount equivalent to the remuneration for such notice period from the
remuneration of the concerned worker which he/she is entitled to receive.
Retrenchment
The Retrenchment Strategy is adopted when an organization aims at reducing its one or more
business operations with the view to cut expenses and reach to a more stable financial position.
Typically the strategy involves withdrawing from certain markets or the discontinuation of selling
certain products or service in order to make a beneficial turnaround. The employer may retrench
workers in following circumstances:
 Enterprise faces financial problems in its operation; or

 Workers become redundant because of merger of more than one enterprises; or
 Enterprise needs to be closed down partially or completely because of any other reasons.
The employer shall provide the notice at least 30 days before the date for retrenchment with
information about grounds for retrenchment, probable date for retrenchment and probable
number of workers to be retrenched. Notice shall be provided to the office and authorised trade
union of the enterprise or in absence of such authorised trade union, to any trade union which is
active or labour relation committee of such enterprise. The employer shall consult the concerned
trade union or the labour relation committee after serving the notice in relation to alternatives to
the retrenchment of workers and the grounds and conditions for the selection of the workers for
retrenchment. If an agreement is reached, the employer may retrench the workers accordingly.
The employer may retrench the workers after informing the Office where the trade union or the
labour relation committee does not want to hold any consultation or where the trade union or

labour relation committee fails to reach to an agreement in the consultation. While retrenching the
workers pursuant to this section, normally it shall be done in the following order:
 Foreign workers;
 Workers who have received comparatively more punishments for misconducts;
 Workers with poor work performance standard;
 Workers who are hired at the last from among the workers in the same category of work
(retrenching the workers first who were hired last).
The workers who were appointed earlier may be retrenched first by stating the grounds for doing
so. Unless otherwise agreed with the trade union, the office bearers of the Collective Bargaining
Committee and the authorized trade union shall be retrenched last.
The employer shall pay a lump sum amount as compensation calculated at the rate of one month
basic salary for number of years served to those workers who have completed at least one year
of employment in such enterprise. However, if the service period is less than one year, the
compensation shall be paid proportionately. The worker shall not receive the compensation, if he
or she is entitled to receive unemployment benefit under the social security laws.
Notwithstanding anything contained elsewhere in this section, the provision in this section
relating to retrenchment shall not be applicable to any employer who employs ten or less than
ten workers.
Resumption of operation: Section 146

Where any enterprise, after the workers are retrenched, resumes operation within two years
or needs to hire more workers, the preference for employment shall be given to the workers
retrenched pursuant to section 145.
Notwithstanding anything contained in Sub-section (1), any other persons may be hired, if the
workers who were retrenched fail to come in spite of the notice issued as prescribed.
Where the employer does not issue any notice or does not hire the workers who were retrenched,
the concerned worker may, within 35 days, submit an application in the Labour Court. Other
provisions relating to this matter shall be as prescribed.

10. Settlement of Labour Disputes
General notes
Dispute is an obvious result where two or more persons engaged in a relation or business. Dispute
is the matter of difference between two or more parties to a particular subject relating to the rights,
interests, duties, obligations or liability. In a relation between the parties or in business activities,
the disputes are very common; hence, the law has to provide provisions for the dispute settlement
mechanism in a state. As there is possibility of conflict and disputes between the employers and
employees as to the claims or demands of the workers, the Labour Act has inserted the various
legal provisions for the settlement of such disputes which may arise in the due course of business.
Labour dispute either may arise between the employer and an individual worker for the individual
issues- claims or demands or the employer and the workers for their collective issues- claims
or demands. Consequently, the Labour Act, 2074 has provided the provided the separate legal
provisions for the settlement of individual disputes- claims or demands and the settlement of
collective dispute in the name of collective claims or demands. To decide the claims or demands
either individual or collective claims or demands or the other disputes, the Act has provided the
provisions for the Labour Office, Labour Department, Arbitration Committee and the Labour
Court.
Settlement of Individual Claims

The arrangements provided by the Labour Act, 2074 for the settlement of individual disputes as to
the workers individual claims and demands are stated herein below.
Submission of individual claim: Section 113

Any worker having an individual claim concerning any matter relating to the right entitled under
this Act, the rules, prevailing laws or collective bargaining may submit an application in writing
to the employer. The employer, after receiving the claim shall settle the dispute relating to the
claim within l5 days after consultation with the concerned worker and the time for the settlement
of dispute may be extended through consent between the employer and the concerned worker.
Application may be filed in the Labour Office: Section 114

Any concerned party, for the settlement of dispute under section 113 through mediation, may
submit an application to the office in the following situations:
 If the employer does not give any notice for consultation within 7 days from the date of
submission of the application.
 If an agreement could not be reached after the consultation held and l5 days from the
date of submission of application to the employer have elapsed.

After receipt of the application, the office shall notify the date and time to the employer and the
concerned worker for consultation. The office shall settle the dispute relating to the claim within
2l days from the date of the receipt of the application by holding consultation as required between
the employer and the concerned worker. However, the time for the settlement of dispute may be
extended through consent between the employer and the concerned worker. If an agreement is
reached between the employer and the worker with mutual consent, such dispute relating to the
claim shall be deemed to have been settled ant it shall be binding to both the parties.
Decision of the Office: Section 115

Under the Labour Act, 2074, the Labour Office has given, to some extent, the judicial powers to
make decision over the dispute following the common norms of judicial proceedings and the
principles of natural justice. Where the dispute does not get settled pursuant to section 114, the
Labour Office shall give decision within 15 days on the basis of evidences.
Settlement of Collective Claims

The legal provisions and steps for the settlement of collective claims and demands of the workers
provided under the Labour Act, 2074 can be stated as under.
Collective Bargaining Committee: Section 116

As per Labor Act, in an entity with 10 or more employees, there should be a collective bargaining
committee. The Labor Act also defines as to how the committee should be formed such as by
authorized trade union or by all the trade unions in absence of authorized trade union or by the
signature of 60 percent workers in absence of any trade union. The member of the committee
should be at least 3 but not exceeding 11. The committee is authorized to submit collective claims
or demands to the employer, negotiate and settle the claims or demands.
Excluded matters from collective claims or demands: Under Sub-section (3), the following matters
are prohibited from the submission of collective claims or dispute:
 Matters which is contrary to the Constitution of Nepal.

 Matters which may adversely affect the interest of any other person because it is based
on groundless allegation without any proof.
 Matter which may affect the personal behaviour of any employer or worker.
 Matters which are not related to the enterprise.
 Matters where a collective agreement has been made and the period specified in the Act
for such agreement has not expired yet.
 Matters relating to contribution rate and benefits specified for social security schemes.

Hold consultation on collective claims: Section 117

On submission of collective claims or demands, the concerned employer shall give a notice in
writing to the Collective Bargaining Committee within seven days from the date of submission of
such claims or demands stating the place and time for the consultation and the dispute relating to
the collective claims or demands shall end if any agreement, between the concerned two parties,
is achieved which is binding for both of the concerned parties.
Settlement of dispute through mediation: Section 118

Mediation is one of the dispute resolution processes through mutual consultation facilitated by
a person or entity or authority. If an employer fails to give notice to the Collective Bargaining
Committee for consultation within seven days or an agreement could not be reached within
2l days from the date of submission of claims or demands, any concerned party may give an
application to the Labour Office for the settlement of such claims or demands through mediation.
On receipt of the application, the office shall call both the concerned parties and resolve the dispute
through mediation. The proceeding of mediation shall be completed within 30 days from the date
of application for mediation. Once, the parties entered into an agreement in the presence of the
office, the dispute between them is treated as solved and the agreement shall be binding for both
the concerned parties.
Mandatory settlement of dispute through arbitration: Section 119

If the dispute is not resolved through mediation, such dispute relating to the collective claims or
demands shall be settled through arbitration as follows:
 If the Collective Bargaining Committee and the employer agree to settle the dispute re-
lating to collective claims or demands through arbitration.
 If a collective dispute arises in an enterprise providing essential service.
 If a collective dispute arises in an enterprise located inside the special economic zone.
 If, in a situation, where strike is prohibited due to imposition of emergency under the
Constitution.
Formation of arbitration: Under Sub-section (2) of Section 119 of the Act, the Ministry, irrespective
of the state of the collective dispute, may give an order for the settlement of the dispute through
arbitration where the Ministry has a ground to believe that a financial crisis may take place in the
country as a result of ongoing or possible strike or lockout or believes that the dispute needs to be
settled by arbitration ensuring representations from workers, employers and the Government of
Nepal. Further, Under Section 120, The Government of Nepal, for the purpose of settling collective
dispute through mediation and arbitration, may form an independent and permanent Labour
Arbitration Tribunal.

Dispute settlement procedures: When claims or demands submitted in writing to the arbitrators,
under Sub-section (6), they shall send a copy of such claims to the other party and provide an
opportunity to file a written statement in response to that. Hearing shall be conducted by the
arbitrator/s on the specified date, time and place and the arbitration proceeding shall not be
stopped simply on the ground that the other party has failed to be present or a written statement
has not been filed. The arbitrator/s shall have power as that of any court under the prevailing laws
to take evidence into record, examine witnesses, inspect sites and other related work in connection
with the proceeding. Pursuant to Sub-section (9) the arbitrator/s shall deliver the decision within
30 days from the date of ending of the hearing. The decision given by the arbitration shall be
binding to concerned parties of such disputes.
Special Provisions on Collective Dispute: The Labor Act also provides that the collective
bargaining may be placed and settled not in each individual entity but jointly for all the industries
in the same sector in association level. The association of the industries of one sector may enter into
the collective bargaining agreement with the association of trade union active in such business
sector. In the situation the individual industry is not required to deal with collective demand
separately.
Strike
If the dispute is not settled through mediation, the employees can go to strike giving notice, hence,
in order to organize a strike, a written notice along with claims or demands and the date from
which the strike is to commence shall be submitted to the employer 30 days before organizing such
strike and the Office of the Local Administration as well as concerned Labour Office shall also be
informed accordingly. Even the matter is referred to arbitration the employee may go to strike
in certain situation as defined in the Labor Act. Similarly, even in situations where the notice on
strike, pursuant to Sub- section (2), is given or the strike is commenced, it shall be withheld and
take part in the arbitration process, if the Ministry issues an order to settle the dispute through
arbitration. Under Sub-section (1) of Section 121 of the Act, the Collective Bargaining Committee
may, where any of following situations prevails, organize strike for the settlement of collective
dispute:
 If no condition exists for compulsory arbitration.

 If an arbitrator/s does not perform the functions of arbitration.
 If an arbitration panel could not be formed within 2l days from the date of application in
the Ministry or decision is given against the need for such arbitration.
 If a decision is not given by arbitrators within the prescribed time.
 If the employer refuses to enforce the decision of arbitrators or challenges such decision
on legal grounds.

 Except where compulsory arbitration is to be adopted, if any party dissents with the
decision given by the arbitrator/s.
No Secret Ballot Required for Strike: The Labor Act does not require secret ballot to go for strike.
They can go for strike simply giving notice to the management and other security agencies.
Strike should be Peaceful: The Labor Act provides that the strike should be peaceful and the
employees may call meeting at main entrance of the entity. However, the employee should not
obstruct access to and from the premises and cause any loss.
Lock out
It is the right of employer or management to close the enterprise to challenge the employees if they
believe that the worker's strike is illegal and not for genuine cause. The employer or management
can lock out the entity in the case of illegal strike or violent activities in strike. Sub-section (1) of
Section 124 states that where a strike is organized without giving a notice pursuant to this Act or
continues the strike or collective dispute could not be settled through the procedure prescribed in
the Act, the management may, by giving justifiable grounds, lockout the enterprise after acquiring
an approval from the Department. Before carrying out lockout, the management shall issue a
notice of at least seven days along with a date for the lockout to the workers in case they do not
end the strike.
However, the Department may at any time declare the lock-out of an enterprise illegal in case it
appears unjustifiable or it is likely to disturb the peace and security of the country or it is likely to
cause adverse affect on the economy of the country. Notwithstanding anything contained in this
section, lockout is prohibited in enterprises providing essential services.
Remuneration during Strike and Lock Out: The employees are entitled to half remuneration
during lawful strike or lawful Lock Out. The employees are not entitled to any remuneration
for unlawful strike. Conversely, the employees are entitled to full remuneration during unlawful
Lock Out.
Government Intervention: The government has authority to require the parties to settle any
collective disputes at any stage through arbitration if it potentially trigger financial crisis in the
country or the government believes that the dispute should be settled through arbitration.

11. Labor Court and Adjudication of Disputes
General notes
Dispute is a common result where two or more persons engaged in a relation or business. The
labour related disputes under the Labour Act, 2074 are settled either by administrative process
exercised by the Labour Office, Labour Department and Arbitration Committee or by judicial
process of the Labour Court. The Labour Act, 2074, has provisioned for the adjudication of the
disputes in impartial and judicial manner by providing the sound provisions of Labour Court.
Any individual or collective claim or dispute, any order issued by the labour office, any action
taken by the labour department or award made by the arbitration committee can be examined
by the labour court if a litigation filed by the concerned party to the labour court with competent
jurisdiction. The decision made by the labour court is generally final but an appeal can be filed as
against the labour court's decision to the Supreme Court of Nepal. The Labour Court has right to
exercise various powers required to accept, hear, examine the dispute and make its final decision
along with to initiate a legal proceeding for contempt In the process of deciding a case filed under
this Act, if there is a possibility of succeeding a claim on any amount by one party against the other
party and it is probable that such party will not pay the amount, the Labour Court, in order to
execute such decision may require the concerned party to deposit amount equivalent to the claim
amount or require to give bank guarantee sufficient enough to cover such claim amount.
Establishment of Labour Court: Section 151

The Government of Nepal, through notification in the Nepal Gazette, shall establish required
number of Labour Courts. The jurisdiction and territory of the courts shall be as prescribed in the
same notice published in the Nepal gazette. The Labour Court shall consist of one Chairperson
and two members.
Qualification and terms of service: Any sitting judge of the High Court or any person having
the qualification of becoming a Judge of the High Court shall be qualified to be Chair-person or
member of the Labour Court. Except when a sitting judge of the High Court is appointed as a
member of the Court, the tenure of the Chair-person and other members shall be four years. The
terms of service and benefits of the Chair-person and members of the court shall be same as to that
of judges of the High Court.
Jurisdiction of the Labour Court: Section 153

The Labour Court, apart from the powers specified in the Act or the rules made under this Act,
may use the following powers in the course of deciding a case:
 Witness examination;
 Seek necessary explanation from respondent treating it as written statement;

 The Labour Court, on the basis of application or nature of the case, suomoto may give an
order to summon any party during the hearing even though such party has been made
neither defendant nor respondent in the case and if necessary make him a party to the
case.
 Inspect places or workplace relating to the dispute;
 If an application filed by any party to a court proceeding to keep the case which is sub-ju-
dice in the Labour Court in pending or give continuity till it is finally decided and dis-
posed if found reasonable, notwithstanding the state of the case, the Labour Court may
issue an interlocutory order against any of the parties to stop any act for a specified time
or give continuity to any act with or without fixing a period;
 Confirm or invalidate or alter any directive or decision or order given by the Office or
an employer;
 The Labour Court, when carrying out a court proceeding and disposing a case, shall
have the powers as prescribed over the matters specified in the Act or the rules made
under this Act and in other matters, it shall have the powers equivalent to that of any
other District Court.
Similarly, under Section 159 of the Labour Act, 2074 if the Labour Court or the Office lacks
jurisdiction over the case filed in such court or the Office as per the Act and the rules made under
this Act, the Labour Court or the Office, when giving a decision over the lack of jurisdiction, shall
send the documents relating to such case to the concerned competent body for decision specifying
the date for hearing. Other provisions relating to the proceeding of cases filed in the Labour Court
shall be as prescribed.
Case may be compromised: Notwithstanding the state of the court proceeding relating to the case
in the Labour Court under this Act, on the basis of the application filed by any concerned party, the
Labour Court may give a permission to compromise or keep in pending or withdraw the case. When
executing a compromise or keeping the case in pending or revoking, no fines or lees shall be charged.
High Court may undertake the functions of Labour Court: Section 158
Notwithstanding anything contained elsewhere in this Chapter, the Government of Nepal may,
through a notification in Nepal Gazette, assign the functions of the Labour Court to any High
Court determining its jurisdiction. The assigned High Court may use all the powers of the Labour
Court under this Chapter when carrying out the court proceeding and disposing the case.
Appeal: Section 161

Any party dissatisfied with the order or decision of the Labour Court in a case looked into by
such court from the beginning to the end may appeal in the Supreme Court within 35 days from
the date of announcement of such order or decision. However, any decision made by the Labour
Court on appeal shall be final.

12. Complaint and Punishment
General notes
The purpose and effectiveness of law always depends upon its execution by the institutional
mechanism. If all the disputes and claims are to be decided by the judicial process, it would be
hardship to those suffered in the industrial relations to get the justice as the litigation is the complex,
lengthy and expensive process. From the labour jurisprudence view point, the law should provide
a system by which proper implementation of the law could be assured and defaulters could be
penalized under the administrative powers without following the court procedure. The Labour
Act, 2074 has admitted this need and provided such mechanism under a separate chapter to assure
to protect the interest of the workers and other parties involve in the labour relation. The Act
has given powers to the Labour Office and the Department to hear the complaints and protect
the interests of the injured party by imposing fine and other punishment to those violating the
provisions of the Act. In fact the Office and Department are the administrative organ to monitor
the continuous implementation of the Act where any person, employer, worker or officer acts
in violation of the Act or the rules made under this Act, the person affected by such act or the
concerned trade union with a written consent of the affected person may file a complaint pursuant
to section 163 or 164 to the competent authority having the power to decide within 6 months
from the date of such act. However, there are various forms of punishment which only can be
imposed by the decision of the Labour Court. Further, the Act has provided the provisions for
the appeal against the decision made by the Office and Department while taking administrative
action as per the Act. However, every worker has right to submit an application to the employer
under the procedure prescribed for settlement of individual dispute and settle such dispute
accordingly. Proceeding and decision of the complaint filed in the Department or the Office shall
be as prescribed.
Power of the Department to decide: Section 163 (1)

Under the Labour Act, 2074, the Department, after conducting necessary inquiry into the complaint
on the following matters, may act as follows:
 To impose a fine of up to two hundred thousand rupees and issue necessary order sub-
ject to the scope of this Act to any labour provider supplying workers without acquiring
any license to do so or any person who hires workers from such labour provider and
employs them in the work;
 To impose a fine of up to two hundred thousand rupees to any person on the basis of
number of foreign workers he/she has employed in any work without taking work per-
mit and an additional fine of Rs 5000 per person per month in case such person continues
to employ the foreign workers in spite of the punishment imposed earlier.

 To impose a fine of up to 1 lakh rupees and issue an order for equal treatment to any per-
son who discriminates workers at the time of hiring or during employment in violation
of Chapter 2;
 To impose a fine of up to five hundred thousand rupees at the rate of Rs 10000 per person
and issue an order to give an appointment letter or execute an employment contract to
any person who employs any worker without giving an appointment letter or executing
any employment contract;
 To take a departmental action pursuant to the prevailing law against any inspector who
causes loss or damage through any act done negligently or wrongfully pursuant to
Chapter 15;
 To issue necessary order in case any person does any unfair labour practice or
transfers any worker in an unjustified manner in violation of this Act or carries on activ-
ities relating to promotion in violation of the bylaw of the enterprise;
 To issue necessary direction to the Office in case it does not perform any task within 30
days from the date of ending of the period prescribed in the Act or the rules made under
this Act for the accomplishment of such task;
 To carry out necessary work for the settlement of dispute if such dispute relating to
remuneration and benefits to be provided to workers arises between a labour provider
and a main employer.
Power of the Labour Office to decide: Section 163 (2)

The Labour Office, after conducting necessary inquiry in relation to the application on the following
matters, may act as follows:
 To make the employer pay the deducted amount and a damage equivalent to two times
of such deducted amount to the concerned worker if such worker is paid below the
minimum wage or any remuneration or benefit is deducted in violation of the Act or the
rules made under this Act;
 To impose a fine up to Rs. 20000 to any employer or worker or person who obstructs the
performance of duty by government employees or gives false description or statement
or influences or attempts to influence in a wrong way;
 To impose a fine at the rate of Rs. 10000 per apprentice or trainee to the employer who
engages any person as an apprentice or trainee in violation of the Act and issue an order
to employ such apprentice or trainee on regular employment and pay the remuneration
and benefits accordingly;
 To issue an order to the employer, who does not pay the amount of gratuity and provident
fund or contribute the amount to the social security fund or pay medical expense or does
not subscribe insurance for the purpose of compensation which workers are entitled

to receive under the Act or the rules made under this Act to pay compensation and a
damage equivalent to an amount which is two times more than such compensation.
 To issue necessary direction to the employer who terminates the employment or prohib-
its any worker from attending the work in violation of the Act, the rules made under this
Act or the by-law.
Decision may be made by the Labour Court: Section 164

Certain matters relating to the labour issues only can be decided by the Labour Court as these
matters involve the legal issues which are to be decided by the courts with judicial process as they
have greater impact in the labour relation. The Labour Court has authority to make decision in the
following matters:
 If any person is engaged in forced labour, the person doing so may be punished by the
Labour Court with imprisonment up to two years or a fine up to five hundred thousand
rupees or both and may require such person to pay remuneration and other benefits
including a damage equivalent to two times of such amount.
Provided that if any person engages someone in forced labour outside the territory of
Nepal, the person involved in such act shall also be ordered to pay necessary expense to
bring the affected person to Nepal.
 In case of death or disablement of any person as a result of non-compliance of provisions
relating to Occupational Safety and Health under this Act or the rules made under this
Act or death of any person as a result of occupational disease caused due to performance
or non performance of any act or any part of the body is disabled or physical or mental
state is adversely affected, the person involved in the act shall be punished pursuant to
the provision in the prevailing law or in absence of such provision in the prevailing law,
such person may be punished with imprisonment up to two years and make such person
pay appropriate compensation to the affected person.
 Where a corporate body commits any offence punishable under this Act, such body shall
be punished with fines and if imprisonment is also prescribed for such offence, Chief
Executive of such corporate body shall be imprisoned.
Appeal: Section 165

Any person dissatisfied with the order or decision given by the Department or Office under this
Act or the rules made under this Act may file an application appeal in the Labour Court within 35
days from the date of such decision.
Any worker dissatisfied with the decision relating to the termination employment or punishment
given for misconduct, such worker may appeal in Labour Court within 35 days from the date
of notice of such decision punishment. However, if there is any provision in the by-law of any
enterprise on internal appeal mechanism, nothing shall act as a constraint for making an appeal
accordingly.

In case of appeal filed to such internal appeal mechanism, the affected party may appeal in the
Labour Court within 35 days from the date of receipt of the notice of the decision given by the
body with authority to hear appeal or the date on which a period of sixty days from the date of
appeal expires for receiving a notice of the decision against appeal.
Execution of decisions: Section 166

Sub-section (1) of Section 166 provides that where the decision or judgment given by the Labour
Court pursuant to this Act becomes final or the limitation period for appeal ends, the concerned
party shall enforce the decision against the other party. Further, Sub-section (2) provides that any
agreement reached in respect of an individual or a collective claim between any worker or trade
union and employer or in presence of the Office or any other authority or officer or any decision
of arbitrator shall be enforced in good faith by the concerned parties.
Where the agreement or decision pursuant to Sub-sections (l) and (2) is not enforced, as per Sub-
section (3) the affected party itself or through a trade union or an employers' association, an
application may be filed in the Office.
On receipt of the application pursuant to sub-section (3), the Office pursuant to Sub-section
(4) shall write to the concerned worker or employer for the enforcement of such agreement or
decision or judgment and on receipt of such written direction pursuant to Sub-section (4), the concerned
worker or employer shall enforce such agreement, decision or judgment within l5 days from the
date of receipt of such direction.
Powers of Office to enforce agreement and decisions: Section 167

Where the decision, judgment or agreement could not be enforced pursuant to Section 166, the
concerned party may file an application in the Office. On receipt of application the Office, may
enforce such decision, judgment or agreement against the concerned employer or worker by
adopting any or all of the following means stated below and the concerned authority shall act
accordingly if the Office makes a request in writing:
 Write to the concerned authority or officer to freeze the immovable property of the con-
cerned party or auction the property ;
 Write to the concerned authority to freeze the bank account of the concerned party;
 write to the concerned authority to suspend or withhold all the concessions or facilities
provided to the concerned party as per the prevailing law;
 Write to the concerned authority to suspend the labour permit or license of the con-
cerned party;
 Issue any other appropriate order.

If the decision or judgment is not executed within three months from the date of filing of application
pursuant to sub section (1) or within 15 days from the completion of the process under sub section
(2) and (3) or such decision or judgment is challenged, in such case, a complaint may be filed for
punishment pursuant to section 168 in the Labour Court.
Punishment for non-execution of decision, compromise or agreement

Pursuant to Sub-section (1) of Section 168 of the Act the Labour Court, for the purpose of execution
of decision given by the Labour Court or Supreme Court on labour issues, shall issue a notice
prescribing the time limit to the concerned worker.
The Labour Court may impose a fine up to one hundred thousand rupees or maximum of one year
of imprisonment to any employer or worker who refuses or delays or lingers the execution of the
order of the Office issued for the enforcement of the order or decision given by the Labour Court or
decision of an arbitrator or an agreement entered into between an employer and workers pursuant
to this Act. Provided that if the order, decision, compromise, agreement or contract is executed
within the period prescribed by the Labour Court, the Labour Court may annul such punishment
or give partial or full exemption in the enforcement of such punishment if already pronounced.
Notice and period of limitation: Section 169

Notice is a fundamental for every legal action as it is a part of due process of law. Only after serving
a formal notice, one can get opportunity to defend the allegation against him/her. Similarly, the
limitation primarily imposes the obligation to the justice seekers that he has to submit his case or
defend it within the fixed period of time otherwise he shall not be listened. The Labour Act, 2074
has provided the provisions of notice and limitation to bring certainty in the litigation or other
administrative actions. The provisions of notice and limitation are as under:
 Any notice or period of limitation sent by the employer to any worker or to the employer
by any worker shall be immediately acknowledged and proof of such acknowledgment
shall be provided.
 Where such notice or period of limitation could not be delivered, one copy of such notice
or period of limitation certified by three witnesses shall be sent through courier or postal
service at the given address and one copy shall be put up at the workplace. Such notice
or period of limitation shall be deemed to have been notified on time if the Office is in-
formed about such certified notice or period of limitation. Provided that the application
or notice given by the worker need not be put up at the workplace.
 Where any worker refuses to accept such period of limitation or notice, it may be sent
through fax or email or any other electronic means of communication. It shall be deemed
to have been notified unless proved otherwise.

 Any notice on any matter required to be informed to all workers collectively shall be
deemed to have been received by the workers once it is put up on the notice board of the
workplace and the trade union which is active in the enterprise is informed in writing
accordingly
Test Questions
1. Highlight the principles envisaged under the Labour Act, 2074 for the protection of the
workers.
2. Explain in brief the applicability of the Labour Act, 2074.
3. Classify the employment as provided under the Labour Act, 2074.
4. Write note on Interns and Trainees and applicability of the Labour Act, 2074 to them.
5. What is the effect of ownership change in enterprise to the workers of the enterprise?
6. Write short note on probation.
7. State the legal provision on the part time workers under the Labour Act, 2074.
8. State the legal provisions on lay off period under the Labour Act, 2074.
9. Can foreigners be employed in Nepalese enterprises? What is the general rule and its reasons?
10. State the legal provisions of appointment of foreign workers in Nepalese enterprises.
11. What is outsourcing of labour? State the responsibility of the labour provider.
12. What are the obligations of the main employer in case of outsourcing of labour?
13. When the labour provider's license can be cancelled or suspended?
14. What is working period fixed under the Labour Act, 2074?
15. State the provision relating to overtime period and its remuneration.
16. Enumerate the various leaves and holidays provided under the Labour Act, 2074.
17. What amounts the employer can deduct from the salary to be paid to the workers under the
Labour Act, 2074?
18. State and explain the provisions of provident fund under the Labour Act, 2074.
19. Write short note on gratuity.
20. State the legal provisions on medical and accidental insurance.
21. State the duties of employer towards the workers relating to the occupational safety and
health under the Labour Act, 2074.

22. What are the responsibilities of employer towards the non-workers for their safety and health.
23. Highlight the duties of manufacturer, importer and supplier for the safety and health of
workers.
24. Explain the duties to be followed by the workers under the Labour Act, 2074.
25. State the functions, duties and powers of the Safety and Health Committee under the Labour
Act, 2074.
26. Explain the power of Labour Office relating to the inspection and direction relating to the
safety and health of the workers.
27. State the duties of employers towards the tea estate workers.
28. What are the duties of employers towards the transport workers?
29. State the legal provision under the Labour Act, 2074 relating to the domestic workers.
30. Write a note on Seasonal Enterprise.
31. List out the labour practice of employer considered as unfair.
32. When the trade union's acts are considered as unfair labour practice?
33. Stat the misconduct and punishments under the Labour Act, 2074.
34. How individual disputes are settled as per the Labour Act, 2074?
35. State the process of settlement of collective dispute under the Labour Act, 2074.
36. When the dispute relating to the collective claims is to be settled mandatorily through
arbitration?
37. What matters are excluded from the collective claims or demands under the Labour Act,
2074?
38. What is strike? When it can be called?
39. What is lockout? When an employer can lock out the enterprise?
40. What are the salient features of the Labour Act, 2074? State in brief.


CHAPER 10 : CIVIL CODE, 2074 (PART 5)
CHAPTER 10
CIVIL CODE, 2074 (PART 5)

1. Meaning, Nature and Function of Contract
General notes
Contract, in simple words, is an agreement between two or more parties to do or not to do something.
In a social life, no person can live without services of others and for these services, we enter into
contracts very frequently, in some cases, almost every day. All these services and activities are the
most important for us and depend upon a legal relation, i.e., contract for their successful operation.
The principles of contract deal with the simple transaction between consumers and sellers as well
as the commercial transactions between business people and companies. Commercial transactions
involve the exchange of land, goods and services. This exchange is not immediate as in a
supermarket or a private dealing but is to take place in the future which demands certainty as to
their operation and assurance as to the remedies to the injured party through the judicial process.
In this way, contract provides legal basis of each and every dealing or business relation to be taken
place between two or more parties.
The contract in juristic concept consists of two constituent elements, viz., Agreement and Obligation.
The term contract as we defined, generally, means an agreement between the parties that creates
certain rights and duties or obligations between them. If there is an agreement without obligation
and there is obligation not from agreement, there is no contract. Therefore, law of contract, rightly
said by Salmond, is not the whole law of agreement nor it is the whole law of obligations. It is the
law of those agreements which have their source in agreements. Thus, the contract is an agreement
that creates rights or obligations between two or more parties.
Meaning of contract
In general, contract is an agreement made between two or more parties to do or not to do something
in a particular way. In every contract, the parties make promises about something which is to
be performed in future. These promises or expectations take form an agreement and when this
agreement is enforceable or recognized by law, it becomes a contract. The agreements creating
obligations between the parties if enforceable by law are treated as contract. It binds the parties or
creates legal obligations to perform or fulfill the promises made by them. Further, to state the term,
contract is not an essential.
According to Sir John Salmon, "Contract is an agreement creating and defining obligations
between the parties".
David Walker defines, "Contract is an agreement between two or more persons intended to create
a legal obligations between them and to be legally enforceable".
Sir Willian Anson defines a contract as, "A legally binding agreement made between two or more
persons by which rights are acquired by one or more to acts or forbearances on the part of the other
or others."

In the American Restatement of Law of Contracts, contract is defined as:
"A promise or set of promises for the breach of which the law gives a remedy or the performance
of which the law in some way recognizes as a duty."
The Indian Contract Act 1872, section 2(h) defines a contract as: "An agreement enforceable by
law."
Civil Code, 2074, Sub-section (1) of Section 504 states:
Contract means an agreement, enforceable by law, between two or more parties to do or forbade
doing something.
Nature of contract
If we analyze the definitions of contract above, we find that a contract essentially consists of two
fundamental elements firstly, an agreement between two parties with conditions that creates
obligations and secondly, its enforceability by law. If the agreement creating obligations between
the parties is not recognized and enforceable by law such agreement never be a contract.
Thus, the nature of contract can be stated as follows:
 Contract is an agreement between two or more person on a particular matter or matters.

 It is recognized and enforceable by law, i.e., Contract law.
 It creates legal and binding obligations between the parties. The parties acknowledge
that they are under obligations and ready to perform these obligations.
 It establishes a course of actions and arrangements between the parties which is to be
perform by the parties in future.
 It provides certain remedies if things go wrong to the affected or injured party and im-
poses some detriment upon those in default.
Functions of contract
A contract establishes various obligations which are to be performed by the parties to it; and that
determines the circumstance in which a promise shall be legally binding on the person making it. In
the sense, contract has an important function of security that the expectations created by a promise
of future performance are fulfilled, or that compensation will be paid for its breach-remedies for
breach of such promise or contract. Another important function of contract is a constitutive one.
It means that a contract facilitates forward planning of the transaction and makes provisions for
future contingencies when the things go wrong. The modern and complex transactions need
detail planning and more detailed the provisions that are likely to be made. These two paramount
functions of a contract have other functions. They are as follows:

 Contract normally establishes as the value of the exchange or transaction i.e. how much
is to be paid for the land, goods or services to be provided.
 Contract lays down the respective responsibilities of the parties and the standard of per-
formance to be expected of them.
 Contract enables the economic risks involved in the transactions to be allocated in ad-
vance between the parties.
 Contract provides remedies to the affected party if promise is not fulfilled by the other
party.
 Contract in effect, the instrument by which the separate and conflicting interests of the
participants can be reconciled and brought into a common goal.
Types of contract
Contract can be classified into different divisions on the different basis. The important classifications
of contracts are discussed as follows:
1. On the basis of enforceability contracts. It can be classified into:

 Valid contract: A contract having the entire essential elements are known as valid contract
in the eye of law. The valid contract, constitutes an enforceable agreement, creates legally
binding obligations between the contracting parties. The party, who is not in default, can
claim various remedies as his own rights against the other party of the contract. Valid
contracts are the contracts creating and defining legal rights and obligations between the
parties and the law enforces such rights and obligations created by the contract.
 Void contract: The term void contract can be used in two senses, firstly, as a void contract,
i.e., a contract, when originally entered into, may be valid and binding on the parties but
it ceases to be enforceable by law becomes void when it ceases to be enforceable under
certain grounds. Secondly, as a void agreement. An agreement not enforceable by law
is said to be void. Void agreement lacks one or all of the essential requirement of a valid
contract. In the eye of law, void contract is not contract at all and it does not create
and define obligations between the parties. It is void-ab-initio, i.e., void from the very
beginning. According to Section 517 of the Civil Code, 2074, following agreements are
void:
 Contract in restraint of trade and profession which is not prohibited by law in–force.
 Contract in restraint of marriage.
 Contract in restraint of using common facilities used by the public in general.
 Contract in restraint of legal proceedings to enforce the legal rights by the court.
 Contract against the law-in-force or contract for legally prohibited activities.
 Immoral contract or contract against public policy and welfare.

 Contract becomes impossible due to not having knowledge of the subject-matter of

contract.
 Impossible contract.
 Contracts the meaning of which is uncertain.
 Contract of incapable persons.
 Contract for unlawful consideration and purpose.
 Voidable contract: The voidable contracts are those whose validity depends upon the
option of the parties. These contracts are not void from the beginning, become void if the
party challenges the validity of such contract. The contract becomes void from the date
of such action taken. Voidable contracts are those which are made without free consent.
Where consent of one party is taken by coercion, undue influence, misrepresentation or
fraud: the party can avoid the contract if he chooses so, by filling a case before the court.
 Unenforceable contract: Some contract are valid, but cannot be enforced by law known
as unenforceable contracts. An unenforceable contract is one that cannot be enforced
in a court of law because of only some technical defects such as absence of writing or
where remedy has been barred by the lapse of time or where legal formalities for specific
contract are not fulfilled.
 Illegal contract: An illegal agreement is one which violates or defeats some rule of basic
public policy or is criminal in nature or which is immoral. An illegal agreement is not
only void as between the immediate parties but has this further effect that even the
collateral transactions to it become illegal with no legal effects. The parties of an illegal
agreement, further, subjects to punishment.
2. On the basis of formation contracts. It can be classified into:

 Express contract: If the terms of a contract are expressly agreed upon, whether by words
written or spoken, at the time of the formation of the contract is said to be an express
contract. Where the offer and acceptance of an agreement are made by words, it results
in an express contract.
 Implied contract: An implied contract is one which is inferred from the acts or conducts
of the parties or course of dealings between them. Where the parties, by their acts or
conducts show or inferred from a course of dealings, there is a contract between them,
such contracts are termed as implied contracts.
 Quasi contract: Under certain circumstance a person may receive a benefit from other
for which the law considers he should pay to the other person even though there is no
contract between the parties. Such relations are termed as quasi-contracts. These are not
contracts in the strict sense because there is no offer no acceptance, no meeting of minds
and, in fact, neither agreement nor promise. Yet the law from such circumstances of the
case and the relationship of the parties implies, by a fiction, that there is a contractual
relation and the parties are bound to perform their promises.

3. On the basis of existing duty under a contract. It can be classified into:

 Unilateral contract: The term unilateral does not mean contract made by only one party.
Only one party cannot enter into a contract. Unilateral contracts are those where only
one party is under obligation to fulfill his promise at the time of formation of the con-
tract, the other party having fulfilled his obligation at the time of the contract or before
the contract comes into an existence. Such contracts are also known as contracts with
executed consideration.
 Bilateral contract: A bilateral contract is one in which the obligation on the part of both
the parties to the contract are outstanding at the time of formation of the contract. By
contrast with unilateral contract, in bilateral contract both the parties have to fulfill their
respective obligations in future and no party had already performed his obligation be-
fore the contract is existed. Such contracts are also known as contracts with executory
consideration. Most of the contracts are of bilateral in nature.
4. On the basis of performance of contracts. It can be classified into:

 Executed contract: Executed contract is one in which both the parties have performed
their respective obligations under a contract. If both the parties, after the contract, fulfill
their promises, it becomes an executed contract. No parties under duty to perform the
contract; and all the obligations are completed as mentioned and fixed by their agree-
ment.
 Executory contract: If both of the parties are under obligation to perform their duties
under the contract, it is known as executory contract. Therefore, the parties as per the
terms and conditions of the contract have to perform their obligations in the future date.
In some cases, one party may fulfill his obligations but the other party may not fulfill his
part, the contract still is known as executory contract.
5. On the basis of future contingency of contracts. It can be classified into:

 Simple/general contract: In a simple contract, the promisor binds himself to perfor-
mance in any event without conditions. There is a continuous obligation to perform the
contract from the date of agreement in a simple or absolute contract. It is an absolute
because it does not dependent on something else. His obligation to perform the contract
begins from the beginning.
 Contingent contract: Contingent means dependent on something else. A contingent con-
tract is a contract that’s performance depends upon the happening or non-happening of
some future uncertain event collateral to such contract. The promisor is not bound to
perform the contract from the beginning but the obligation arises only after happening
or non happening of a future uncertain event. The performance of a contract, if depends
upon some future uncertain event or condition known as contingent contract.

2. Essential Elements of a Valid Contract
General notes
Parties may enter into various agreement to fulfill their need either private, family or business. All
the agreements may not be treated as contract and enforceable by law. Then, a specific question
arises that why or when an agreement is enforceable by law and becomes a contract; and why or
when an agreement is not enforceable by law and remains an agreement only, not a contract. Thus,
it saying that, "all contracts are agreements but all agreements are not contacts". This simply means
that those agreements which are enforceable by law are become contracts and other agreements
not enforceable by law are just agreements but not contracts. The enforceability of every agreement
depends upon the essential elements of a valid contract. If, in an agreement, these elements are
present, the agreement is enforceable by law or a contract and if not, it is not enforceable by law
and cannot be a contract creating legally binding obligations between the parties. Therefore, an
agreement between the parties becomes a contract when all the essential elements are present. If
an agreement lacks or absence or not presents one or all of the essential elements, the agreement
cannot be a valid contract.
Essential elements of a valid contract

The essential elements of a valid contract can be listed as under.
 Two parties: There must be two parties in an agreement. To form an agreement there must
be one party making the offer and other party accepting it. Every contract creates obligations
which bind together two or more determinate individuals, the person under an obligation
and another entitled to enforce the obligation. There cannot be an agreement unless there are
two or more parties and no man can be under an obligation to himself.
 Offer and Acceptance: To enter in to an agreement, out of the two parties, one has to express
his willingness to another to do or not to do something which is known as an offer and the
other party has to give his consent or acceptance to the terms of offer. It is the process by
which most of the contracts are made between the parties. The meeting of minds can be
recognized when the offer made by the Offeror is accepted by the person to whom the offer
was made, i.e., Offeree.
 Intention to create legal relationship: An agreement to be a valid contract the parties must
have such intention to create or establish a legal relationship between them when they enter
into the agreement. If there is no such intention shown or inferred on the part of the parities,
there is no contract between them. The parties when they agreed, they must be sincere about
their promise and their intention must be to create a legal relation. An intention to create legal
relationship or obligation between the parties is necessary in order to exclude agreements
regarding social matters. Thus, in Balfour V. Balfour, (1919) 2 KB 571:

The defendant and plaintiff were husband and wife, residence in England. The defen-
dant, Mr. Balfour, at the time of his departure for Cylon, where he was employed, prom-
ised to send her a household allowance of £ 30 every month so long as she had to remain
separate but the husband failed to pay the promised amount to her. The wife Mrs. Bal-
four brought an action to enforce the promise as per the contract.
The main question before the court was whether the agreement between the husband and
wife is a contract or not. If yes the husband is bound to pay the promised allowance to his
wife, if not he is not bound. The court held that the agreement without intention to create legal
relation never be a contract and be enforceable by law.
In commercial and business agreements, the presumption is usually that the parties intended
to create legal relations. But this presumption is rebuttable if the language and the term of
the agreement shows there is no such intention of the parties to be legally bound. That was
happen in Rose & Frank Co. Crompton Bros., (1925) AC 445:
There was an agreement between Rose & Frank Co. and Crompton Bros, company for an
agency by means of which the former was appointed as an agent of the later. One clause
in the agreement was. "This agreement is not entered into as a formal or legal agreement,
and shall not be subject to legal jurisdiction in the law courts." The plaintiff company
brought an action against the defendant company when the plaintiff was dismissed from
as an agent by the defendant company.
The court held that there was no binding contract as there was no intention to create legal
relationship between the parties. The clause of the agreement that negative the intention of the
parties to create legal relationship.
Where an agreement contained a condition that "It shall not be attended by or give rise to any
legal relationship, right, duties, consequences whatsoever or be legally enforceable or be the
subject of litigation, but all such arrangements, agreements and transactions are binding in
honour only". Held such agreement is not Binding.
 Meeting of minds/consensus-ad-idem: For an agreement the minds of the parties must be

met upon same thing in the same sense. When two or more parties are convinced or agreed to
do or not to do something in the same sense, there is an agreement between them. When the
parties are agreed upon same thing in the same sense is known as consent. In fact, the consent
is a bridge which links the two different minds in same thing in the same sense. For example:
'A' offers to 'B' to sell his land in Kathmandu valley for 20 Lakhs intending to sell in terms
of 'Ana' where B, being from Terai region, agreed to purchase the land for 20 Lakhs in
terms of 'Kaththa'. In such a case both of the parties are agreed to enter into a contract
and agreed to sell and purchase the land for 20 Lakhs. There is no meeting of minds
because 'A' wants to sell his land in terms of 'Ana' and 'B' wants to purchase the land in
terms of 'Katha'. The terms 'Ana' and 'Kaththa' are the different units of measurement of

land and the area of land differs from 'Ana' to 'Kaththa'. The price of land depends upon
the measurement of land, which is important for the contract. The agreement between A
and B is not enforceable by law. There is no contractual relation between the parties. The
parties are not bound by the agreement and there is no any agreement or contract because
there is no meeting of minds.
 Consideration: An agreement to be enforceable by law it must be supported by consideration.

Agreement not in deed (written form) cannot be enforceable if there is absence of consideration.
In simple words, consideration means something in return or something for something. It is a
price of promise that provides some benefits, profits and rights to the promisor and imposes
or confers some sort of detriment, loss or obligation to the promise. For example:
'A' offers to 'B' to provide certain service if 'B' pays him Rs. 50,000. 'B' agrees to provide
that amount. Here, the promise of 'A' is bought by 'B' for Rs. 50,000. Here, Rs. 50,000 is
consideration for this contract.
If 'A' promise to 'B' to provide certain service without any return, such a promise cannot
be enforced by B because the contract is not supported by consideration. Thus, expect
in some cases, the agreement to be an enforceable contract it must be supported by
consideration and if there is lapse or absence of consideration there is no contract at all.
The rule is "no consideration no contract".
 Free consent: When the parties of contract are agreed upon same thing in the same sense,
we can say they are consented to enter into an agreement, thus, the consent links the offer
and acceptance or minds of the parties and creates an agreement between them. In this
process, the parties' consent must be free. The consent becomes free if it is made voluntarily
and knowingly, or consent becomes free if it is not caused by coercion, under influence
misrepresentation, fraud and mistake. The party whose consent is so affected can avoid the
contract by filling a case before the court within a stipulated time fixed by law. For example:
'A' agree to sell his motorbike to 'B' for Rs. 10,000 by force or compulsion employed by
'B'. 'A' can file a case to invalidate the transaction because his consent is taken by force or
coercion, i.e. without free consent.
'A' induced to 'B' to purchase a house stating that the house is built by No. 1 breaks
with pillar system and using the equipments resisting earthquake of 7.5 rector. 'B' agreed
to purchase that house for Rs. 1 Crore relying upon these features. After the contract
between 'A' and 'B', if these features are not found in that house 'B' can avoid the contract
because the consent of 'B' was taken by misrepresentation or by fraud.
In Atlas Express Ltd. V. Kafco (Importers and Distributors) Ltd.: [1989] Q.B. 833
The defendant had agreed to supply basket ware to a chain of retail shops and made
a contract for its delivery with the plaintiff, a carrier. The plaintiff had erroneously
estimated that each load would contain over four hundred cartons and, on the basis, had

agreed a price of £ 1.10 per carton. The first load was for a smaller number of cartons,
and the plaintiff, believing that carrying such a load at the agreed rate was not financially
viable, said that it would not perform, unless the defendant agreed to pay a minimum of
£ 440 per load. Because the defendant's commercial survival dependent on the contract
with the retail chain and it could not find an alternative carrier, it agreed to the plaintiffs'
demand but then refused to pay the same.
It was held that the new terms were agreed under economic duress. In that case there was a
direct threat to repudiate the contract, but the threat may be indirect. Thus, the defendant was
not bound to pay to the plaintiff under the new terms.
 Contractual capacity of the parties: The parties of contract must be capable to enter into a
contract. Contractual capacity of the parties generally means the reasonable ability of the
parties to calculate the effect of the contract upon his own interest. If one or both of the parties
of a contract have not contractual capacity the agreement except in some cases, cannot be a
valid contract. No party can claim legal rights and obligation from other. Under the Contact
Act 2056 the persons of minors and the person of unsound-mind cannot enter into a legally
binding contract. Section 506 of the Civil Code reads thus:
Except the following person, all other persons are qualified to enter into a contract:
 Person not completed the age of 18 years old.

 Persons of unsound mind.
 Other persons disqualified by the law-in-force.
It has been held that a minor may be liable for the supply, not merely of the necessaries of life,
but things suitable to the minor's station in life and particular circumstance at the time. Since
an infant requires not only food, clothing and lodging but also education, apprenticeship
and instruction, the law recognizes such contracts also valid. Hence, the minors are liable for
necessaries, and not merely necessities. the actual requirements of the minor must be assessed
and it must be decided whether he was already adequately supplied with articles of the kind
of question at the time of their delivery. In Nash V. Inman, [1908] 2 K.B. 1, thus:
A tailor supplied a Cambridge undergraduate with clothing which included eleven fancy
waist coats worth of £ 145. It was proved that he was a minor at the time of contract as
well as at the time of delivery and he had already a sufficient supply of clothing according
to his position in life.
The court of Appeal dismissing the claim held that the tailor had failed to prove that the
clothing was suitable to the minor's actual requirements at the time of the sale and delivery.
And the burden of proof is on the supplier.
A minor if he enters into a contract of employment or a contract for the purpose of obtaining
instructions or education thus making him qualifies and capable for a suitable trade and

profession, whereby he may profit himself afterwards and binds himself. In Robert V. Gray;
[1913] 1 KB 520:
The plaintiff Robert was a professional billiards player. He enters into an agreement with
the defendant, Gray. They agreed that the defendant should accompany the plaintiff on a
world tour for playing billiards matches and during the tour all expenses should be met
by the defendant and that the defendant should be paid a remuneration of £ 1,500.
The trial court awarded £ 1,500 to Roberts and the decision was affirmed by the Court of
Appeal. In the opinion of the court playing billiards in company with a noted player like
Roberts may be an instruction of the most valuable kind for an infant who desired to make
playing billiards the occupation of his life. The agreement was in effect for teaching instruction
and employment and was reasonable and for the benefit of the minor; thus enforceable.
 Legality of object and Consideration: The subject matter of agreement as well as the object
and consideration must be legal or lawful. Where an agreement is made for unlawful purpose
or for illegal consideration the agreement is not enforceable by law and thus no contract at
all creating legal obligation. The parties cannot enter into a contract for unlawful purposes
objectives. For example:
'A' and 'B' enter into an agreement whereby 'A' promises to lend his house on rent to
'B'. Here to lend house on rent is a lawful acts. But if the agreement was made for the
purpose of Gambling or prostitution being the object of the agreement unlawful no party
can claim any rights or obligation because the agreement is not a contract binding the
parties. Section 13(k) of the contract Act states that contract becomes void if it is made for
unlawful consideration and object.
 Not expressly declare void: The parties cannot enter into an agreement that is expressly
declared by the contract law and other law-in-force as void. The transactions which are
prohibited by law or against the public policy and morality are declared as void by contract
law. Under Section 517 of the Civil Code, 2074, the following agreements are void:
 Contract in restraint of trade and profession which is not prohibited by law in–force.
 Contract in restraint of marriage.
 Contract in restraint of using common facilities used by the public in general.
 Contract in restraint of legal proceedings to enforce the legal rights by the court.
 Contract against the law-in-force or contract for legally prohibited activities.
 Immoral contract or contract against public policy and welfare.
 Impossible contract and the contracts the meaning of which is uncertain.
 Contract of incapable persons.
 Contract for unlawful consideration and purpose etc.

 Possibility to perform: The agreement must be such which can be perform in near future in
real/ practical life. If the parties of a contract agreed to do or abstain from doing anything
which cannot be perform by the parties, that agreement cannot be a contract. Agreement to do
an act impossible in itself cannot be enforced. The contract cannot be performed at the time of
agreement they are void contract or not a contract at all. For example;
'M' promise to kill 'O' by magic if 'N' provides him his ancient coins. 'N' agrees the same
but 'M' fail to kill by magic because of impossibility to perform. In such a case 'M' is not
bound by his promise and he cannot recover the price from N. Similarly, N is not bound
to provide such coins and cannot demand for performance. The contract between 'M' and
'N' is void contract or unenforceable contract but only an agreement.
 Certainty and clarity: The terms conditions and the language used in an agreement must
be certain and clear. From the words and language of the agreement everybody must know
that what the agreement is; and what the rights and obligations are fixed by the parties. The
agreement must give some meaning. It must be certain and not vague or indefinite. If it is
vague and it is not possible to ascertain its meaning, it cannot be enforced. Therefore, A agrees
to sell to B a "hundred tons of oil". There is nothing whatever to show what kind of oil was
intended. What the amount is to be paid and when is to paid. The agreement hence, is not
enforceable by law and becomes void for uncertainty. In Scammel V. Ouston, thus:
'O' agreed to purchase a motor van from 'S' 'on hire-purchase terms'. The hire-purchase
price was to be paid over two years. Held, there was no contract was the terms were
not certain about rate of interest and mode of payment. No precise meaning could be
attributed to the words 'on hire-purchase' since there was a wide variety of hire-purchase
terms
 Legal formalities: An agreement can be formed by words written or spoken and even by
conduct of the parties. There are some other formalities which have to be complied with in
order to make an agreement legally enforceable. In some case, the contract is to be stamped
and in some other cases, a contract, besides being a written one, has to be registered in an
authorized government office. Thus, where there is a statutory requirement that a contract
should be made in writing or in the presence of witnesses or stamped or registered, the
required statutory formalities must be complied with.
Difference between a contract and agreement

In general, contract and agreement refer the same meaning and can be used interchangeably
to denote an understanding between two or more parties to do or not to do something but the
term agreement and contract carries the different meaning in contract law. In the light of the
above mentioned essential elements of a valid contract, the difference between a contract and an
agreement can be shown as follows:

S. No. Basis Contract Agreement

1. Enforceability It is enforceable by law. It may not be enforceable by law.
2. Legal Creates legal obligations to Agreement does not create legal

obligations perform. obligations.
3. Remedies Contract provides remedies if Agreement does not provide such
it is not fulfilled without lawful remedies.
excuses.
4. Legality of To be a contract, the Agreement may be without lawful
objects consideration and object must be consideration and object.
legal or lawful.
5. Contractual Contract is made by competent Agreement may be made by the
capacity parties. person without contractual capacity.
6. Free consent Contract is made with free Agreement may be made without
consent of the parties. free consent.
7. Binding to the The parties of a contract The parties of an agreement may
parties are bound by the terms and not be bound by the terms of the
conditions of the contract. agreement.
8. Damages The parties who refused to The parties of an agreement are
perform the contract they are not under such obligations to pay
bound to pay compensation or compensation or damages.
damages to the other party.
9. Types There are different types of There are no such types of an
contract. agreement.
10. Rights and The parties of a contract can The parties of an agreement cannot
duties claim some rights or duties as claim such rights or duties as
against other. against other.
11. Relationship All contracts are agreements. All agreements are not contracts.

3. Performance of Contract
General notes
The term performance refers the fulfillment or execution of contractual obligations by the parties of
it in accordance with the terms and conditions of the agreement. The general rule of performance
is that the performance of contract must be exact and precise. Once a valid contract formed,
the contracting parties enter into the second stage of contract, i.e., performance of contract, or
fulfillment of the contractual obligations fixed by the parties at the time of entering into a contract.
Section 521 of the Civil Code, 2074, thus, states that each party to a contract shall fulfill his/her
obligation under the contract. The performance of contract is the legally binding obligation of the
parties of contract. All the parties, therefore, are bound to discharge their respective obligations
as per the conditions inserted in the agreement. If not performed, it amounts to the breach of
contract where the injured party or the party not in default can file a case before the court for the
legal remedies. The performance of contract is the most important part of contract and the contract
law as well. Because of this, the various legal provisions are given in Contract Act to regulate and
monitor the performance of contract. In fact, the significance or importance and use of contract
depend upon the successful performance of contract.
Need or importance of performance

The need for or the importance of performance can be stated as follows:
 To fulfill the expectations of the parties. The expectations of the parties are expressed at
the time of agreement through offer and acceptance. If these expectations go in vein, it
causes loss to the parties which law, always, intended to avoid or minimize.
 To avoid the legal consequences of punishment which may arise from the non-
performance.
 To fulfill the legal duty as the performance is binding obligation of the parties.
 All contracts are made for performance.
 If the performance is impossible, the contract is not valid. The validity of contract
depends upon the matter of performance.
 It is an essential element of a valid contract that if the contract need not be perform or
cannot be perform, there is no valid contract.
Types of performance
On the basis of time of performance carried on by the parties to it can be classified into two
divisions.
 Actual performance: In simple words, it is the performance of contract on the due date
of performance as agreed by the contracting parties. If A promised to supply goods to B

on the 25th of March and accordingly supplies the goods on the agreed time, it is called
as an actual performance.
 Tender or offer to perform: On the other hand, if the promisor or party to perform
the contract at first, expresses his willingness to perform his obligation before the due
date of performance, it is known as tender or offer to perform. Contract law lays down,
here, double standard, i.e., where the time is an essence no contract can be perform
after the time of performance. It amounts as the breach. But the promisor is, in general,
can perform his obligation before the date of performance where another party cannot
generally refuse to it. Therefore, for example,
'A' contracted with 'B' to supply rice on 1st day of next month. However, 'A' 3 days earlier
expresses his willingness with intention to supply the goods to perform his obligation
and delivers the goods to B's place. It is a tender or offer to perform. The general rule
regarding the offer or tender to perform is that the offer or tender cannot be rejected by
the Promisee provided the offer or tender is valid.
Requisites of a valid tender/ offer: An offer or tender to perform is considered as valid and
binding if:
 It is unconditional.
 It is made at the proper time and place.
 It is made for the whole performance of contract.
 It is expressed by the promisor or the person obliged and willing to perform the promise.
 It is made to the proper person.
 It is made at such a period of time where the promisee is able to accept the delivery of
goods or the performance of contract.
Attempted performance: When the offer or tender to perform is rejected by the promisee it
amounts to an attempted performance. Where a promisor has made an offer of performance
to the promisee and the offer has not been accepted, the promisor is not responsible for
non-performance, nor does he there by lose his rights under the contract. Thus, a tender
of performance is equivalent to actual performance and excuses the promisor from further
performance and entitles him to sue the promisee for the breach of contract.
Rules regarding performance

The law applicable to the performance of contractual obligation by the parties can be mentioned
as under.
 Time and manner of performance: A person who is bound to perform a contract must be
ready to perform it at the time when he has undertaken to do the same. In law, no request or
demand for performance would be necessary to entitle a party to sue for breach unless such

demand is made a conditional precedent or the nature of the contract is such as to rise on
implication of such a condition. And where, a demand or request is necessary, the demand or
request must intimate to the promisor, the time and place at which performance is required.
Section 523 of the Civil Code, 2074 under different subsections has laid down the rules
regarding the time and manner of performance. Sub-section (1) reads: "In case the time and
procedure of performance of contract has been mentioned in the contract, it shall be performed
within a specified time and according to the specified procedure."
Likewise, Sub-section (2) follows: "In case no time or procedure of performing the work
mentioned in the contract has been specified, whereas in case the work can be performed only
at any specified time, the contract shall be deemed to have been concluded so as to perform
the work at that time and according to that procedure."
Further, Sub-section (3) runs: "Except in the circumstances mentioned in Sub-section (2), in
case the time and procedure of performing the contract has not been mentioned in the contract,
the contract shall be performed within a reasonable time by adopting a reasonable procedure."
Reasonable time always a question of fact depending upon the nature of the contract, the
situation of the parties, the circumstances of the case and the usages of a particular market
or business. Instead of this where the time mentioned or time of performance is implied by
reason of the nature of contract that the work can be performed only at any specific time, there
is no such question in this regard.
Manner of performance: The general rule is that the performance of a contract must be
precise and exact. That is, a party performing an obligation under a contact must perform that
obligation exactly within the time frame fixed and to the standard required by the contract. It
means that the performance must comply with the terms of the contract. Where the conditions
fixed are essence, as like the statutory implied terms of quality in the contracts for the sale of
goods and if there is a minor deviation from the terms of the contract, the party not in default
will be entitled to say that the contract has not been performed and can sue for damages for
breach or can treat the contract as terminated.
Place of performance: Further, regarding the place of performance, the Section 524 of the
Civil Code, 2074 is quiet descriptive. The general principle laid down under Sub-section (1) of
Section 524 is that the contract must be performed at the same place if any specific place has
been specified in the contract. Where it is not specified the place for performance, it depends
upon the intention of the parties as indicated by the nature and terms of the contract and the
other circumstances of the particulars case. In such a case, the party performing the work shall
inform the party to specify a reasonable place for performing the work, and the other party shall
specify a reasonable place to perform the work. Under the Indian law, if no place is mentioned,
the promisor must ask the promisee where they would like the contract to be performed. In the
contract specified two or more alternatives places for payment or performance, the questions

who has the right of selection depends on the intention of the parties to be ascertained from
the nature of the contract and the circumstances of the case. Thus, in Re Moore & Co. and
Landaure & Co., (1921) 2 K.B. 519:
The defendant agreed to buy from the plaintiff 3,000 tins of canned fruit from Australia
to be packed in cases containing 30 tins. When the goods were tendered it was found that
a substantial part of the consignment was packed in cases containing 24 tins.
It was held that the defendants were entitled to reject the whole consignment. Even if the
performance affected is commercially no less valuable than that
 Person bound to perform: Normally, a contract, in the absence of a contrary intention, express
or implied, is enforceable by and against the parties there to. It is the absolute obligation
of the promisor who has under taken responsibility to perform, therefore, the promisor is
bound to perform the contract. The promisor is the party to whom the promisee has got trust
and confidence. The expectations or objectives of contract are achieved if it is performed by
the promisor himself. This rule is not so strict that law in the different sets of circumstance
makes liable to other persons to perform the contract and other person than the promisor can
perform the contract. But where performance involves some personal also qualification, for
example, a contract to deliver lecture or sing the contract must be performed by the promisor
himself. Section 521 of the Civil Code, 2074 reads thus:
"Each party to a contract shall fulfill his/her obligation under the contract."
In fact, the real realization of those expectations contemplated in the mind of the parties or
purpose of the contract is possible if the contract is performed by the parties themselves. It
is strictly applies to those contract which involves the personals skill, volition or diligence of
the promisor. It refers, on the other hand, that where the performance of contract does not
include such personal skill, volition, diligence or trust and confidence, it is open that such can
be performed by other person. Thus, Sub-section 1 of Section 521 lays down a common rule
that the promisor may executed the contract by other persons but such can be done only with
the consent of other party. Therefore, the other persons, than the promisor, who can perform
the contract, are:
 Agent:
 Legal representatives:
 Third person: Section 529 (3) of the Civil Code, 2074
 Joint promisor: Section 529 (4) of the Civil Code, 2074
Devolution of joint liabilities and rights: Section 528 of the Civil Code states:
"In case party to a contract dies or loses his/her senses, the rights accruing from the contract
shall devolve on the heir to his/her property, and the heir shall also bear liability to the extent

covered by the property received by him/her provided that, the rights and liabilities accruing
on the basis of personal skill and qualification shall not devolve on such heirs. For example:
'A' promises to pay 'B' Rs. 5,000 for the supply of goods to him within 15 days from the
delivery of goods. The goods are delivered but before making payment, A dies. A's rep-
resentatives/ heirs are bound to make payment to B and B is bound to deliver the goods
to the A's legal representatives.
'A' promises to 'B' to provide plumbing services by a certain day at a certain price. A dies
before that day. The contract cannot be enforced either by A's representatives.
 Who can demand for the performance: General rule under Sub-section (1) of Section 530
of the Civil Code, 2074 is that only the party of contract or promisee can demand for the
performance of contract and any other third person being stranger to contact cannot ask the
promisor to perform the contract. Sub-section (2) provides that where a promise has made by
several person jointly, the action can be proceed to enforce the promise only in the names of
all the joint promisor, and one of them cannot sue alone. The other person than the promisee
who can demand for the performance are:
 Joint promisee
 Agent duly appointed
 Legal representatives
 Official assignee/ Official receiver
 Trustee of a trust.
 Performance of reciprocal promises: Promises which form the consideration or part of
the consideration for each other are called reciprocal promises. Reciprocal promises can
be classified as mutual and independent or conditional and dependent and mutual and
concurrent. The rules regarding the performance of reciprocal promises are contained in
Section 522 of the Code as follows:
a. Simultaneous performance of reciprocal promises: In case a contract has been concluded

with a provision requiring both parties to simultaneously fulfill their respective
obligations, and in case one party fundamentally shows a conduct or intention of not
fulfilling his obligation, the other party shall not be required to fulfill his promise. (Sub-
section (1) of Section 522)
b. Order of performance of reciprocal promises: In case the order of priority relating to

fulfillment of any promise has been specified in the contract itself, it shall be fulfilled
accordingly and in case no such order or priority has be specified, the party who is
required to do so first according to the nature of the contract shall fulfill it. (Sub-section
(2) of Section 522)

c. Effect of default as to promise to be performed first: In case one promise cannot be

fulfilled without fulfilling another promise under any contract containing reciprocal
promises, the party, who cannot execute the contact because of the failure of the other
party to fulfill its promise, may recover the loss or damages caused by the failure of the
other party to execute the contract. (Sub-section (3) of Section 522)
d. Effect of one party preventing another from performing promise: In case a contract
containing reciprocal promise has been concluded, and any party obstructs the other
party from executing the contract, the party which becomes unable to execute the
contract may the contract cancel and also recover any loss or damage suffered by him
from the cancellation of the contract in the manner. (Sub-section (14) of Section 522)
 Effects of fundamental change in the circumstances to the contract: It is laid down under
Section 531 of the Civil Code, 2074 that when the contract becomes impossible to perform
because of fundamental change in the circumstances at the time of entering in to the contract. It
is the case of supervening impossibility or frustration. The following cases are to be treated as
fundamental change in the circumstances where the contract becomes impossible to perform.
 If the contract becomes void.
 If the performance become impossible because of war, earthquake, flood, landslide,
volcano etc. beyond the human control.
 If the subject matter of contract destroys or does not exist.
 In case of death, insanity or physical incapacity where the performance of contract
depends on the personal capacity, skill and quality.
 Contract need not be performed: Section 527 has listed the various contracts which need not
be performed by the parties. These contracts are:
 If the contract subsequently becomes unlawful.
 If the voidable contract is declared as void.
 If the contract becomes impossible.
 If the contract is subtitled by a new contract.
 If it is illegal.
 If contract entered into by agent beyond the limit of authority.
 If one party to the contract absolves the other party from fulfilling the obligation
according to the contract.
 If the contract becomes unnecessary to perform under this Act.
 If one cannot execute the contract due to its violation by the other party.
 If the contract entered into by a trustee in breach of trust.

4. Breach of Contract and Remedies
General notes
A valid contract creates and defines legally enforceable obligations to the contracting parties and
these obligations are to be discharged by them as their legal duties or liabilities. The vary objective
of contract fulfils only if it is perform, therefore, every contracts are made for performance. By
contrast to it, if one or both parties fail to fulfill their duties or obligations under the contract
without lawful grounds or the cases of excuse, such willful default of performance of contract is
known as breach of contract. When the contract has been breached or going to be breached, the
law has empowered the injured party to overcome from the possible loss resulted from the breach.
These various means or techniques as assured by the law to protect the interests of the injured
party which can be used as against the party in default are called as remedies. As per the nature
of contract in a particular business and its effects, the injured party may seek remedies either
damages or specific performance or quantum-meruit or rescission of contract.
Breach of contract
In general terms, breach means the non-performance or non-fulfillment of contractual obligations
included in the contract at the time of agreement. All the cases of non-fulfillment of contractual
obligations are not called by breach, for example, in case of discharge or non-performance of
contract by agreement or operation of law or, lapse of time or supervening impossibility. Where the
contractual obligations are not fulfilled or performed but it may not amount to a breach. Therefore,
according to Section 535 of the Civil Code, 2074 if a party of a contract, without lawful excuse,
refuses, or informs not to perform the contract becomes unable perform or fulfill his contractual
obligations as per the terms of agreement by his acts or conduct or by his own act makes the
contract impossible to perform, the contract is said to be breached. Once the contract has been
breached, it comes to an end but it confers the various remedies to the injured party.
Types of breach: On the basis of time of breach, it may be of two types:
 Actual breach of contract: It may take place:

 On the due date of performance: When the contract has been breached on the date of
performance or at the time when the performance is due is called the actual breach.
Where the time of performance is essence for the contract, it immediately comes to an end
by breach when time lapsed. On the other hand, where the time is not an essence and the
defaulting party expresses his willingness to perform the obligation after the due date,
the other party may accept the performance subject to the payment of compensation.
 During the performance: Actual breach may take the place when during the performance
of contract, one party fails or refuses or becomes unable to perform the contract. This
also may occur by express words or acts or implied by some acts making the contract
impossible to perform.

 Anticipatory breach of contract: It may sometimes happen that even before the time of
performance arrives, the promisor may definitely renounce the contract and refuse to perform
it when the time arrives, or he may by his conduct disable himself from performing the
contract at the appointed time. Therefore, when a party of a contract signifies his willingness,
expressly or impliedly not to perform his obligations under the contract before the due date of
performance, it is called as an anticipatory breach. Now, the question in such cases is whether
the other party would be at once be entitled to treat the contract as broken, or whether he
should wait till the time for performance arrives and then only bring an action for damages.
Effects of anticipatory breach: Where there is an anticipatory breach, the other party:
 May treat the contract terminated, or

 May wait till the date of performance.
If he treats the contract as dead or terminated, the contract comes to an end immediately
and he can go to court for damages and need not wait till the due date of performance. The
anticipatory breach entitles the other party to choose the contract as discharged or terminated
and to sue at once for damages. Thus, in Hochster V. De-la-Tour: (1853) 2 E & B. 678
The defendant company engaged the plaintiff, Hochester, on 12th April to enter into
his service as a courier and to accompany him upon a tour; the employment was to
commence on 1st June. On 11th May the defendant wrote to the plaintiff to inform him
that his services would no longer be required. The plaintiff at once brought an action,
although the time for performance had not yet arrived.
The court held that he was entitled to do so. The rule has also been applied to situations where
the performance is contingent. For example, A promised to B to marry her upon her father's
death, but during her father's lifetime he renounced the contract. In such a case, B can sue for
damages
On the other hands, where there is an anticipatory breach and the other party treats it as
alive, and choose to wait for the performance of contract, the promisor though he has already
breached the contract can perform at the time of performance.
Remedies for the breach of contract

Under chapter 5 of Part 5 of the Civil Code, 2074 the provisions for the breach and remedies for the
breach has been provided These remedies can be used by the injured party as per his necessity or
which may prove as appropriate for justice. The remedies for the breach of contract are as follows:
 Recession: In general, a contract cannot be cancelled without performing the contractual

obligations or it cannot be refused to perform. Therefore, if a party refuses to perform the
contract, it amounts the breach of contract, and becomes liable for the legal consequences.
But, when a contract is breached by one, the other party may sue to treat the contract
terminated by giving notice thereof and refuse for the further performance. Recession is

a right of an innocent party of contract to refuse to perform his obligation under it when
it has already been breached by the other party. In such a case, on one hand, he becomes
free from the contractual obligations and, on the other hand, he can sue the other party
for damages.
 Damages: Where a party suffers by a breach of contract, he is entitled, at all events to
claim damages therefore. In simple, words the damages refer a monetary compensation
allowed to the injured party awarded by the court for the loss or injury suffered by
him by the breach of contract. The fundamental object of awarding damages is to put
the injured party in the same position, if money can do it, as if the contract had not
been breached or the contract had been performed. Damages for breach of contract are
designed to compensate for the damage, loss or injury the plaintiff suffered through that
breach. A party who has not, in fact, suffered by loss reason of breach still, he is entitled
to recover the damages. Section 537 of the Civil Code, 2074 has provided the provisions
of various damages for the breach of contract. The damages may be ordinary damages,
special damages, exemplary or vindictive damages, nominal damages etc. Further,
under Section 543 of the Code the court has discretionary power to fix the amount of
damages to be awarded by considering the ground of breach and the possible loss to the
injured party resulting from such breach. The foundation of the law regarding damages
for the breach of contract both in England and Nepal as well as in India is to be found in
the judgment in the case of Hadley V. Baxendale: (1854) 9 Exch. 341
 H's mill was stopped by the breakage of a crankshaft, and it was necessary to sent it to
the makers as a pattern for a new one. The defendant B, who were carries, undertook to
deliver to the makers, but the only information given to them was that the articles to be
carried was the broken shaft of a mill, and that the plaintiffs were the owners of the mill.
By some neglect on their part the delivery of the shaft was delayed and in consequence
the mill could not be restarted until sometime after it could otherwise have been. H,
the plaintiffs, lost profits which they would otherwise have made. The question was
whether or not this loss of profit could be recovered by the plaintiffs.
The court held that the plaintiff, H could not recover damages for the loss of business profit.
The court pointed out that the circumstances communicated to the defendants did not show
that a delay in the delivery of the shaft would incur loss of profit of the mill, the plaintiffs
might have had another shaft, or there might have been some other defect in the machinery
to cause the stoppage.
Finally, the rule in Hadley, V. Baxendale lays down that where the parties have made a
contract which one of them has broken, the injured party can recover:
 Specific performance: It is an order of the court which directs the party in default to
perform the contractual obligation in accordance with its terms. The performance is
specific as the contract once breached but defaulting party has to perform the contract by
the order of court. In general, the injured party cannot file a case for specific performance

as his right as he could do so in damages. Similarly, in most of cases the courts prefer to
issue order for damages even if the injured party might be apply for specific performance.
Sub-section (1) of Section 540 of the Civil Code, 2074 provides that an order of specified
performance is issued where it is established that:
 The damages are not an adequate relief. That is, the monetary compensation cannot
fulfill the loss caused by him because of the breach.
 There exists no standard for ascertaining the actual loss and to awarded damages caused
by the breach of contract.
On the other hand, under Sub-section (2), the specific performance shall not be granted in the
following cases:
 Where the damages are an adequate relief.

 Where the damages can be ascertained.
 Where the contract is unequal to either party.
 Where the contract is entered by trustee in breach of his trust or by an agent beyond the
limit of his authority.
 Where the contract is of a personal nature, for example, a contract to marry.
 Where the contract is entered into by a company ultra-virus to its memorandum and
articles of association.
 Where the court cannot supervise its carrying out.
 Where the contract is impossible or unlawful.
 Quantum Meruit: An action upon quantum meriut may arise when an act has done or
service has render by one to another without to do so gratuitously whether or not there is
a contract between them for such act or service or its remuneration, he is entitled to recover
the reasonable remuneration of his act or service from that another. It may be contractual or
quasi contractual obligation. Therefore, when a person has done some work under a contract,
and the other party terminates the contract or because of happening of some event rendering
the contract impossible to perform, the party who has performed the work or rendered the
service can claim remuneration for the work done or service rendered. Similarly, where
one person has expressly or impliedly requested another to render him a service without
specifying any remuneration, after the work or service, he is bound to pay for such service
provided that the circumstance of the request imply that the service is to be paid for. The
general rule regarding the quantum merit is that if a person received some benefit from the
act or service or expense or benefit of another, the law regards that he should return for those
works, service or expenses.

 Injunction: It is an order of a court, on the request of a party of a contract, where the other
party of the contract is going to breach of contract or doing such acts for which he had
promised not do to restraining him from doing what he promised not do to. Such order can
be issued by the court under Section 541 of the Civil Code, 2074.
5. Contract of Indemnity and Guarantee
General notes
Some commercial transactions or business dealings do depend upon some sort of promise in the
nature of assurance that in case of loss one shall protect another and make him good against such
loss suffered. It is unavoidable where there is a chance of risk involved in the dealing between
the parties and therefore, it seems that if there was no such promise made there would not be the
dealings between the parties. Where a person brings another and involves him in dealing with
assurance or promise that he will make him good or harmless if he sustained any loss, it seems
natural or obvious that he should make harmless for the loss suffered as he would not enter into
the dealing if such assurance was not made. Such obligation arising out of such relation between
the parties is termed by either indemnity or guarantee. The general principles of contract law
relating to the formation, legality, performance and remedies are equally applied to the contract
of indemnity and guarantee as well as other special contract, for example, contract of Bailment
and Pledge, Agency Sale of goods and Carriage. Further being special contracts some other special
rules also applied and in that extent the general rules may ineffective.
Indemnity
Section 571 of the Civil Code, 2074 has mentioned about the various circumstances where the
promisor shall liable to make good for loss caused to the promisee in case the promisee acts as
per the direction of the promisor in a contract. Subsection 1 of Section 571 defines the contract of
indemnity and reads thus: "In case a contract is entered in to with a provision to pay any party to
a contract or third person for any loss or damage that may result from his action or the action of a
third person while working under the direction of that party to the contract a contract relating to
indemnity shall be deemed to have been concluded.
In English law, a contract of indemnity has been defined as a promise to save another harmless
from loss caused as a result of a transaction entered into at the instance of the promisor. It has wide
application and covers promise to save the promisee from loss caused even by events or accidents
happened beyond any one's control. The loss need not necessarily be the result of the conduct
of the promisor or any other person. Therefore, the indemnity is a contract by which one party
promises to save the other party from loss caused to him by the conducts of the promisor himself,
or by the conduct of any third persons, or by some events or accidents without any default of the
either parties. The contract of indemnity includes two parties; they are:

Indemnifier: The party who promises to save other from loss caused to him under the contract.
Indemnity holder: The party who is saved from loss by the promise of the promisor. He is also
known as 'Indemnified'.
Examples:
a. A, the supplier of industrial machinery, at the time of dealing, promises B that if there
is any loss to B by reason of any proceedings which C may take against B in case C
is injured because of the defective goods supplied by A. Contract between A and B is
indemnity.
b. A agrees to act as a country dealer of the products of B on the promise of B that he will
be responsible for loss suffered to A because of delay or defective goods or dumping of
them. Contract is indemnity.
c. A promises to B to pay for loss if his car is destroyed in an accident. Contract is indemnity.
Rights of indemnity-holder
The law has conferred various rights on the indemnity holder to protect his assets and interests
which are at stake in a dealing caused by the promise or the indemnifier. The fundamental right
of indemnifier is concerned with the recovery of amounts which he has actually been suffered
in the contract. Under various clauses of Sub-section (2) of Section 571 of the Civil Code 2074
has listed out the various amounts which an indemnity holder can claim and recover against the
indemnifier. The rights of an indemnity holder, thus, can be summed up as under:
 The indemnity holder can recover the entire amount mentioned in the contract as
indemnity.
 He can recover all damages which he may be compelled to pay in any suit in respect of
any matter to which the promise to indemnify applies.
 He can recover the amount incurred in the case filed or defended by him in connection
with the contract of indemnity.
 He can recover all costs incurred on the legal action. In case it becomes necessary to
initiate such action to recover the amount mentioned in 1 to 3 above.
 He can recover all sums which he may have paid under the terms of any compromise of
any suit. The compromise should not be contrary to the orders of the indemnifier and
should be prudent or authorized by the indemnifier.
By contrast, in case any person, while working under the direction of the other party, works
negligently or with an intention of causing any loss or damage that party or a third person, and
in case the concerned party or the third person suffers loss or damages as a result thereof, he shall
himself be responsible for such loss or damages.

Implied Indemnity: Indemnity contract may be express or implied and a claim to indemnity may
also arise on an implied contract. Such a contract may be based either on an inference of fact to be
deduced from the circumstance of a particular case or on the obligations caused by the relationship
of the parties. For example: The obligation of a beneficiary to indemnify his trustee or the relation
between auctioneer and client, etc.
Guarantee
Guarantee is a contact where a person promises to another that he shall be responsible for the act
or default of a third person. In other words, it is a contract to perform the promise or discharge the
liability of a third person in case of his default. In fact, it is a promise or assurance given by one
to save the another from loss caused to him because of some act, default or miscarriage of a third
person mentioned in the promise. Sub-section (1) of Section 563 of the Civil Code, 2074 defines
that a contract of guarantee shall be deemed to have been concluded in case it provides that if
any person defaults in the repayment of the loan obtained by him or fulfillment of the obligation
accepted by him, it shall be repaid or fulfilled by a third person.
In every contract of guarantee, there are three parties; hence, called as tripartite agreement. They
are:
 Surety: The person who gives a guarantee to other.

 Creditor: The person to whom such guarantee is given.
 Principal debtor: The person in respect of whose default the guarantee is given.
Types of guarantee
The contract of guarantee can be divided into the different kinds as stated here in below:
 On the basis of limit of surety's liability.

 Limited guarantee: If the surety's liability is limited to a certain extent irrespective the
amount of debt, is called limited liability. If it is not clearly mentioned that the guarantee
is limited, it amounts an unlimited guarantee.
 Unlimited guarantee: If the surety's liability is co-extensive with the liability of principal
debtor known as unlimited liability.
 On the basis of purpose of liability.
The function of a contract of guarantee is to enable a person to get a loan, or goods on credit
or an employment. Therefore, the guarantee may be:
 Guarantee for the repayment of a debt.

 Guarantee for the payment of the price of the goods sold on credit.
 Guarantee for the good conduct- Fidelity guarantee

 On the basis of guarantee given for an existing or future debt or obligating.

 Retrospective guarantee: If the guarantee given for an existing debt or obligation. It is
called as retrospective guarantee.
 Prospective guarantee: Where the guarantee applies to the future debts or obligations. It
is known as the prospective guarantee.
 On the basis of series of transaction of which guarantee applies.
 Specific guarantee: If the guarantee applies to a single transaction or debt or obligation,
it is called a specific guarantee. It comes to an end when the guaranteed debt is duly paid
or the promise is duly discharged.
 Continuing guarantee: When a guarantee extends to a series or number of transactions
in future is called a continuing guarantee. The liability of surety in case of continuing
guarantee extends to all the transactions contemplated until the revocation of guarantee.
Rights of surety
Broadly speaking, the rights of surety in a contract of guarantee can be studied by dividing them
into the following four headings. These rights are as follows:
 Rights as against security: The expression security includes all rights which the creditor has
against the property at the date of the contract. In a contract of guarantee, at the time of
agreement, may provide security by the principal debtor to the creditor. In such a case, at the
time of payment; the surety has the following rights:
 Right to recover the security: The surety can recover all the securities received by the
creditors at the time of agreement or subsequent and such was known or unknown to
the surety.
 Right to sell the security: The surety can sell the security if the principal debtor fails or
refuses to indemnify him for the amount duly paid by him to the creditor. If his amount
not recovered from the sell proceeds, he can recover the remaining amount from the
principal debtor. Similarly, if there is surplus then, he is bound to return back it to the
principal debtor.
 Rights as against creditor: The rights of a surety as against creditor are as follows:
 Right to get notice of default of the principal debtor: A contract of surety ship emerges
between the principal debtor and the surety but not between the surety and creditor.
Therefore, it is said that the right of a surety arise on notice and not under contract. The
creditor without providing notice to the surety the default of principal debtor, cannot
file a case. Similarly, the creditor without charging the principal debtor cannot charge
against the surety alone.
 Right before payment: A surety has got also certain rights even before he has actually
paid the principal's debt. A surety may, after the guaranteed debt has become due and

before he is called upon to pay, require the creditor to sue the principal debtor. In case of
guarantee given for honesty, i.e., fidelity guarantee, the surety can call upon the creditor
or the employer to dismiss the servant when dishonesty of servant is proved. A surety,
further, even before he actually pays the amount due to the creditor can file an action
for a declaration that the principal debtor is only the person bound to pay the amount.
 Right to ask for the recovery of security held by the creditor: After the payment by a
surety, he can recover all the securities kept by the creditor in the course of guarantee
contract. If the creditor releases the securities to the principal debtor or there is loss in
securities, the surety can bring an action against the creditor.
 Right of subrogation: When rights of one are transferred or devolved to another and
stands he on the place of other, it is known as subrogation. In guarantee, once the
payment is made, the surety stands in the place of creditor and acquires all the rights of
creditor in the contract, mainly rights against the principal debtor. The creditor drops
out from the contract and the surety replaces him and stands in his position.
 Rights as against principal debtor: A surety has the following rights as against principal
debtor:
 Right to be relieved from liability: Before the payment has been made, the surety can
compel the principal debtor to relieve him from liability by paying of the debt. Once the
principal debtor's liability occurs as a fixed sum, the surety can ask the principal debtor
to exonerate him from that liability.
 Right to be indemnified: After the payment made by the surety under the guarantee,
whatever may the amount paid such can be recovered by him against the principal
debtor. For the lawful payment, the principal debtor has to indemnify the surety. As
every contract of guarantee consists of an implied promise by the principal debtor to
indemnify the surety, the surety is entitled to recover all the lawful amount or amounts
duly paid to the creditor.
 Right of a general creditor: After the payment by the surety under the guarantee, he
stands in the place of creditor of the principal debtor and can exercise all rights which a
general creditor has against his debtor. The surety, therefore, what he could not recover
as a surety, can recover as a creditor as against the principal debtor. The surety can
recover compensation as a surety and the paid (loan) amount as a general creditor. A
creditor has more authority to recover loan against the debtor as compare with surety's
rights.
 Rights as against co-sureties: Where S1 and S2 stand as surety for the debt under a contract of
guarantee they are called co-sureties to the debt. Where there are co-sureties, a surety has the
following rights against his co-surety or co-sureties.
 Right of contribution: The important right which one surety has as against other co-
sureties is a right of contribution. Where a surety has paid more than his proportionate

part of burden, or has had judgment against him at the suit of the creditor for more than
his share, then he is entitled to contribution from the co-sureties, who are equally co-
sureties as well as the principal debtor. The rule of contribution is based on equity, i.e.,
there is equality of burden and benefit as between co-sureties.
 Right to divide security: Where there are two or more co-sureties for the same debt or
duty, in case of default of the principal debtor, the co-sureties, in the absence of any
contract to the contrary are liable to contribute equally to the extent of the default. By
contrast, where the co-sureties have agreed to guarantee different sum, they have to
contribute equally subject to the maximum amount guaranteed by each one. And if a
co-surety obtains from the creditor any securities of the principal debtor, the other co-
sureties have right to share or divide the proceeds of the security as per the ratio of their
payments made to the creditor.
 Right in case of release of a co-surety: Where there are co-sureties and the creditor
releases one of them it does not make free the surety so released from his responsibility
to the other co-sureties.
Discharge of surety from liability

When the obligations of a surety come to an end or he becomes free from his liability under a
contract of guarantee, the surety is said to be discharge or terminated. A surety may be discharged
either (I) by in-validation of contract, or (II) by revocation of the contract, or (III) by the acts of the
creditor.
In case of discharge of surety, the rights of creditor as against the surety come to an end but his
rights as against the principal debtor remains intact. On the other hand, when the principal debtor
releases or his liabilities are terminated, it terminates the liability of the surety as his liability is
secondary to the principal debtor where his liability is primary to pay the debt to the creditor.
Modes of Discharge of Surety

The various mode of discharge of surety's liability are shown in the figure given below:
Discharge of Surety
By By the Conduct of the By Invalidation of Contract

Revocation Creditor
Revocation by Notice Death of Surety Novation Misrepresentation Concealment of Fact Lack of Consideration Failure of Consideration
By Variance in the term of By Release of Principal debtor By Compounding by Creditor with By the Creditors Act or Omission By
Contract principal debtor Impairing Surety's Remedy Loss of Security

 Discharge of surety by revocation: It includes:

 Revocation by surety by giving notice: Guarantee can be terminated by surety by
giving a notice of revocation to the creditor. A specific guarantee cannot be revoked
by the surety if the liability has already occurred. A continuing guarantee, on the other
hand, may at any time be revoked by the surety by notice to the creditor as the future
transactions. But the surety remains liable for those transactions already entered into and
liability has occurred therein.
 Revocation by death of surety: Guarantee is a contract based on personal trust and
confidence of the surety and the death of surety makes the contract irrelevant, therefore,
the death of the surety, generally, terminated the contract and the surety discharge from
guarantee so far as regards future transactions in a continuing guarantee. The deceased
surety's estate will not be liable for any transaction entered into after the death, even if
the creditor has no notice of the death.
 Revocation by novation: Novation means substitution of a new contract for an old one
either between the same parties or between one of the old parties and new parties. After
the guarantee contract, if the parties agree to substitute a new contract of guarantee
for an old one already entered into between them, the liability of surety under the old
contract automatically comes to an end or discharged.
 Discharge of surety by the conduct of the creditor: It includes:
 Variance in term of contract: A contract becomes invalid, if the contract of guarantee
is materially altered by the creditor without the consent of the surety. The principle is
strictly applied that any variation in the terms of the agreement between the creditor
and the debtor which could be pre-judicial to the surety will, unless he consents there-to,
discharges him from liability.
 Release or discharge of principal debtor: The liability to pay debt or perform duty of
the principal debtor is primary. Therefore, the surety is discharge when the principal
debtor is released by the creditor. The surety is also discharged by an act or omission of
the creditor, by which the principal debtor is released.
 Compounding by creditor with principal debtor: A contract between the creditor
and principal debtor, by which the creditor promises to give time, to, or not to sue the
principal debtor, discharged the surety, unless the surety assents to such contract.
 Creditor's act or omission impairing surety's eventual remedy: If the creditor does any
act which is inconsistent with the rights of the surety, or omits to do some act which is
necessary as his duty towards the surety and the eventual remedy of the surety himself
against the principal debtor is here-by impaired, the surety is discharged.
 Loss of security: If the creditor loses, or without the consent of the surety, parts with
any securities given to him at the time of contract or afterwards, the surety is discharged
from his liability to the extent of the value of the security.

 Discharge of surety by the invalidation of contract: It includes:

 Guarantee obtained by misrepresentation: Any guarantee which has been obtained by
means of misrepresentation made by the creditor, or with his knowledge and assent,
concerning a material part of the transaction is invalid and can be avoided by the surety
on the knowledge of such true fact.
 Guarantee obtained by concealment of fact: Any guarantee which the creditor obtains
by means of concealment or without disclosing the material fact is invalid. The surety in
the event of knowing the true facts can invalidate the guarantee.
 Guarantee on the contract that creditor shall not act on it until a co-surety joins: Where
a surety gives guarantee upon a contract that a creditor shall not act upon it until another
person has joined in it as co-surety, the guarantee is not valid if that another person does
not join.
 Failure of consideration: Where there is a failure of consideration as between the
creditor and the principal debtor, the surety is discharge. Lapse of consideration makes
the contract of guarantees invalid. The question what has been received by the surety
against his promise is immaterial.
6. Contract of Bailment and Pledge
General notes
Goods and commodities are top most important for human life as we have to use the large verities
of goods to maintain our day-to-day life and fulfill our needs. Interestingly, there is a human
limitation that all the necessary goods for us, we cannot use by purchasing them. In some case it
becomes impossible or in other case impractical. In such a case, we can use these goods by taking
them from another for some period of time or for some purpose and we returned them to the
owner of these goods. This old practice of human behaviour is formalised under a legal principle
in the name of bailment. Hence, a bailment is a delivery of goods or movable property on the
condition that the receiver shall ultimately return back them to the person from whom he may
receive them. The delivery of good may be way of lending, pledge, or deposit for safe custody. It
is a relation between two persons where the goods is in the custody of other.
Bailment and pledge are a special class of contract where some goods or cattle are delivered for
some specified purpose or as security for the performance of a specific obligation. One of the
human limitations is that no person can possess all the goods required to him by purchasing
them. In such a case, he has to receive goods from other with promise to return back them after
completing his object. This human dealing is legalized by the Contract of Bailment and Pledge.
The Civil Code, 2074 has provided the general principles of bailment under Chapter-8 and pledge
under Chapter-9 of Part 5 of the contract laws and other obligation.

Bailment
The word 'Bailment' is derived from the French word 'Bailler' which means to 'deliver' and is
understood as an expression signifying a contract resulting from delivery of goods by one to
another.
Sir William Jones, "Bailment is a delivery of goods on a condition, express or implied that they
shall be restored by the bailee to the Bailor or according to his directions, as soon as the purpose
for which they are bailed shall be answered."
The Indian Contract Act, 1872, Section 148 defines Bailment, "A Bailment is the delivery of goods
by one person to another for some purpose, upon a contract that they shall, when the purpose
is accomplished, be returned or otherwise disposed of according to the directions of the person
delivering them."
According to Sub-section (1) of Section 575 of the Civil Code, 2074, a contract relating to bailment
shall be deemed to have been concluded in case a person delivers any property to another person
to be returned back to him or for handing it over to any other person or selling it as ordered by
him.
Therefore, Bailment is a contract where goods are delivered by one called Bailor to another, called
bailee for a certain period of time or some specified object on the condition that the bailee return
or dispose of the goods as directed by the Bailor when the purpose is accomplished or time has
expired. It is a contract between Bailor and bailee. There is delivery of possession of goods for a
general or specific purpose on the condition that the goods so delivered shall be returned back to
the Bailor or disposed off as directed by the Bailor.
Rights and duties of Bailor and Bailee

The effect of bailment contract is the goods or property of one is in the custody or charge another,
i.e., the goods are in the hands of one who is not the owner of them. In such situation, by reason
of human nature, there may be a chance of misuse or miscarriage which leads to the loss or
destruction of the goods. The goods being fundamental for the contract of bailment as it forms the
subject matter of bailment, the law has intended to protect and preserve the goods as well as the
interest of the Bailor in the goods. For this, the law has imposed various duties to the bailee and
recognizes rights of the Bailor. Similarly, if there is loss or destruction in the goods while they were
in charge or custody of bailee and bailee in all the causes is to be held responsible, it leads injustice
to him. Therefore, the law, to protect the property and interest of bailee, it imposes various duties
to the Bailor and confers rights to the bailee. The rights and duties of Bailor and bailee are stated
here below:

Rights of Bailor
The rights of a Bailor which he can use as against the bailee or the goods bailed are given as under:
 Right to enforce the duties of bailee as his right: The Bailor can enforce by suit all the duties
or obligations of the bailee as his own right. Therefore, he can inspect that whether or not
the bailee has taken care of the goods, or mixing up the goods bailed with his own goods,
or unauthorized use of goods, etc. It follows that the duties of bailee are the rights of Bailor.
 Right to terminate the contract: If the bailee has not fulfilled his duties or there is unauthorized
use of goods. The Bailor, at any time can terminate the bailment and can take back the goods
bailed in his own custody though the contract period is still lapsed.
 Right to return the goods lent gratuitously: When the goods are lent free of cost, the Bailor
can demand for return of the goods whenever he pleases so even though he had lent them for
a specified time or purpose. But if the bailee suffers any loss exceeding the benefits actually
derived by him from the use of such goods because of such premature return, the Bailor shall
have to indemnify the bailee.
 Right to sue for damages against wrong doer: If third person wrongfully deprives the bailee
from the possession of the goods bailed, or does them any injury, the Bailor or the bailee may
bring a suit against third person for such deprivation or damage caused by any third persons.
 Right to recover compensation for loss or destruction of the goods bailed or wrong delivery:
While the goods in the custody of the bailee get damaged, or destroyed or the bailee makes
wrong delivery of the goods to an unauthorized person, the Bailor has not right to claim for
such loss or wrong delivery of the goods bailed.
Duties of Bailor
 Duty to disclose known defect in the goods bailed: It is the fundamental duty of the Bailor
that at the time of agreement or delivery of goods to the bailee he most disclose all the defects
in the goods known to him. If the bailee suffers loss or injury because of the defective goods
which were known to the Bailor, he is liable for all the loss or injury caused to the bailee. In all
the cases Bailor is under obligation to disclose the defects in the goods bailed so far as they are
known to the Bailor. If the goods is bailed for the mutual benefit, i.e., hire, the duty of Bailor
is still greater. He is responsible even for those faults which are not known to him.
 Duty to bear extra ordinary expenses of bailment: The bailee is bound to bear ordinary
or reasonable expenses of the bailment but for any extra ordinary expenses the Bailor is
responsible. It is open to the parties to enter into a contract as regards these expenses. But,
in the absence of such contract, it is understood that the extra ordinary expenses ought to be
paid by the Bailor.
 Duty to indemnify bailee: The bailee is entitled to be indemnified by the Bailor, if the title
of the Bailor is defective, and the right to indemnify extends also to a suit by third parties,
even after the goods are returned to the Bailor. Similarly, if the bailee has incurred expenses

to protect or preserve the goods, the Bailor has to indemnify the bailee and pay the amount
incurred by him.
 Duty to compensate bailee for loss caused by premature termination: A gratuitous bailment
can be terminated and the Bailor receives back his own goods at any time when he pleased
so. If such premature cancellation based on lawful ground, he is not bound to compensate
the bailee. By contrast, if the premature termination causes loss to bailee, the Bailor is bound
to compensate bailee for such premature termination. But in such a case, the loss accruing to
the bailee from such premature termination should not exceed the benefit he has derived out
of the bailment. If the loss exceeds the benefit, the Bailor shall have to indemnify the bailee.
 Duty to respect the bailee's lien: Where bailee exercised his lien, the Bailor must respect the
bailee's lien and cannot ask or compel the bailee for receive back his goods without paying
the lawful charges of the bailee.
 Duty to receive back goods when returned by bailee: After the completion of purpose or
expiring of time when bailee returns back the goods to Bailor, he has to receive the goods so
returned. If he refuses to receive the good and there is any loss or destruction in the goods, the
Bailor cannot make the bailee liable. Further, if bailee has incurred expenses even to take care
of the goods or ordinary expenses after the Bailor refuses to receive the goods, he is bound to
compensate the bailee for such costs too.
Rights of Bailee
 Right of enforce the Bailor's duty as his right: The duties of Bailor can be enforced by the
bailee as his rights. Therefore, if the Bailor had delivered the goods without disclosing defects
in the goods and the bailee suffered loss or injury therefore, the can claim compensation for
such loss or injury.
 Right to delivery of goods to one of the several joint Bailors: If there are several or joint
Bailor, in the absence of any agreement to the contrary, the bailee may deliver the goods to
any one of the joint Bailors. It is sufficient to deliver back the goods to only one Bailor though
he might have been taken it in the presence of all the joint Bailors. No joint Bailor can sue the
bailee for such delivery of goods to only one joint Bailor as per his convenient.
 Right to delivery of goods to Bailor without title: It arises when goods is delivered to bailee
by the Bailor without title where the bailee returns the goods in good faith to the Bailor
without title or disposes of the goods as per his direction. No third person or the true owner
of the goods can sue the bailee for such wrong delivery. By contrast, if he delivers the goods
to the Bailor without title having knowledge that he is not the true owner, he may be liable to
the third person/true owner. It is quite natural to return the goods by the bailee to him from
whom he has received the goods so bailed.
 Right of lien/ Bailee's lien: Right of lien refers a right to retain the goods other until the
lawful incurred by him to the goods were paid to him by that other. Hence, where the lawful
charges of the bailee in respect of the goods bailed are not paid; he may retain the goods in his

own possession. To use the right of lien:

 The goods must be in possession of bailee.
 The bailee must incur some lawful expenses in the goods bailed.
 The Bailor still not paid these lawful charges.
Therefore, till the bailee is not paid all these lawful charges he can retain the goods bailed in
his custody and can make a bargain for the payment of these lawful charges. He is not bound
to return the goods to the Bailor till the Bailor fully paid these lawful charges to him. The
lawful charges include not only money incurred but service and work as well. The bailee's
lien is a particular lien. A particular lien is one which is available to the bailee against only to
those goods in respect of which he has rendered some service involving the exercise of labour
or skill or expenses incurred in the goods.
Duties of Bailee
The duties of bailee are important to make responsible him against the possible loss or destruction
in the goods bailed because of some negligent acts of bailee. These duties are as follows:
 To take care of the goods bailed: It is the first and foremost duty of the bailee that he is bound
to take as much care of the goods bailed to him as a man of ordinary prudence would, under
similar circumstances, take care of his own goods of the same bulk, quality and value as the
goods bailed. The burden of proof lies on the bailee to show that there has been no negligence
and that the loss or damage occurred in spite of the fact that he took reasonable care of them.
 Duty to pay compensation: In case the property is depreciated or lost, stolen, damaged,
destroyed, decreased or harmed because of the negligence or malafide intention of the bailee,
or of his failure to take care or ensure its safety according to the terms and conditions of the
contract, he must return the goods so bailed and pay an equivalent amount of loss so caused
to the Bailor.
 Duty not to make any unauthorized use of goods: In a bailment contract, except otherwise
provided in the contract the bailee can use the goods bailed. While using the goods bailed, he
must use the goods in such a manner not inconsistent to the terms of the contract. It amounts
to an unauthorized use and, in such a case, the Bailor can terminate the contract and the bailee
is bound to compensate the Bailor for such loss or damage in the goods resulting from such
unauthorized use even though he is not guilty of negligence and even if the damage is result
of an accident.
 Duty not to mix the goods bailed with his own goods: It is the duty of bailee that he has
to keep the goods bailed separate from his own goods. The goods bailed may mix with the
goods of bailee in the following three circumstances:
 By the Bailor's consent: If the goods are mixed up with the consent of Bailor, both parties
shall have title on that property, as well as to the income accruing there from, in proportion to

their respective shares, and the expenses incurred for separating the property so mixed and
the loss, if any caused the bailee shall be liable for the same.
 Without the Bailor's consent: In case the bailee has mixed-up his own property with the
Bailor's property without consent of the Bailor the bailee is bound to separate the goods at this
own cost and liable to compensate the Bailor if goods are inseparable.
 By accident or act of god: Where the goods of bailee are mixed up with the goods bailed to
him by an accident or act of god or by the act of an unauthorized third party, bailee is bound
to separate to the goods at his own cost and Bailor cannot sue bailee for loss caused by such
mixture.
 Duty not to set up an adverse title: The bailee must hold the goods on behalf of the Bailor. If
the bailment of goods is for safe custody, he cannot use the goods and cannot deal with the
goods as if they were his own. Hence, he cannot sell, lend on pledge, or dispose of the goods
at his discretion. If he does so, he is liable to pay compensation the bailer for such loss.
 Duty to return the goods bailed: It is the feature of bailment that bailee is under obligation to
return or deliver back, according to the Bailor's directions, the goods bailed, without demand,
immediately after the expiring of time or completion of the purpose for which the goods
were bailed. He is bound to return back the goods though purpose of bailment may not be
completed but time has expired. If the bailee fails to do so, he is liable to compensate the
bailee for any loss resulting from such delay in return back of the goods.
Termination of bailment
A contract of bailment may come to an end in the following cases:
 On the expiry of the time: Where the goods are bailed for a specified period of time. It
terminates immediately on the expiry of the period and it is immaterial that where there or
not the purpose of bailment is fulfilled.
 On the completion of the purpose: In bailment, goods are delivered for some specified
purpose and the contract of bailment terminates when the purpose is accomplished. But it is
to be noted that if goods are bailed for some specific purpose and period of time as well, the
contract terminates along with the expiry of time whether the purpose is fulfilled or not, i.e.,
time prevails the purpose.
 On unauthorized use of goods: If bailee makes an authorized used of the goods bailed
contrary to the bailment contract, the Bailor can terminate the contract and return the goods
from the custody of bailee.
 On destruction of the subject matter: In case the goods is destroyed or it becomes useless for
the purpose of bailment by reason of a change in its nature, it comes to an end.
 On gratuitous bailment: When the goods are bailed for the free of cost, it can be terminated
at any time when the Bailor pleases to do so. For such pre-mature termination he may liable
for compensation to be paid to the bailee.

 On death of the Bailor or bailee: A gratuitous bailment terminates on the event of death of
Bailor or bailee.
Pledge
It is a kind of bailment where a thing is delivered as security for the repayment of a debt. Therefore,
if there is bailment of goods as a security for the payment of debt or performance of a duty, it is
called pledge. The person who delivers his property called pledger or pawnor and the person to
whom the goods is delivered called pledgee or pawnee, in pledge in fact, Bailor in bailment known
as pledger/ pawnor in pledge and bailee in bailment known as pledgee/ pawnee. Thus, the rights
and duties of pledger/pawnor are as like the rights and duties of Bailor and the rights and duties
of pledgee/pawnee are as like the rights and duties of bailee. However, the pledgee/pawnee
cannot use the goods but bailee do so and in case of default in repayment, the pledgee/pawnee
can sell the goods but bailee cannot do so.
In simple sense, the pledge is a contact of bailment where the goods or document of title or valuables
are delivered by pledger to pledgee as a security for the repayment of a debt or performance of
special duty. When a person borrows some loan from a bank or money lender, or when a person
promises to do something for another, he keeps some property as security with the latter, so that if
he fails to repay the loan or fails to perform his promise or fulfills his duty in time, the former may
recover his money even by selling such property in the market. This act of keeping some property
of other as security either for performing a promise or obtaining a loan is called pledge.
Pledge by non-owner
The question of pledge by non-owner is important as, in pledge; if the pawnor makes default
the pawnee can sell the goods. If the pawnor happens to be non-owner and he makes default in
payment of the dept which does not make any loss to him as the goods does not belong to him. It
causes loss to the true owner of the goods. Therefore, the law is that the pledge by non-owner is
void, i.e., a non-owner cannot make a valid pledge.
This rule has certain exceptions, thus, the following persons though they are not the owner of
goods; the pledge made by them becomes valid.
 Pledge by mercantile agent: Where a mercantile agent is, with the consent of the owner,
in possession of goods may pledge by him, when acting in the ordinary of business of a
mercantile agent, is a valid as if he were expressly authorized by the owner of the goods to
make the same. Therefore, the pledge by mercantile agent becomes valid if:
 The goods is in possession of the mercantile agent with the consent of the owner.
 The agent acts in the general course of his business.
 he pledgee/pawnee acts in good faith without the knowledge of the defective title or
want of authority of the mercantile agent.

 Pledge by a person in possession under a voidable contract: Where a person obtains

possession of goods under a voidable contract, the pledge created by him is valid if:
 The pledge created before the contract is rescinded.
 The pledgee had acted in good faith.
 The pledgee had no knowledge of irregularity in the transaction from where the pledger
had obtained the right of possession or knowledge of the defective title of the pledger.
 Pledge by seller in possession after sale: After the sale the property or title in the goods
transferred to the buyer and, therefore, the seller does not have ownership in the goods sold.
Where the goods are sold and they are still in possession of the seller, the seller may pledge
the goods to other person. In such a case the pledge by seller becomes valid:
 If the goods are in possession of the seller even after the sale.
 If the pledgee/pawnee acts in good faith without having knowledge of the sale.
 Pledge by buyer before sale: Where there is an agreement to sale, the property in goods does
not transfer but the buyer may take the possession of the goods. In such a case, if the buyer
in possession of goods before sale pledges the goods and the pledgee received the goods
without having knowledge of the true fact, the pledge is treated a valid.
 Pledge by a finder of lost good: Pledge by a person with limited interest in the goods becomes
valid if he had pledged the goods to the extent of his interest but the pledge more than his
interest becomes void. Similarly, the finder of lost goods who has incurred expenses in the
goods or who is entitled for reward can pledge the goods to the extent of his interest.
 Pledge by joint owner in possession: Where the goods are in possession of a joint owner
with the consent of other joint owners, the pledge make by him becomes valid if the pledgee
had received the goods in good faith believing that he had right to pledge the goods by the
consent of other joint owners.
 Pledge by liquidator or official assignee or receiver: At the time of insolvency or winding
up a company a person is appointed called liquidator or official assignee or receiver who is
entitle to collect and sell the assets of the company and if he thinks appropriate, he can pledge
the property belonging to the company. If he makes a pledge, it becomes valid and effective.
Finally, a general rule regarding pledge by non-owner is that the pledge by non-owner is void
but in the exceptional cases it may valid and for the validity of pledge, the following requisites
should be fulfilled. They are:
 The pawnor must be in possession of goods.

 The possession must be with the consent of owner.
 The pawnee must act in good faith.

 The Pawnee receive the goods without having the illegality or irregularity in the
transaction or be leaving that the pawnor has right to pledge the goods.
 The pledgee should have no notice of the pledger's defective title.
7. Contract of Sale of Goods
General notes
The goods are utmost importance for the human needs to maintained day-to-day life. Equally, it
is the most common of all commercial contracts as the goods are the main subject matter in the
business dealings. Therefore, the rules applied to the sale of goods and its main principles are
important to know by all classes of community. While running our day-to-day life, we entered
into a contract of sale of goods. Therefore, every person enter into a contract of sale of goods every
day knowingly or unknowingly. A contract relating to sale of goods shall be deemed to have been
concluded in case any seller agrees to transfer ownership in the goods to the buyer immediately
or in the future by receiving a price (Section 545). A contract of sale of goods, hence, involves two
parties, namely, seller and buyer. The seller is the person who transfers or agrees to transfer the
property in goods to another. And the buyer is the person to whom property in goods transfers.
Therefore, a contract of sale of goods is a contract between the seller and buyer whereby the seller
transfer or agrees to transfer the property in goods for price. The rules and principles applying to
this are contained under chapter 6 of part 5 of the Civil Code, 2074.
Condition and warranty

While entering into a contract of sale of goods, a seller may say something about the facts of the
goods which may influence the buyer to enter into the contract. Such statements or representations
differ in character and importance and are called either as conditions or warranties.
Condition: A condition is a stipulation or representation or promise regarded as so essential that

on breach of it, the buyer can reject the goods, and treat the contract as discharged. It goes to
the root of the contract and its non-fulfillment upsets the very basis of the contract. It has been
observed that the condition is an obligation which goes directly to the substance of the contract or
in other words, is so essential to its very nature, that its non-performance may fairly be considered
by the other party as a substantial failure to perform the contract at all. Hence, a condition is a
stipulation essential to the main purpose of the contract, the breach of which gives rise to a right
to treat the contract terminated or discharged.
Warranty: A warranty is a stipulation collateral or secondary to the main part and purpose of the
contract and the breach of it gives rise a claim for damages but not to a right to reject the goods
and treat the contract terminated or discharge. It is not of such vital importance as a condition is.
Whether a statement in a contract of sale is a condition or a warranty depends in each case on

the construction of the contract as a whole. The court is not to be guided by the terminology used

by the parties to the contract. A stipulation may be a condition though called a warranty in the
contract and vice-versa.
Implied conditions
Even though in a contract of sale, definite representations might not have been made, yet the law
implies certain representations as having been made. The implied conditions in a contract of sale
are as follows:
 Condition as to title to goods sold: The first condition implied, as a matter of law, in every
contract of sale is that the seller has got the right to sell the goods and in case of an agreement
to sell, he will have a right to sell the goods at the time with property is to pass. (Section 545 (3).
 Condition in sale by sample: Section 553 of the Civil Code, 2074 provides that where the
goods to be sold are bulky in nature the contract can be entered into by providing sample of
the goods. In such a case there is implied condition that:
 The quality of goods supplied are matched to the quality of sample
 The buyer has right to check the good whether the goods supplied are matched to the
sample provided.
 The goods supplied is free from defects and is in satisfactory quality in its first sight.
 He has right to reject the goods and can recover the amount already paid.
 Receive or retain of the goods does not amount to the acceptance of the goods so supplied.
 Condition in sale by description: Where a contract is for the sale of goods by description, the
goods delivered shall correspond with the description. Sub-section (1) of Section 549 of the
Civil Code, 2074 provides that in case the name, brand, trademark or specification of goods
to be sold are mentioned in the contract, the contract shall be deemed to have be concluded to
sell goods of the same name, brand, trademark or specification.
 Condition in sale by sample as well as description: Where the sale was made by sample as
well as description even though the goods supplied correspond to the samples, yet, if it does
not answer to be description, the condition is deemed to be breached and the buyer may reject
the goods. Section 549(2) reads the in case the name, brand trademark or specification and
sample of goods to be sold have been mentioned, the bulk of those goods shall correspond
not only to the sample but also to their name, brand, trademark or specification as mentioned
in the contract.
 Condition as to quality or fitness: Generally, in a contract of sale, there is no implied condition
or warranty as to quality or fitness for any particular purpose of goods supplied under a
contract. Pursuant to Sub-section (1) of Section 551 of the Civil Code, 2074, unless otherwise
stated in the contract the goods sold or to be sold shall be in a satisfactory quality.
 Condition as to merchantability: Even though the goods is as per the description, yet the
goods must be in a merchantable quality. Primarily, Section 46 under subsection (1) lays

down a general rule that except when otherwise provided for in the contract, goods sold or
to be sold shall be deemed to be of satisfactory quality. Further subsection (4) reads, "In case
specific goods sold or to be sold for any specific purpose are suitable for that purpose, they
shall be considered to be of merchantable quality. It is to be noted that in case any defect in
the goods have been mentioned in the contract itself or in case the buyer had become aware
of any defect before entering into the contract or while inspecting the goods, those goods shall
not be deemed to be of merchantable quality.
 Condition implied by custom or usage of trade: In some cases, an implied condition as to
quality or fitness for a particular purpose may be annexed by the custom or usage of trade.
The goods may be known for a long period of time in a particular territory to be fit a particular
purpose. In such case the buyer need not disclose his purpose or rely upon the seller's skill
or judgment. If the goods unfit such purpose for which it is known, the buyer can reject the
goods.
 Condition as to wholesomeness of goods sold: Where the goods sold are provisions or
eatables in addition to implied condition as to merchantability, there is another implied
condition that the goods shall be wholesome, i.e., the goods must be medically fit to eat or
consume. Therefore, in Frost V. Aylesbury Dairy Co. Ltd: (1905) 1 K.B. 608
Frost bought a bottle of milk from the dairy company. The milk contained germs of
typhoid fever. Frost's wife took the milk and got infection as a result of which she died.
Frost, therefore, instituted a suit for damages on the ground that the milk contained
typhoid germs as a result of which his wife contracted typhoid fever and died and he had
to incur medical expenses and was put to loss of services and funeral expenses.
The court held that the company was responsible for the damages.
Similarly, in Lockett V. Charless Ltd., (1938) 4 All. ER 170, thus:
A husband and wife in the course of motor journey stopped at a hotel and had lunch. The
wife was soon after taken ill with food poisoning and sued for damages.
It was held that there was an implied contract between the wife and the proprietor of the hotel
that the food supplies was fit for human consumption and that she was entitled to recover
damages for the breach of warranty.
Implied warranties
 Warranty for quiet possession: Where the buyer has obtained possession of the goods and
his right to possession and enjoyment of the goods is in any way disturbed, he has a right
to sue to the seller to damages so caused. In a contract of sale, unless there is a different
intention, there is an implied warranty that the buyer shall have and enjoy quiet possession
of the good. If the buyer is in anyway disturbed in the enjoyment of the goods in consequence
of the seller's defective title to sell, he can claim damages from the seller.

 Warranty against encumbrances: The buyer is also entitled to a further warranty that the
goods purchased are not subject to any right in favour of a third party. If his possession is in
anyway disturbed by reason of the existence of any charge or encumbrance on the goods in
favour of any third party, he shall have a right to claim damages for breach of this warranty.
Therefore, the goods must be free from encumbrances payable to any third person.
 Warranty as to disclose the dangerous nature of goods: Where the goods sold contains
some dangerous nature by reason of its manufacture or chemical composition, therefore, it
should be handled with special care otherwise it may cause loss to the buyer and the buyer
is ignorant of this, the seller has to disclose the dangerous nature of the goods. If he does not
disclose such dangerous nature and buyer suffers loss, he is bound to compensate the buyer.
Thus, in Clarke V. Army and Navy Cooperative Society, (1963) 1 K.B. 155:
The buyer, Clarke, purchased a tin of disinfectant powder which the seller, the society, sold
it. The seller knew that it was likely to be dangerous to the buyer if it was opened without
special care being taken. The buyer opened the tin where upon the disinfectant powder
flew into his eyes, causing injury. An action instituted by the buyer for compensation.
It was held that the seller is liable for damages to the buyer, as he should have informed the
buyer of the probable danger and the means of protection.
 Warranty as to quality or fitness of goods by custom or usage of trade: An implied warranty

as to quality of fitness of goods for a particular purpose may be annexed by the custom or
usage of trade prevailing in a particular territory and applied to a particular type of goods or
business.
Caveat emptor
The English translation of the term 'caveat emptor' is 'let the buyer beware'. The doctrine of caveat
emptor makes liable the buyer careful while selecting the goods whether the goods shall be fit for
his particular purpose or not. Therefore, in a contract of sale of goods it is the duty of buyer that he
should examine the goods thoroughly and be sure that whether or not the goods he is selecting is
fit for his particular purpose. If he selects a goods which turns to be unfit for his particular purpose
he cannot reject the goods and cannot sue the seller for his loss. This is formulated by the doctrine
of caveat emptor. If the buyer depends upon his own skill or judgment and makes a bad selection,
he cannot blame the seller.
Exceptions: The doctrine caveat emptor has certain exceptions. The exceptions under laying to it
can be stated as under:
 Where the buyer make known, expressly or impliedly, to the seller the specific purpose
for which he needs the goods and depends upon the skill and judgment of the seller.
 Where the consent of buyer has obtained by fraud or coercion or the seller knowingly
conceals a defect which could not be discovered on a reasonable examination, i.e., latent
defect in the goods.

 Where the implied conditions are applied the rule of caveat emptor does not apply.
 Where goods are sold by description there is an implied condition that the goods shall
be of merchantable quality.
 Where the quality or fitness of goods in annexed by custom or usage of trade.
 Where the defects in the goods cannot be easily discovered even examined with care and
skill.
Rules regarding the transfer of property

The term property denotes ownership and the transfer of ownership or property is the most
important elements of the contract of sale of goods. The transfer of property in goods is determined
as per the rules. The rules regarding the transfer or passing of property can be stated as under:
 Where the goods is unascertained goods: Where there is a contract for a sale of unascertained
goods, no property in the goods is transferred to the buyer unless and until the goods are
ascertained.
 Where the goods is ascertained goods: Where there is a contract for the sale of specific or
ascertained gods the property in them passes to the buyer at the time when the parities intend
it to pass, and if no intention expressed in the contract, it shall be in accordance with the
conditions of the contract, the conduct of the parties, and their intentions expressed through
the concerned circumstances.
 Contract for ascertained goods without expression as to passing the property: Where there
is a contract for the sale of specific goods but no such intention expressed in the contract as to
the passing of property, the property in such goods passed under the following rules:
 Passing of property at the time of contract: Where there is an unconditional contract for
the sale of specific goods in a deliverable state, the property in such goods passes to the
buyer immediately when a contract is made. The payment and delivery of goods is not
essential for the passing of property in the goods.
 Passing of property in goods after the date of contract: Where there is a contract for
specific goods not in a deliverable state, i.e., the seller has to do something to the goods
to put them into a deliverable state, the property does not pass until such thing is done
and the buyer has noticed of it.
 Where the price of goods is to be ascertained by weighing, measuring, printing, etc:
Where there is a contract for the sale of specific goods in a deliverable state but the seller
bound to weigh, measure, test or do something to ascertain the price, the property in
goods passed when the seller completes the remaining works and informs to the buyer.
 Contract for future goods: Where there is a contract for future goods, the property passes
from seller to buyer when the future good takes place and informed the same to the buyer.

 Contract for contingent goods: Where there is a contract for contingent goods, the property
in such goods passes to the buyer only after happening or non-happening of the future event
specified in the contract.
 Goods sold on sale or return: Where goods are delivered to the buyer on approval or on
sale or return, the property therein passes to the buyer when he signifies his approval or
acceptance to the seller, or when he does other act adopting the transaction.
Sale by non-owners
A question may arise where a sale is made by a seller who happens to be a non-owner that whether
the property in such goods passes to the buyer who might be purchased the goods in good faith
believing that the seller was the true owner of the goods. The general rule of law regarding the
transfer of property is that no one can give that which one has not got. This is expressed in Latin
maxim "nemo dat quod non-habet". Therefore, where goods was a sale by a seller who is non-owner,
no property transferred to the buyer and it is only the owner of the goods, or a person authorized
by him, who can sell the goods. As a general rule, therefore, a non-owner of goods cannot make a
valid sale. This rule has some important exceptions which are discussed herein below:
 Sale by a person having title by estoppel: Estoppel may arise where the owner by any act or
omission leads the buyer to believe that the seller has the right to sell. In such cases, though
the seller may not have the entire consent of the owner, the buyer gets a better right than
what the seller has. Again, an owner may be stopped if he receives the sale proceeds with
the knowledge that the sale is without authority. To raise an estoppel, the owner must have
so acted as to mislead the buyer into a belief that the seller was entitled to sell the goods.
Therefore, when a man, by his words or conduct leads another to believe that he is not the
owner and has no interest in the goods whereupon the other buys them or sells them, to an
innocent purchaser, the true owner cannot afterwards assort that they were his own goods
and the seller could not make a valid sale.
 Sale by a mercantile agent: A mercantile agent is a person who, in the course of business, has
authority as like an agent, either to sell or buy goods, or rise on the security of the goods or can
consign the goods for the purpose of sale. A person who purchased the goods from a mercantile
agent, who has no authority from the principal to sell, gets a good title of the goods if:
 The seller is the mercantile agent.
 He is in possession of the goods or documents of title of goods.
 Such possession obtained with the consent of the owner.
 He acts in the ordinary course of business as a mercantile agent.
 The buyer acts in good faith or is bona-fide.
 The buyer has not notice of the want of authority of the mercantile agent to sale the
goods.

 Sale by one of the several joint owners: Where there are two or more owners of a goods
called joint owners and the goods is sold by a joint owner without participation of remaining
owners, the sale becomes valid if:
 The goods was in possession of a joint owner with the consent of other joint owners.
 If the buyer purchased the goods in good faith without having notice of the want of
authority of the joint owner to sell the goods.
 Sale by a person in possession of goods under a voidable contract: Where a seller happens
to be a person having possession of goods under a voidable contract, the sale becomes valid
and the buyer acquires a good title in the goods if:
 The seller has obtained the goods under a voidable contract not a void agreement.
 The goods must be in possession of the seller.
 The sale is executed before the invalidation of contract.
 The buyer purchased the goods without notice of the prior irregularities in the transaction
or such voidable contract.
 Sale by seller in possession after sale: Where a seller having sold goods continues to be in
possession of goods and sells them to a person who buys them in good faith and without
having notice of the prior sale, the buyer gets a good title in the goods. After sale the seller
becomes non-owner of the goods but while the goods still in possession of the seller if the sells
them to a buyer in good faith, the buyer is protected and the earlier buyer cannot sue against
the new buyer neither for compensation nor to recover the goods against him.
 Sale by buyer in possession before sale: Where there is an agreement to sell, therefore,
no property has transfer to the buyer yet but the goods in his own possession as they are
delivered by the seller. If the buyer, who is non-owner of goods, sells the goods to a buyer in
good faith without notice of such agreement to sell, he acquires a good title though the seller
had not title in the goods.
 Sale by an unpaid seller: The seller of good to whom the whole price is not tendered known
as unpaid seller. The sale by unpaid seller becomes valid.
 If the goods are in this possession.
 If the buyer had refused to pay the price even after notice of the seller to sell them.
 If the unpaid seller sells the goods to a buyer he obtains a good title to the goods as
against the original buyer.
 Sale by the finder of lost goods: The person who finds some lost articles of other and keeps
them in his own charge, in law, he is called the finder of lost goods. The finder of lost goods
in not the true owner though sale by him becomes valid if.

 The true owner is not found even with due care and skill.
 His expenses incurred in the goods amounts to two third or more than the total with of
the goods.
 The true owner cannot sue against the buyer who has purchased the goods from such
finder of lost goods.
 Sale by Pawnee or pledgee: In a contract of pledge, if the pawnor, the owner of goods, makes
any default in the repayment of a debt, in case of such default, the Pawnee or pledgee can sell
the goods. The sale by the pawnee or pledgee becomes valid.
 Sale by an official assignee or receiver or liquidator: Sale by an official assignee or official
receiver on behalf of an insolvent person or by liquidator on behalf of a liquidated company
becomes valid though the official receiver or assignee or liquidator is not the true owner.
 Sale in market over: It is sale of goods in an open, public and legally constituted market.
Where goods are sold in such market over, the buyer acquires a good title to them irrespective
of the seller's title provided:
 The goods are sold in accordance with the usage of the market, and
 The buyer bought the goods in good faith and without notice of a defect or want of title
on the part of the seller.
Unpaid seller and his rights

A seller of goods is called as an unpaid seller in the following conditions:
 When the whole of the price has not been paid or tendered.
 When the price was paid through a negotiable instrument which was dishonored by the
concerned person therein.
 When the goods are sold on credit, the buyer fails to pay on the due date of payment.
Rights of an unpaid seller

When a seller becomes an unpaid he is in loss by both as, firstly, he loses his right of ownership
in the goods as there is a sale and property passed to the buyer and, secondly, he is deprive from
receiving the benefit of the losing his rights in the goods sold. Therefore, the law, to protect the
seller's rights has given various right to the unpaid seller these rights, primarily can be classified
into two rights, i.e., the rights of unpaid seller as against goods sold and the right against the buyer
personally. The rights of unpaid seller are shown herein below:

Rights of Unpaid Seller
Rights against goods Rights against the buyer personally
Right of lien Right to sue for Right to stoppage the Right to resale Right to sue for price Right to sue for Right to rescind the Right to sue
price goods in transit of goods interest contract for damages
 Right of an unpaid seller against the goods: It includes:

 Right of lien: It is right of an unpaid seller of retain the goods in his own possession until
whole price of the goods sold is paid by the buyer or on his behalf. An unpaid seller may
use this right:
 If the goods are in the seller's possession even after the sale.
 If the whole price of goods in not paid or tender to him.
 The unpaid seller can retain the goods until the price is not paid the buyer or on his
behalf.
 Right of sue for price: The seller after sale transfers the property in goods to the buyer
and if the whole price of the goods not paid, sold the seller can file a case to the buyer
of the goods. For the right of sue for price the property in the goods must necessarily
passed to the buyer.
 Right to stoppage the goods in transit: It is the expansion of right of lien. In case of
lien the goods must be in the seller's custody or possession or charge, therefore, once he
departed his possession in the goods, he cannot use the right of lien. But the seller who
once departed the goods can be use the right of stoppage the goods provided:
 The goods are in transit, i.e., not actually delivered to the buyer or his agent.
 The buyer, on the other hand, declared as insolvent before receiving the goods by
himself or any other person as an agent of the buyer.
When the unpaid seller directs the carrier to stop the goods and return back to his custody
which has been not followed by the carrier he is under obligation to pay damages to the
seller.
 Right of resale: An unpaid seller can use this right of resale in the following cases.
 If the goods are in possession of the seller.
 If he is an unpaid seller.
 If the buyer does not pay the price even after the notice by the seller for the payment
of goods.

In case of resale if there is any loss the seller can or sue the buyer but if there is any surplus
he is not bound to return those benefits.
 Right of an unpaid seller against the buyer personally: It includes:

 Right to sue for price: Where the property in the goods passed to the buyer and the
buyer does not pay the amount agreed, the seller can sue the buyer for the price of the
goods. This right is available to the seller even the goods are not delivered to the buyer
and are in his own possession. Similarly, in some cases where the ownership in the goods
has not passed to the buyer yet, but had agreed the price at a certain date even without
delivery of goods, the seller can sue for the price of goods.
 Rights to sue for damages: Where the buyer neglects or refuses to accept and pay for the
goods, the seller will have a right to sue for damages for non-acceptance of the goods.
This right to claim damages exists ordinarily in cases in which the property in the goods
has not passed to the buyer. In such cases, since the seller continues to be the owner of
the goods, he has got the right to sell the goods to any other person and he could claim
damages based on the difference the contract price and the market price.
 Right to sue for interest: The unpaid seller has not only got right to sue for price but
entitled to sue for the interest of the price if there was an agreement for this and can be
claimed from the date on which payment becomes due.
 Right to rescind the contract: It is a right to cancel the contract by the seller if the buyer
even before the date of performance refused the contract to perform it. Therefore, if the
contract has already breached by the buyer the seller has right either to wait till the date
of performance or treat the contract terminated and sue the buyer. If he goes to treat the
contract as dead, he can rescind or cancel the contract and no need to wait till the date
of performance.
8. Contract of Agency
General notes
The term agency is used to refer the relationship between two persons where a person is appointed
to act as a representative of another. Section 591 of the Civil Code, 2074 defines that any person may
appoint any other person as his agent to do anything on his behalf, except something connected
with this personal skill or to conduct business as his agent of any transaction with a third person
on his behalf or to represent himself to such person, or to establish any kind of legal relation with
the person appointing an agent and a third person, a contract relating to agency shall be deemed
to have been concluded. The act to be done vary widely in nature. For example; making a contract,
institution of an action, conveyance of land or in case of a power of attorney, the exercise of any
proprietary right available to the employer himself. It is necessary because of the complexities of
modern business are such that is impossible for any person to transact all his business by himself.

He cannot personally attend to all matters in which it is necessary for him to be brought into
legal relations with other people. Of necessity, he has to employ another as his representative to
act on behalf him in order to run his day-to-day business affairs while dealing with others. The
legal device which makes it possible is the rule of agency by which a person can appoint different
persons to perform different works or business transactions with different persons at the same day
and same time. In such a case, the acts done by a person binds the other who has appointed him.
Creation of agency
The relationship of agent and principal may establish by any one of the following ways:
 By Express Authority/Contract: It is an obvious mode of creation of agency and, therefore,

in the most of the cases agency is created by this mode where principal employs his agent
and authorizes him to act on behalf of him while dealing with third persons by his express
words either written or spoken. The usual form of a written contract of agency is the 'power
of attorney'. However, in certain cases, e.g., to execute a deed for sale or purchase of land,
the agent must be appointed by executing a formal power of attorney authenticated by the
district court judge or by the ambassador or councilor of Nepali Embassy in foreign land with
proper registration.
 By Implied Authority/Contract: It arises from the conduct, situation or relationship of
parties. It may be inferred from the circumstances of the case and things spoken or written
or the ordinary course of dealing may be accounted as circumstance of the case. It may take
place either one of the following forms:
 Agency by estoppel: The doctrine of estoppel arises where a person, has his conduct or
words led another to believe that a certain set of circumstances exist and so alter his
position, he cannot afterwards be permitted to deny, as against him, the truth of such
statements. Therefore, if a person represents a certain set of circumstances and leads
willfully another person to believe that a certain state of affairs exists and induces him to
act on that belief, afterwards he cannot alter his previous position and is prohibited from
denying subsequently whatever he had stated before.
Examples:
 'A' tells to 'T' in the presence and within the hearing of 'P', that A is P's agent and P
does not contradict the statement and if, subsequently, T enters into a contract with A
believing that A is P's agent. In a suit between P and T, P cannot deny that A was not his
agent, even through, in fact, A never was his agent.
 'P' tells to 'T', while selling his car, that 'A' is his agent. Believing that A is P's agent he
pays Rs. 5 Lakh in advance to purchase the car but P refused to deliver the car to T. In
a suit, P is precluded from denying that A was not his agent, even though A was not
appointed or authority was given to him by P.

 Agency by holding out: It is a branch of agency by estoppel. In this case, there is some
affirmative conducts amounting to a holding out. Therefore, if a person by his some
affirmative or positive acts or conducts induced third person that one is his agent, he is
liable to the acts of such person done while dealing with the third person as if he was
his agent.
Examples: 'P' sends his servant 'A' to purchase goods on credit from 'T' and subsequently,
A uses P's authority to purchase goods for himself, in a suit between P and T, P cannot
claim that A had no authority on the second occasion to purchase on credit. P becomes
liable on the principle that P, having held out A as his agent on a previous occasion,
becomes bound by subsequent transactions entered into under similar circumstances.
 Agency by necessity: A contract of agency may also arise because of the exigencies of the
circumstances. Emergency may cost on a person a power and even a duty to protect the
interests of another by taking steps on such occasions the person has an implied authority
to bind the other by his acts. An agency by necessity arises wherever a duty is imposed
upon a person to act on behalf of another apart from contract and in circumstances of
emergency in order to prevent irreparable injury. It may also rise where a person carries
out legal or moral duty of another in the absence or default of that other, or acts in his
interest to preserve his property from destruction. Where there is a case of necessity or
emergency, acts of a person bind the other person as if there was an agency between
them only if:
 There was no possibility to communicate to the principal.
 He had taken all reasonable steps to protect and preserve the goods or property of
the principal.
 He acted in good faith/ bona fide.
 Agency by Operation of Law: In case of agency by operation of law, the participation of
the parities is not necessary not their acts or conducts. In this case, agency is established
by the operation of law. For example, the promoters of a company are the agent and a
partner is the agent of the firm for the purpose of the business of the firm. Here, a person
is placed by law in a relationship of agent and principal.
 By Ratification: The term ratification refers the subsequent adoption and acceptance of
an act originally done without having authority or instruction to do the same. A person
is liable for an act of another if he had given authority to do so. But, where a person
acts something for another or deals with third persons on behalf of other, the other has
option either to accept the act or transaction or reject the same. If he accepts the act, there
is an agency by ratification. The person ratifying the transaction becomes principal and
another as his agent and he is liable and bound by the act of that another as if there were
a contract of agency between them. Likewise, when an agent exceeds his authority and
acts on behalf of his principal. The principal may ratify the unauthorized act. Therefore,
an agency by ratification may arise in the following two situations:

 Where one acts for or on behalf of another without having authority which is
accepted subsequently by another to whom act has done.
 Where an agent acts for his principal by exceeding the limit of his authority which
is accepted subsequently by the principle.
In both cases, principal is bound by the act of his agent as if he had appointed and authorized to
the agent to do such act for him.
Examples:
 'A' purchased a car for P without his authority. P ratifies the act and uses the car for his
personal use. P is bound to pay the price.
 'A' was appointed as an agent to purchase a motor bike for 'P'. 'A' purchases a car for P
instead of motorbike. If 'P' accepts the car, 'A' becomes an agent of P even to purchase the
car and he becomes liable to pay.
Essentials of a valid ratification

The rules, requisites or essentials of a valid ratification can be discussed as under:
 Principal must be named or identifiable: At the time of contract, the agent must purport
to act as agent for a principal who is in contemplation and is identifiable to the third person
and it is not sufficient to indicate simply that he is acting as an agent of some one. Where
the principal is not named or identifiable, it creates difficulties that that will ratify the acts
because, the general rule of ratification is that only the person to whom the act has done
can ratify the act. It is not possible for an undisclosed principal, i.e., a principal who is not
disclosed by the agent to the third party at the time of contracting, to step in and ratify acts
done by the agent in excess of what had previously be authorized. In Keighley, Maxsted &
Co. V. Durant: (1901) A.C. 240
A corn merchant was authorized to buy wheat at a certain price on a joint account for
himself and the appellants. Acting in excess of his authority he purchased wheat at a
higher price from the respondents but in his own name. The appellants next day ratified
the transaction, but later failed to take delivery of the wheat. The respondents brought an
action against them for breach.
The action failed. The corn merchant had contracted in his own name without mentioning
that the appellants were his principal. Any purposed ratification by them was, therefore,
ineffective and they were consequently under no contractual obligation to the respondents.
 The principal must be in existence at the time of contract: To ratify the contract, the intended
principal must have been in existence, and ascertainable, at the time of the contract entered
into. This rule is important in its bearing on the liabilities of companies for the contracts made
by the promoters on their behalf before they are formed. In Kelner V. Baxter, (1866) L.R. 2
C.P. 174:

The promoters of a proposed company entered into a contract on its behalf, which the
company when duly incorporated, ratified. It went into liquidation, and the promoters,
who had contracted as agents, were sued upon the contract. They pleaded that the liability
had passed, by ratification, to the company and no longer attached to them.
The court rejected the argument and held that ratification can only be by a person ascertained
at the time of the act done, by a person in existence either actually or in contemplation of law.
 The principal must have contractual capacity: For a valid ratification the principal must
have contractual capacity both of the time of contract and at the time of its ratification. If
the supposed principal is suffered by incapacity to contract, cannot make liable himself by
ratifying the act done. Thus, if an agent enters into a contract on behalf of a principal who
is, at the time, incapable of making it, no ratification is possible. Further, the principal can
only ratify the act of the agent if at the time of the purported ratification; the principal could
personally do the act in question.
 Principal must have full knowledge of the true facts: It is an obvious that the principal should
have such opportunity to know the true facts of the contracts entered into by the agent. So,
if the acceptance of principal obtained without disclosing the true facts, the ratification does
not take place. But, where the principal expressly intends to take the risk of what the agent
has done to the third party, he is bound by ratification to perform the contractual obligation
under the contract by his agent done without disclosing the true facts.
 Ratification must be done within a reasonable time: The principal to be bound by the contract
entered into his agent, the ratification must be done within a reasonable period of time after
the contract. If it is made after the expiring of the reasonable time, it will not be valid.
 The whole transaction must be ratified: The principal is not allowed to ratify some part and
reject another part of a transaction made by his agent. The rule is that if the principal accepts
some part of the transaction, it is assumed that he is ratifying the whole transaction.
 The act to be ratified must not be unlawful or ultra-vires incase of a company: Unlawful
acts cannot be perform by principal nor it can be done through agent nor can make it valid
through ratification. No authority can be delegated for unlawful acts or no unlawful acts be
ratified. Similarly, a company cannot ratify and bear obligation by ratifying such business
which is not warranted by its Memorandum or Articles of Association, i.e., ultra-vires.
 Ratification must be communicated: The ratification of the acts done by agent must be
communicated to the party who is sought to be bound by the act done by the agent and it
must be communicated within a reasonable period of time.
 Ratification may be express or implied: This, we have already discussed above that the
ratification can be made either by words written or spoken or by the conduct of the principal.
 Ratification should not put a third party to damages: Ratification, which has the effect of
subjecting a third person to damages or of terminating any rights or interest of a third person,
cannot be made.

Limitation to the ratification: In the following cases, no relation of agency be created between the
parties by ratification. They are:
 Where agent not disclosed the principal.

 Where the principal is incapable to contract.
 Where the principal, at the time of contact, was incapable to contract.
 Where the principal, does not have full knowledge of facts.
 Where the ratification is not communicated to the concern parties.
 Where the principal has no power of ratify the acts done.
 Where the ratification causes harm or injury and third person.
Duties of the Agent

The duties to be followed by an agent under Section 594 of the Civil Code, 2074 are as follows:
 Duty to follow the instructions given by the principal: It is the first and for most duty that
during the business of agency, the agent is bound to follow all the lawful instructions given by
the principal. In the absence of any such directions be must act according to the custom which
prevails in doing business of the same kind at the place where he conducts such business.
When he acts otherwise, if any loss be sustained, he is liable to compensate his principal
though he may act bona fide. Thus, in Lilley V. Doubleday, (1881) 1 Q.B.D. 510:
The agent was instructed by the principal to warehouse to keep the goods at a particular
place but the agent selected another place equally good for the purpose at a lower rent,
and the goods were subsequently destroyed by fire and loss occurred without any ne-
glect on the part of the agent.
It was held that since the agent had not carried out the instructions of the principal, he was
liable.
 Duty to exercise care skill and diligence: The agent must use ordinary care, skill and diligence
in the discharge of its duties, displaying and special skill or capacity which it may profess in
relation to the work in hand. Where the agency is gratuitous, the agent is liable of care which
might reasonably be expected in the circumstances. Therefore, he is always bound to act with
reasonable care skill and diligence as he possesses, and to make compensation to his principal
in respect of the direct consequence of his neglect, want of skill or misconduct.
 Duty to keep and render proper accounts to his principal: It is the duty of an agent to keep
proper accounts of his principal's money or property and render them to the principal on
demand or periodically if so provided in the agreement. He is bound to account for such
property of the principal as comes into its hands in the course of the employment. Therefore,
the agent always must keep accurate accounts of the transactions which are entered into on
the principal's behalf and produce them on demand to the principal.

 Duty to follow custom: Where there is no direction given by the principal or no clause
provided in the contract of agency, the agent has to carry on the business of agency by
following customs or usages of trade prevailing in the same kind of business at the place
where the agent acts for his principal.
 Duty to communicate with the principal in case of difficulty: In case of difficulty or emergency,
the agent must notify the same to the principal as soon as possible and obtain necessary
direction from him. In such a case, he has to use all reasonable efforts to communicate the
principal and obtain directions from him. If it seems impossible to communicate and obtain
directions he is bound to take reasonable steps to protect and preserve the rights, interest or
property of his principal.
 Duty to pay sums received to the principal: An agent is under obligation to pay to his
principal all sums received on his account. He may deduct there from if he had incurred
necessary expense properly incurred and such remuneration as may be payable to him for
acting as agent.
 Duty not to deal on his own account: An agent must not deal on his own account in the
business of agency without obtaining the consent of the principal and acquainting him with
all the material circumstances which have come to his knowledge. And if the agent deals in
the business of agency on his own account without knowledge of his principal he may either
terminate the transaction or claim from the agent any benefit which may have resulted to him
from the transaction.
 Duty not to make secret profit from the business of agency: It is the duty of an agent that he
must not make any secret profit from the agency business without knowledge and consent
of his principal. It is the basic characteristic of agency that the business being the business of
principal, all the profits and losses are also belonged to him. If it is proved that the agent has
made any secret profit, the principal can claim such profit from him whenever he knows that,
i.e., either during the agency or afterwards. If the agent makes a secret profit or takes a bribe
from the other party, the principal may:
 recover the amount of the secret profit from the agent,
 refuse to pay the agent his commission or remuneration,
 dismiss the agent without notice,
 repudiate the contract with the other party.
 Duty not to use information obtained in the course of agency against the principal: The
agent by nature of his business is in capacity to obtain each and every information and trade
secret of his principal which may be used by him against the principal's interest after the
termination of agency. To make unable the agent misuse the information, the law has imposed
a duty to agent that he cannot use the information and trade secrets of his principal obtained
in the course of agency. If he is found to have used such information against his principal, the
principal can sue him for loss resulting from the use of information.

 Duty to protect and preserve the interest of the principal in case of his death or insolvency:
An agency terminates immediately after the death or insolvency of his principal and agent
becomes free from his obligations. Still he has to take, on behalf of the representatives of the
deceased principal, all reasonable steps for the protection and preservation of the interests
entrusted to him. If, at the time of principal's death, he was in possession of the principal's
property, he is bound to take care and preserve it and do all acts necessary therefore.
 Duty not to delegate authority: Agent is the person known to the principal to whom he has
trust and confidence. The same trust and confidence may not apply to other person who is not
employed by him but appointed by his agent. Similarly, at the time of appointment, the agent
took obligation to carry on business for his principal by himself. Therefore, it is unreasonable
to say to delegate his authority to any other person to do the business of agency without
express or implied authority of his principal. The general rule, therefore, is the agent cannot
delegate his authority to any other person.
Rights to Agent
The following rights can be used by an agent against his principal in the business of agency.
 Right to receive remuneration: The agent is entitled to receive such amount, as agreed between
the parties for remuneration, or if there is no agreement, to a reasonable remuneration.
The rule is that where there is no agreement as to remuneration, the agent is entitled to a
reasonable amount only after the completion of the business of agency. Thus, in East Bourne
Ltd. V Cooper, (1941) A.C. 108
Cooper was employed by the company, owner of a property as its agent to sell certain
property belonging to the company on the terms that he would be paid commission on
the completion of sale. He produced a person ready and willing to buy but the owner
refused to sell. When agent asked for his remuneration the principal refused as the busi-
ness was not completed.
It was held that the agent was not entitled to receive remuneration as sale had not been
completed. But in Sellers V. London Country Newspaper, (1951) 1 All E.R. 544
A seller was appointed an agent to secure orders for advertisements in a newspaper. The
commission was agreed to be paid when an advertisement was published. After seller
had obtained orders for certain advertisements, the agency was terminated.
It was held that the agent was entitled to commission on orders obtained by him although
the advertisements were not published. Similarly, if a transaction for which the agent
claims remuneration is the direct or indirect result of his services or efforts, he is entitled to
remuneration. In Gren V. Barlett, (1863) 14 C.B. N.S. 681, thus:
An agent was appointed to sell a house. He held an auction but could not find a pur-
chaser; one of the people attending the auction obtained from him the address of the

principal and finalized with him the purchase without the agent's participation. It has
held that the agent was entitled to his commission as the transaction was the result of his
services or efforts.
By contrast, an agent who is guilty or misconduct in the business of agency is not entitled to
any remuneration in respect of that part of business which he has done such misconduct.
 Right to be indemnified: The agent has a right to be indemnified against the consequences
of all lawful acts done by him in exercise of the authority delegated to him by the principal.
Examples:
'A', at Hong Kong, under instructions from 'P' of Kathmandu, contracts with 'T' to deliver
certain goods to him. 'P' does not send the goods to 'A' and 'T' sues ''A for breach of contract.
'A' defends the suit and is compelled to pay damages and costs, and incurs expenses. 'P' is
liable 'A' for such damages, cost and expenses incurred by him.
A, an agent, seized goods of T, a third party, at the command of P, the principal although the
goods had been seized improperly was shown that A had acted bonafide. A is entitled to be
indemnified.
However, the right of agent to be indemnified does not extend to acts which are unlawful and
known to the agent. But the agent can be saved if he acted such act in good faith.
 Right to receive compensation: The agent has right to be compensated for injuries sustained
by him by neglect or want of skill on the part of the principal in the business of agency.
 Right of lien: Unless otherwise provided in the contract, an agent entitle to retain goods,
documents and other property either movable or immovable, of the principal received by
him, until the amount due to him for commission, disbursements, compensation and services
to be paid to him. For the right of lien, the following conditions must be fulfilled.
 The goods or other property must be in his possession with consent of the principal in
the course agency business.
 The agent has incurred expenses or lawful charges in the goods or agency.
 The principal still has not paid for the same to the agent.
In these conditions, the agent can retain the goods or other property in his own custody until
these expenses and lawful charges are paid to him.
The nature of lien exercised by the agent is particular lien and by a special contract an agent
may have general lien extending to all claims arising out of the agency.
 Right of a retainer. The agent may retain, out of any sums received on account of the
principal in the business of agency, all moneys due to himself in respect of his remuneration
and advances made or expenses properly incurred by him to protect and preserve the goods
or interest of the principal in the business of agency.

Delegation of authority
The general rule of agency that 'Delegatus non-potest delegare'which means a person having
delegated authority cannot further delegate the same to another. Therefore, an agent is not entitled
to delegate his authority to another without the consent of his principal. The reason behind this
rule is that an agent is employed by the principal because he is known to the principal and he
does have trust and confidence on the agent and it is unreasonable to say that the same trust and
confidence shall apply to other person than the agent who is not known to the principal. An agency,
being a contract depending upon personal skill, trust and confidence, agent cannot delegate his
authority though he has to perform the business of agency by himself. Further, the delegation may
lead to the non-performance of contract or its obligations. Where the original agent delegates his
authority, the person so appointed may be either sub-agent or substituted agent.
Sub-agent: A sub-agent is a person employed by and acting under the control of the original agent
in the business of agency. It follows that sub-agent is the agent of the agent. The relation of the sub-
agent to the original agent is as between themselves, that of the agent and principal.
Sub-section (1) of Section 593 of the Civil Code, 2074 reads thus:
'In case it is necessary to appoint a sub-agent according to the nature of any trade, business
or transactions, or in case a sub-agent can be appointed according to the provision contained
or practice followed in the contract relating to agency, the agent may, except when otherwise
provided for in the contract, appoint a sub-agent with the consent of the principal. Provided that
an agent who has been appointed on the condition that he will personally represent or execute any
work may be able to appoint a sub-agent.
Co-agent and Substituted Agent: Where an original agent, with the express or implied authority
or consent of principal, appoints or employs another to act on behalf of the principal in the
business of agency for which the original agent was appointed, he is known as substituted agent.
Once a substituted agent appointed, the original agent drops out from the business of agency
fully or some part of the agency business for which the substituted agent is appointed. After the
appointment of substituted agent, he becomes the main agent for the business of agency and he is
entitled to act on behalf of principal and capable to bind the principal in dealing with third person.
Therefore, where an agent having authority, expressly or impliedly to delegate his authority
appoints another person to act in the matter of the agency, such other person is called a substituted
agent, if the original agent drops of the transaction and the newly appointed agent carries on the
business of the agency.
Examples:
A, asks his solicitor M to sell his estate by auction and to appoint an auctioneer for the purpose.
M names T, an auctioneer, to conduct the sale. T is a substituted agent, therefore, the agent of
A for the conduct of the sale.

P authorizes A, merchant in Nepalgunj, to recover trade debts due to P from T. A instructs

M, an advocate, to take legal proceedings against T for the recovery of the money. M is a
substituted agent and has authority to act on behalf of P directly.
A co-agent is the substituted agent if he doesn't replace the original agent completely from the
business of agency but from some part of it. In this case, the original agent and newly appointed
agent both act on behalf of the principal in respect of their part of business. Therefore, where two
or more agents are appointed to act for a principal, each agent called co-agent. And one co-agent
is not liable for the act of another co-agent.
Personal liability of agent

Agent is a person who is employed by the principal and brings him in a contractual relationship
with third person. In this way, the acts of agent only create obligations with third person as he
is just a link between the principal and third person. The general rule is that only the principal
enforce, and can be held liable on a contract entered into by the agent. Therefore, in the absence of
any contract to that effect, an agent cannot personally enforce the contract entered into by him on
behalf of his principal, nor is he personally bound to them. Under Section 595 of the Civil Code,
2074, an agent will be personally liable in the following cases:
 When the contract expressly provides: It is always open to the third party when
contracting with an agent to specifically stipulate that the agent should be personally
liable on the contract. Hence, in case the agent concludes a contract with a third party
in relation to any transaction with provision for personal liability, he is personally liable
for his acts.
 When agent acts for an undisclosed principal: Where an agent acts without disclosing
the principal on behalf of whom he is entering into a contract with third party, it is not
possible that the third party could look to the credit of the undisclosed principal and in
such a case, the law presumes that the third party relied upon, the credit of the known
agent and consequently, the agent becomes responsible for the transaction. Therefore,
if work has been due for or on behalf of an unidentified principal in case the principal
person is not identified, the agent is personally liable.
 When agent acts for a principal who cannot be sued: Where the principal is identified,
but no suit can be instituted against him, e.g., where the agent acts for a minor or person
of unsound mind or disqualified by law, he is personally liable as the credit is presumed
to have been given to the agent and not to the principal.
 When agent signs a contract in his own name: An agent who signs a contract in his own
name without disclosing that he is acting as an agent, though known to be an agent, he
is personally liable for the transaction, unless a contrary intention appears from the body
of the instrument.

 When agent acts in contravention of or beyond the authority given to him: The acts of
agent bind the principal which are within the limit of authority expressly or impliedly.
Therefore, for those acts done by the agent though on behalf of his principal, the principal
is not responsible for those acts unless he ratifies them. In such a case agent is personally
liable.
 When agent acts for a foreign principal: Where an agent enters into a contract for a
foreign principal, it is the agent that is responsible under the contract and not the
principal. It was observed that where a merchant resident aboard buys goods here
through an agent. The seller contracts with the agent and there is no contract or privity
between him and the foreign principal. By contrast, he can exclusive his personal liability
by express provision to this effect in the contract. If he does so, he cannot be sued on the
contract.
 Where agent acts for a principal not in existence: This arises when the principal happens
to be a company not to come into existence. The promoters of a company, yet to be
incorporated, sometimes enter into contract on behalf of the company, though in such
a case the alleged principal has no legal existence till the time of incorporation. In such
a case, the promoters acting as agent are held to have contracted on their own account
and are personally liable. Such contracts are pre-incorporation contract and the company
neither causes nor sued on such contract. But the company, after its incorporation, may
ratify the transaction and bear the obligations under such pre-incorporation contract.
 When custom or usage of trade makes him personally liable: Where there is a custom
or usage of trade prevailing in a particular locality in a particular nature of business
making the agent personally liable, he is liable unless there is a contract to the contrary.
 When money paid by mistake or fraud: Where an agent receives money by mistake
or fraud from their party, he can be sued therefore. Similarly, where an agent has paid
money to third parties, by mistake or by fraud practiced on hi the agent can himself file
a suit for recovering such money.
 When authority is one coupled with interest: Where the subject matter of agency
business is formed in such a manner the agent has an interest in the subject matter along
with the interest of the principal, it called the agency coupled with interest. He has, in
such a case, the right to sue or be sued, but only to the extent of his interest in the subject
matter of agency.
Termination of agency
When the agency relation comes to an end or the agent becomes free from the contract of agency, is
known as the termination of agency. Section 597 of the Civil Code, 2074 has provided the various
modes of termination of agent. The different modes of termination of agency can be stated in the
figure given below:

Termination of Agency
By Acts of the Party By Operation of Law

1. Agreement 1. Performance of contract
2. Revocation by the principal 2. Expiry of time
3. Revocation by the agent 3. Death of either party
4. Insolvency of either party
5. Destruction of the subject matter
6. Principal becoming al alien enemy
7. Dissolution of a company
8. Impossibility
Termination of Agency by Acts of the Parties: It includes:
 By agreement: When an agency can be created by an agreement, it can be terminated by an

agreement at any time and at any stage between the principal and agent.
 By revocation by principal: The principal, at any time before the agent has exercises his
authority so as the bind the principal may revoke the authority of the agent. If the revocation
is lawful, the principal is not liable for such revocation but if it is not proper, therefore,
causes it loss to the agent, he can claim compensation against principal for such pre-mature
termination of agency.
Irrevocable agency: Where agency cannot be terminated by revocation by the principal, agency
is termed as irrevocable agency. An agency becomes irrevocable in the following cases:
 Where agency is coupled with Interest: Where the agent has himself an interest in the
property which forms the subject matter of the agency, the agency cannot be terminated
to the prejudice of such interest. An authority coupled with interest is not determined by
the death, insanity or insolvency of the principal. But where the interest which the agent
has in the agency is merely the prospect of remuneration, or where the agent is permitted
to pay himself the salary due to him out of the rents of the properties managed by him.
 Where agent has incurred personal liability: Where the agent has incurred a personal
liability, the agency becomes irrevocable, since the principal cannot be permitted to
withdraw, leaving the agent exposed to the risk of liability which he has incurred.
 Where the agent has partly exercised the authority: Where the authority has been partly
exercised by the agent, the principal cannot revoke the authority given to his agent so far
as regards such acts and obligation as arise from acts already done in the agency.
Termination of agency by operation of law: It includes-
 By performance of contract: Where the agency is one given in respect of a single transaction,
when that transaction is completed the agency also terminates. The most obvious mode of putting
an end to the agency is to do what the agent has undertaken to do. Therefore, where an agent is
employed to sell certain goods, the agency terminates when he succeeds to sell the goods.

 By expiry of time: Where agent is appointed to do some work within a fixed period of time,
the agency comes to an end when the time expires irrespective of the completion of the
business of agency or its purpose. Time prevails over the purpose.
 By destruction of subject matter of the agency: Where there is destruction of subject matter
which form the agency. It comes to an end as there is nothing left to do in the agency.
Therefore, where the agency is for the sale of house, if the house is destroyed by earthquake,
the agency is necessarily terminated.
 By happening of any event rendering the agency impossible or unlawful: Where after the
contract of agency, it becomes impossible or unlawful because of happening of some event
rendering the agency impossible or unlawful, the agency necessarily be terminated as there is
no possibility to perform the business of agency physically or legally.
 By death of either party: A contract of agency being dependent on the personal skill, trust
and confidence after death of either party, the agency terminates. The rights and obligations
of agent or principal cannot be transferred any other person after their death. But in case
where agency is coupled with interest, the death of principal does not terminate the agency.
Similarly, the principal has to pay remuneration of the agent to his heirs even after his death.
 By insanity of either party: When the principal becomes insane the agency terminates but a
question may arise what would happen if agent becomes a person of unsound-mind. As the
agent only brings his principal in a contractual capacity become immaterial, therefore, even
an insane can be appointed as an agent. But matter becomes difficult when agent, who was
sane at the time of his appointment, now becomes an insane, the agency may come to an end
at the option of the principal.
 By insolvency of either party: After the insolvency of the principal or agent, the contract of
agency terminates. Though the credit-worthiness of agent is immaterial in an agency but it
may cause loss to the principal when he has to file a case against his agent for loss caused by
the failure to perform his duties. As no action institute against insolvent person the principal
should have right to terminate the agency in the event of the agent's insolvency.
 Dissolution of a company: When a company, whether principal or agent, is dissolved, the
contract of agency with or by the company necessarily comes to an end. After dissolution,
there is no more existence of the company and who is not in an existence neither can be a
principal nor an agent.
Effects of termination of agent's authority: The termination of the authority of an agent takes
effect, so far as regards the agent, when it becomes known to the agent, and so far as regards the
third person, when it becomes known to them. In other words, the revocation of agency as regards
the agent and as regards the third parties may take effect at different point of time.

Examples:
 'P' employs 'A' as his agent to sell his goods on commission. P afterwards, by a letter,
revokes A's authority. After the letter is sent but before A receives it, he sells the goods
for Rs. 10,000. The sale is binding on P, and A is entitled to his commission as agreed.
 'P' directs 'A' to sell his furniture lying in his office and afterwards by a letter revokes his
authority to sell. 'A' even after receiving the letter of revocation of authority, enters into
a contract with T who without having knowledge of such revocation pays the price of
furniture to A with which A absconds. T's payment is valid and binding on P.
9. Contract of Carriage of Goods
General notes
It is a pre-condition that for the trade and commercial transactions or business activities, the
goods and people must move from one place to another. The advance means of transportation
through land or water or air have brought the whole world into an economic village. The modern
commodity market has expanded rapidly throughout the world irrespective of continent, culture,
religion or ideology. A particular goods manufactured in one part of the world, by today are
easily available in other part of the world by tomorrow. Numbers of companies are becoming
multinational or transactional day by day. All these are made possible because of the invention
of modern technology, specifically, in the area of transportation and communication. At present,
if transportation is shutdown, the world cannot take a single breath. An act of carriage or
transportation is fairly characterized as like the life blood of a human body. Carriage plays, thus,
a significant role in the economic development of any country. It facilitates the free movement
goods and people from one place to another place within or beyond the country.
Meaning
Carriage: In general the term carriage refers an act of transporting or carrying goods from one
place to another by the different means of transportation within a country or beyond the country.
In fact, it is the act of transportation of goods as a business from one place to another by the
different mean of carriage.
Carrier: The person who, as his business, carries the goods of other for consideration, generally,
either an individual or a company known as the carrier. The carrier finds an important role in
carriage as without him the carriage of goods turns impossible.
Law of carriage: The law which deals with the acts of transportation of goods and set forth the
various rights, duties and obligations of the parties involved in this act or dealing is known as
the law of carriage. It is a branch of business law relating to the carriage of goods from one place
to another. It is an important as it provides the rules to determine the obligations of the parties
involving in transportation in case of loss or destruction of goods or things go wrong.

Contract of carriage: The contract made between a carrier and the owner or consignor of goods
for the carriage of goods from one place to another known as a contract of carriage. Every act of
carriage is carried on through a contract of carriage expressly or implied. Sub-section (1) of Section
602 of the Civil Code, 2074 states that the contract of carriage is deemed to be concluded when
there is a contract of carriage of goods from one place to another. The receipt issued by the carrier
is the proof of such contract.
Types of carrier
On the basis of nature, the carrier can be either by a private carrier or by a common carrier.
 Private carrier: A private carrier is the carrier who carries the goods of other from one place to
another not as a regular business of carrier but occasionally not through a fixed or customary
route with discrimination by taking or not the remuneration of its service.
 Common carrier: A common carrier is a person either an individual or a firm or a company,
private or public, other than the government carrier who carries the goods of other as his
regular business from one place to another place through a fixed or customary route without
discrimination and for a price or remuneration.
Characteristics of a Common Carrier

The followings are the characteristics of a common carrier:
 It may be an individual, or a firm or a company either private or public but it is not a

government carrier.
 Carrying goods is its regular business.
 It carries only the goods of owner or consignor.
 It always carries the good through a fixed or particular or customary route.
 It carries goods without discrimination.
 It is a non-gratuitous carrier.
The common carries only the goods from one place to another through a fixed or particular route.
It is a land ways carrier; therefore, it finds an important role while moving the goods from one
place to another as almost all the goods are to be carried through land or road ways. It is the oldest
form of carrier and still it has been providing its service to the commercial world.

Different between Common and Private Carrier
Basis of Difference Common Carrier Private Carrier

1. Nature of It carries the goods of other as a Carrying the goods is not its regular
business regular business. business.
2. Route It carries goods through fixed or It can carry goods through the
customary route. different routes.
3. Price/ Fee If carries goods for a fixed price. It may carry without price or fixed
price.
4. Reward It is non-gratuitous carrier. It may be a gratuitous carrier.
5. Right to It cannot discriminate from It may discriminate from carrying the
discriminate carrying the goods. goods.
6. Comparison to It is less expensive. It is more expensive.
price
7. Things they carry It only carries goods. It carries goods and people as well.
8. Role in business It finds important role in the It finds less important role as
business world. compared with common carries in
business world.
9. Determination of The rights and obligations of a The rights and obligations are
right and duties common carrier are determined determined under a contract between
by the law of carriage. the owner of goods and the private
carrier.
10. Insurance of The common carrier makes The owner of goods makes insurance
goods insurance of the goods to be of the goods to be carried.
carried.
Rights and Duties of a Common Carrier

Duties of a Common Carrier
The duties to be followed by a common carrier are discussed as under:
 Duty not to make discrimination: The first duty of a common carrier is that while carrying
the goods he cannot make any discrimination and he has to carry goods of all people by
charging a fixed charge. Until vehicle is fully loaded, he has to accept to keep the goods them
and carry without discrimination. Therefore, a common carrier cannot refuse to carry the
goods when tendered them for the purpose of carrying from one place to another.
 Duty to carry the goods with reasonable care, skill and diligence: The common carrier in
all the cases is bound to carry the goods with a reasonable care, skill or diligence, so that
they may be safely delivered to the receiver or consignee of the goods in time. If the goods

are lost, damaged or perished is stolen in transit due to the carrier's negligence, the carrier
is responsible for such loss or damage and liable for the same. The general rule regarding
the liability of a common carrier is that he is liable for loss or damage of the goods in transit
whatsoever may be the reason.
 Duty to carry and deliver the goods within a reasonable time: The common carrier is under
duty to carry and deliver the goods to a right person and place within the time as specified
at the time of delivery of them to him by the owner or consignor of goods. But, where the
time of delivery is not mentioned in the contract, he has to carry and deliver the goods to the
concerned person within a reasonable time. The reasonableness of time depends upon the
nature of the goods to be carried, the intention of the owner and circumstances of the case.
 Duty to deliver the goods to the receiver or consignee of the goods: The common carrier is
under a duty to deliver the goods to a rightful person, i.e., the receiver or consignee of the
goods whose name is mentioned in the contract while delivering the goods to them by the
owner or consignor of goods. He has to be sure that the person receiving the goods is really
the receiver or consignee of the goods. If the goods are delivered other than the receiver or
consignee, he is liable for compensation.
 Duty to deliver the goods at the fixed place: The common carrier owes a further obligation
that he has to make a delivery of goods at the place which has been agreed for. If no place has
been mentioned in the contract, the goods should be delivered to a reasonable place to both
for the consignor and consignee.
 Duty to pay compensation: The common carrier is liable to pay compensation or make good
for loss to the consignor or the consignee for any loss, destruction, damage or loss of goods
in transit whatsoever may be the reasons. Similarly, he is liable to compensate the owner or
consignee of the goods for such loss caused by reason of not fulfilling his duties specified
under the contract of carriage or the law of carriage.
 Duty to communicate in case of emergency: The common carrier is under obligation to the owner
or consignee of the goods to communicate about the event of emergency and necessity. If the
communication cannot be established, he has to act as like a prudent person to carry on reasonable
steps to preserve the goods and to protect the interest of the owner or consignee of the goods.
 Duty to insure the goods: The common carrier is bound to insure the goods. Subsection 3
of Section 68 of the Contract Act, 2056 provides thus: "For the purpose of bearing the risk
involved in the transportation of goods, the carrier might have them insured against the risk
through their owner or his agent or by himself by collecting a separate fee for the purpose, or
take other necessary arrangement to avoid the risk."
 First carrier to be hold responsible in case goods are carried through several means of
carriage: Where the goods are, by their nature, to be carried by more than one carrier or
means of carriage and there is loss or destruction or damage in the goods, the first carrier with
whom the goods where entrusted for the purpose of carrying them, he is under obligation to
pay compensation, except when otherwise provided in the contract.

Rights of a Common Carrier

The rights conferred a common carrier are discussed as under:
 Right to refuse the goods from carrying them: It is the basic characteristic of a common carrier
that he cannot refuse to carry the goods of owner and therefore, cannot make discrimination
in any manner, i.e., he has to carry goods of all the people without discrimination. However,
in the following conditions, he may refuse to carry the goods of owner from carrying them.
 If there is no place in the vehicle, i.e., if the vehicle is fully loaded.
 If the goods are those which are not authorized to carry by the carrier or he generally
does not carry.
 If the lawful charge or fee is not paid unless there is a contract that the charge of carriage
shall be paid after the delivery of goods.
 If the goods are not properly packed.
 If the owner or consignor of goods refused to disclose the nature of goods when it was
asked for.
 If the goods are prohibited from carrying them.
 If the goods are to be carried through such a route which he is not authorized or usually
carries.
 Right to receive remuneration: The common carrier being a non-gratuitous carrier is entitled
to receive remuneration of his act or service. If the contract has provided the amount of
remuneration, he is entitled to such fixed remuneration and even the contract is silent on
the terms of remuneration, he is entitled for a reasonable remuneration. Reasonableness of
remuneration depends upon the market rate prevailing on the similar types of act or service
charged by other carriers at the area where such services were rendered.
 Right to be indemnified: If the common carrier has incurred some expenses to protect and
preserve the goods while carrying them or to protect the interest of the owner or receiver of
the goods, he is entitled to be indemnified by the owner/ consignor or receiver/ consignee
of the goods.
 Right of compensation: In case, where the common carrier has suffered by loss including
some physical loss or injury because of the defective goods or wrong direction of the owner
of the goods, he can claim compensation for such loss suffered by him.
 Right to receive extra remuneration for extra work: Where the common carrier has rendered
extra work or service that it was expected and required at the time of contract he is entitled
to receive more remuneration for the extra work done or service rendered while carrying the
goods.

 Right of lien: It is the right of a common carrier to retain the goods in his own possession
until the lawful charges are paid to him by the owner/ consignor or receiver/ consignee of the
goods. The lawful charges includes all the amount of remuneration, indemnity, compensation
or extra remuneration for extra work. A common carrier can use the right of lien if:
 The goods are in his possession.
 He has incurred expenses in the goods or entitled to recover remuneration or
compensation.
 The lawful charges still are not paid to the common carrier.
Liabilities of a carrier
In general, to perform all the duties as already discussed above is the liability of the common
carrier. Section 603 of the Civil Code, 2074 has provided the liability of a common carrier. Some of
the liabilities of a common carrier are as follows:
 To be liable to deliver the goods received from the owner to the proper place in the
proper condition.
 To be liable for compensation for the loss, damage or destruction of the goods or not
delivered in good condition at the fixed place whatsoever may be the reason.
 To be liable to carry the good at a fixed or within a reasonable time and deliver to the
owner of goods or his agent or other person deputed by him.
Liabilities of carrier to be limited

In the following cases the common carrier can be relieved from his obligation even if the goods are
destroyed. Unless the owner of goods or his agent had stated the price of goods to be transported
or provided in the agreement, in case of loss or destruction of such goods, the carrier shall not be
liable more than Rs.100000/- for such loss or destruction of goods. The cases where the carrier's
liability is limited are as follows.
 Act of God: If the goods are destroyed or damaged or lost because of an act of good, i.e.,
the natural disaster, he is not held liable for such loss or damage. It is not only an accident
occurred by human errors, though he was not in default but it is the event which is taken
place beyond the control of human beings.
 Inherent defects of goods: If the goods are destroyed or damaged because of the inherent
defect in the goods which may or may not be disclosed by the owner of the goods. If the goods
is destroyed by its inherent defects even taking due care of the goods, the common carrier
becomes free from the obligations.
 Exoneration by law from liability: Section 606 under Subsection (2) exonerates the liability of
the common carrier from the loss of the following goods. It provides that the carrier shall not
be liable for any loss or damage of the following goods:

 Gold, silver, diamond, Jewels or goods made thereof.

 Precious stones.
 Negotiable instruments and securities.
 Documents registered by offices.
 Certificates issued by educational and other institutes.
 Coins, bank notes and postal stamps.
 Fish, meat, fresh fruits and vegetables.
 Insecticide or pesticides.
 Inflammable materials and petroleum products.
 Precious art pieces, idols, curio goods handicraft.
 Glass and goods made thereof or fragile goods.
 Wildlife and pets.
 Explosive, arms and ammunition.
 Radio, television, computer and similar other goods and their spare parts.
 Machinery and other goods specified in the prevailing laws.
If the owner or his agent has not clearly declared them at the time of contract or delivering them
to the carrier, the common carrier cannot be held liable for the loss or destruction of these goods
while carrying them.
Termination of the carrier's liability

Under Section 608 of the Civil Code, 2074, the liability of a common carrier may come to an end
and becomes free from the liabilities in the following circumstances:
 In case the common carrier or his agent delivers them to the owner or his agent or a
receiver or consignee of the goods or other person designated by him.
 In case the goods delivered to the common carrier are received by the owner or consignor
or his agent.
 In case the goods are returned back to the owner or consignor of goods or his agent as
the goods cannot be carried or delivered to the receiver or the consignee of the goods
because of the reasons mentioned in clause (b) of subsection (2) of Section 531 of the Civil
Code, 2074.

Test Questions
1. What is contract? State its functions.
2. Explain the essential elements of a valid contract.
3. Distinguish between a contract and agreement.
4. What is a void contract? When a contract becomes as void?
5. What is free consent? When a consent is treated as free?
6. Who are legally incapable to make a valid contract? Discuss the effect of incapacity to the
contracts made with or by them.
7. What is a contingent contract? State the rules regarding its performance.
8. What is performance of contract? State the rules regarding performance.
9. What is breach of contract? Distinguish between actual and anticipatory breach.
10. State the various remedies for the breach of contract.
11. What is indemnity? State the rights of indemnity-holder.
12. What is guarantee contract? State its features.
13. What are the rights of surety? Explain.
14. When a surety becomes free from his liability? State the various modes of termination of
guarantee.
15. Distinguish between indemnity and guarantee.
16. What is bailment contract? State its features.
17. State the rights and duties of a bailee.
18. Explain the rights and duties of a Bailor.
19. What is pledge? Distinguish it with bailment.
20. State the legality of pledge made by non-owner.
21. When the contract of bailment comes to an end? Explain with illustrations.
22. Who is agent? Explain the various types of agent.
23. Examine the various modes of creation of agency.
24. What is agency by ratification? State the requisites of a valid ratification.
25. What are the rights and duties of an agent?

26. State the rights and duties of a principal.
27. Can an agent be held personally liable for his acts in the business of agency?
28. Who is sub-agent? When an agent appoint sub-agent to work for the principal.
29. When agency comes to an end? When agency becomes irrevocable.
30. State the legal provisions regarding registration and renewal of agency under the Agency
Act, 2020.
31. What is a contract of sale of goods? Distinguish between sale and agreement to sale.
32. Explain the implied conditions and warranties under the contract of sale of goods.
33. Can non-owner make a valid sale? State the cases where even a non-owner can make a valid
sale.
34. What is meant by caveat emptor? Explain exception if any to it.
35. Who is unpaid seller? State the rights of an unpaid seller under the contract of sale of goods.
36. What is carriage? State the types of carrier.
37. Distinguish between a common carrier and private carrier.
38. Who is a common carrier? State his rights and duties.
39. When a common carrier cannot be held liable for the loss or destruction of the goods carried.
40. When the liabilities of common carrier comes to an end?

CHAPER 11 : SOCIAL WELFARE ACT, 2049
CHAPTER 11
SOCIAL WELFARE ACT, 2049

Social Welfare Act, 2049
General notes
The importance and fundamental basis of the Social Welfare Act, 2049 has been provided in its
preamble itself. The Government of Nepal has enacted the law for the overall development of
Nepalese people and Nepalese society, in order to relate social welfare activities and various social
welfare oriented activities to tie up with reconstruction activities, in order to provide humanistic
livelihood to the weak and helpless individual, class and community and make them enable; in
order to provide status and respect to the welfare oriented institutions and individuals and in
order to develop a co-ordination between social welfare oriented institutions and organizations.
The development of one or more field or prosperity of some or few section of people and
community cannot make the nation developed and the society peaceful until there is proportionate
development and the people are deprived from taking the benefit of such economic and other
form of development. There is no doubt that the government is the main provider, operator and
protector of the development and benefit of it to all the people of a given country. The policies
and programs of the government should not only be concentrate to the area of production, trade
and industry, infrastructure development and the economy but it has to design, prepare and
implement various programs to empower its people by launching social welfare programs for the
better and enhanced life of every section of people. It is the fundamental concept of social justice.
In spite of this, it is an obvious that only the government and its departments cannot fulfill and
take care of each and every interest of the people or community towards each and every area of
human concerns. This bitter facts demand the presence of some other organisations or institutions
than the government organs to provide the better delivery of service for the wellbeing of those
section of people who are weak, ignorant, backward and alienated because of various reasons
either political, economic, socio-cultural, ethnicity, geography or religious involving in to or
assisting to uplift their status either by educating them or by assisting financially or improving
the quality of life. This need can be fulfilled by those organisation established with such sacred
objective based upon humanitarian basis.
Similarly, the protection of environment and ecology is one of the greatest challenge for every
state around the world and the non-government organisation may act to this areas. It is to be
noted that the organisation so established and run with their specified objects neither they are the
competitor nor the substitution of the government authority but they are the complementary or
supplementary of the government and its departments. To fulfill the need of time, in the year of
2049 after the restoration of democracy the democratic government of Nepal has introduced the
Social Welfare Act, 2049 with new legal framework to pave the way to establish a council by which
the activities of the social welfare programs can be coordinated and the government can take
effective control over the activities of those involved in the social welfare activities.

Social welfare program

Under Section 3 of the Social Welfare Act, 2049 the Government of Nepal, by means of different
activities relating to the social welfare work, to support the overall development of the country
may operate the social welfare program through the concerned Ministry and Social organizations
and institutions formed according to the prevailing laws. Further, Section 4 of the Act empowers
the Government of Nepal to operate special Programs, relating to the social welfare activity and
social service, in the following matters:
 To serve interest and render welfare to the children, old age, helpless or disabled people.
 To foster participation in development and to promote and protect the welfare, rights
and interest of the women.
 To rehabilitate and help to lead a life of dignity to the victims of social mischief's and
also to juvenile delinquency, drug addicts and similar people involved in other kind of
addictions.
 To help to lead a life with dignity to the jobless, poor and illiterate people.
 To manage religious places and the activities of the trust Guthi institutions.
 To take effective management and actions for the welfare of the backward communities
and classes.
Formation of Social Welfare Council

The Act under Section 5 has provided the provision for the establishment of Social Welfare to make
effective co-ordination, co-operation, mobilization and promotion of the social organizations and
institutions, in order to run social activities in more organized way. Pursuant to Sub-section (2) of
Section 5 of the Act, the council shall consists of the following members:

1. The Minister, Ministry for Woman, Children and Senior 1 Chairperson
Citizen
2. Social worker nominated by Government of Nepal 1 Vice-chairperson
3. Social worker nominated by Government of Nepal 1 Treasurer
4.
5. Member (responsible for the social service), National 1 Member
Planning Commission
6. At least four persons (at least one women) nominated by 4 Member
Government of Nepal from among the social worker
7. At least three persons nominated by Government of Nepal 3 Member
from among various social organizations and institutions
8. Representative of the relating Ministry responsible for 1 Member
social welfare
9. Representative, Ministry of Home Affairs 1 Member

10. Representative, Ministry of Health and Population 1 Member

11. Representative, Ministry of Finance 1 Member
12. Representative, Ministry of Health 1 Member
13. Representative, Ministry of Education, Science and Tech- 1 Member
nology
14. Person nominated by Government of Nepal 1 Secretary
Pursuant to Sub-section (3) the tenure of the nominated members shall be four years and they
may be re-nominated and as per Sub-section (4), the Government of Nepal may make alterations
of the council members based on the recommendation with reasons submitted by the Council
and is shall be notified in the Nepal Gazette. The central office of the Council shall be located in
Kathmandu and may open contact offices as necessary within the Nepal.
Legal character of the council

Section 6 of the Act has listed the legal character of the council as under-
 The Council shall be an autonomous corporate body having perpetual succession.

 The Council shall have a separate seal of its own to carry out its all activities.
 The Council may have power to acquire, enjoy, sell or otherwise dispose of movable and
immovable property, as a person.
 The Council may sue on its behalf or be sued against it as a person.
 The Council shall have a separate flag of its own.
Meeting and decision of the council

All the authorities, powers and rights of the council to be exercised by it under the Act are exercised
through the meetings. Meeting of the council if important as the necessary decision to operate
the social welfare program taken and other administrative arrangements are made through
the meeting, hence, it is the supreme body of the council. Section 8 of the Act has provided the
provisions applied for the meeting of the council as under.
 The meeting of the Council shall take place in the date, time and place specified by the
chairperson at least twice a year.
 The quorum for the meeting of the Council shall be at least fifty percent of total number
of the member.
 The chairperson shall preside the Council meeting in case of absence of the chairperson,
vice-chairperson, and if both absent, the member selected among themselves shall
preside over the meeting.
 The opinion of the majority shall be credible in the meeting of the Council and in case of
tie chairperson shall give the casting vote.

 The decision of the Council shall be authenticated by the member secretary.

 Other procedures relating to the meeting of the Council shall be determined by the
Council.
Functions, duties and powers of the council

One of the basic objective and importance of the Act is to establish an institutional mechanism
to server both functions, i.e., to formulate policies and programs for the better services to be
provided by the social service organisation and to regulated the activities of the organisations.
While regulating the activities of the organisations formed for the social services the council
provides its affiliation and continuously monitors the functions of the social organisations. The
possible different forms of negative impact of the non-governmental organisations have to be
controlled for the public interest and welfare of the country and the council is such mechanism for
the purpose. To make enable the council to achieve the objectives as defined by the Act, Section
9 of the Act has provided provisions about the functions to be done, duties to be observed and
powers to be exercised of the council as follows:
 To run or cause to run the social welfare activities smoothly and effectively, to extend
help to the social organizations and institutions and to develop co-ordinations among
them and to supervise, follow up and carry out evaluations of their activities.
 To extend or cause to extend help and support to establish social organizations and
institutions, their development, strengthening and extensions.
 To work or cause to work as co-coordinator between Government of Nepal and social
organizations and institutions.
 To provide consultancies to Government of Nepal in order to formulate policies and
programs directly related to social welfare activities and other social services.
 To establish and conduct or cause to establish and conduct a fund, for the social welfare
activities.
 To work or cause to work as a center for dissemination of information and documentation
to the affiliated service oriented organizations and institutions with Council.
 To conduct or cause to conduct trainings, studies and research programs in the areas
with social welfare.
 To carry out or cause to carry out the physical supervisions of the properties of those
social institutions and organizations affiliated with the Council.
 To carry out or cause to carry out the necessary functions to implement the objectives of
this Act.
 To make or cause to make contract or agreement with the local, foreign or international
organizations and foreign countries.

 To collect grant from the national and international agency and to manage the received
grant.
Executive and Sub-committee: Pursuant to Section 10 of the Act, in order to carry out its regular
activity the Council shall form an executive committee among its members. The executive
committee shall consist of maximum of seven members, including chairperson, vice-chairperson,
treasurer and member-secretary of the Council. The executive committee shall prepare its annual
program budget and
other related policy matters of the council and execute them with the approval of the Council. The
other functions, duties and powers of the Executive Committee shall be as prescribed.
Further, under Section 11 of the Act, the council may form Sub-committee as necessary for the
efficient conduct of its business and the functions, duties, powers and procedures of the sub-
committee shall be as specified by the Council.
Employees of the council: The Council may appoint employees as necessary and the remuneration,
terms of the services and associated facilities of the Council's employees shall be as specified by
the Council from time to time. Under Section 22 of the Act, the employees of the Council shall
not be allowed to involve as authority or members of the executive committees of those social
organizations or institutions affiliated with the council.
Annual Report: According to Sub-section (1) of Section 23 of the Act, the Council shall submit an
audit report to the Government of Nepal within the period of six months after the completion of
its fiscal year, along with detail descriptions of its work and activities.
Further, The social organizations or institutions affiliated with the Council shall have to submit
audit report, to the Council within the period of six months after the completion of fiscal year
along with the detail descriptions of their work and activities.
Permission and agreement
Welfare of the human being or common people is not only the concern of a given country, hence, the
international organisations should allowed to serve the needy people irrespective of nationality,
race and religion. The time has proved that the international non-governmental organisations
have been playing very decisive role for the betterment of the common people in vulnerable
situations because of different reasons. The Act has provided the provisions for the foreign non-
government organisation intended to run social welfare activities in the various areas as identified
by the government of Nepal. The primary condition is that they have to obtain permission from
the government. Sub-section (1) of Section 12, thus, states that any foreign non-government
organization if willing to work within the state of Nepal, before starting the work shall submit
an application to the Council for permission. The council may give permission deciding within
three months. Further, under Sub-section (3) of the Act, the permitted foreign non-government
organization before operating the work within Nepal, shall have to reach in an agreement with the

Council. The agreement may provide the various terms and conditions relating to the operation of
such welfare activities by the foreign non-governmental organisation.
Affiliation with the council
Affiliation with the council fulfills various purposes, firstly, it helps the government to collect
data of the organisations operating in the various sectors of social welfare. Secondly, It enables
the government to make effective control over the organisations. Thirdly, it helps to motivate the
organisations to run their activities to the priority areas as determined by the government and
finally, the organisations can be benefited by the assistance of the government either financial or
logistic or legal. As a regulating body the social organisations or institutions shall have to keep
affiliation with the council and for this purpose they have to submit an application as prescribed
in the form pursuant to Sub-section (1) of Section 13 of the Act.
Under Sub-section (2) of the Act, the organizations and institutions applying for affiliation with
the council shall submit and mention its Constitution, name of executive committee members,
their occupations and addresses and the office where the organization or institution has been
registered and the date of the registration along with the application.
If the council deems to be affiliated such institutions or organization with the Council, the
Council shall issue the certificate as prescribed form taking the fees as prescribed. Similarly, the
organization or institutions affiliated with the Council may keep out its affiliation as prescribed.
Economic assistance
Social organizations and institutions willing to get material, technical, economic or any other
kind of assistance either from Government of Nepal or foreign countries, international social
organizations and institutions or missions or individuals under Sub-section (1) of Section 16 of
the Act shall submit a project proposal and application along with other details to the Council as
prescribed.
Provided that, yearly assistance up to Rs. 200000/- for the project that to be finished immediately
may be taken only giving prior notice to the Council and after the completion of said work, a
report should be submitted to the Council, within the period of three months.
After receiving an application, the Council shall provide permission coordinating with the
concerned ministry or agency within the period of 45 days. However, no permission may be given
to the work or project which is against the national interest.
Sub-section (3) makes it mandatory that the social organisation and institutions shall have to
cooperate and coordinate with local agency while implementing the approved project.
Under Sub-section (4) no pre-permission shall be required to those international institutions

established under international Agreements in which Government of Nepal is a party for
assistance that relates emergency relief services whatsoever may be stated in Sub-section (1) of the

Act. However, notice shall be given to the Council after receiving such assistance. While providing
economic assistance to the approved projects by the foreign organizations, assistance shall be
channelized through the commercial
The fund of the council
Fund is an essential to achieve the objective of the council. All money of the Council shall
be deposited by opening an account in the name of the Council in Nepal Rastra Bank or any
Commercial Bank. All expenditure of the Council shall be borne from the fund. The operation of
the account of the Council shall be as prescribed and its fundamental objective is to use the fund
in transparent and wise manner. Pursuant to Section 17 of the Act, the Council shall have own
separate fund and the fund shall contain the following money:
 Money received from Government of Nepal.

 Money received from foreign Governments, international organizations or foreign
organizations, through Government of Nepal.
 Money received from the movable or immovable property of the Council.
 Money received from any individual, institutions or countries in the form of donation,
assistance, grants and presents.
 Money received from any other sources.
Suspension and dissolution

Section 20 of the Act has authorised the Government of Nepal on the recommendations of
the council to suspend or dissolve the executive committee or those social organizations or
institutions affiliated with the council or, receiving economic assistance from the Council, if they
do their business against, prevailing laws or their own constitutions. While doing so, a reasonable
opportunity, to give their clarification shall be given to the executive committees before their
suspension or dissolution.
Similarly, under Sub-section (2) of Section 20 of the Act, the Government of Nepal may constitute
a Ad hoc committee from the general members of that organization and institution to carry out
the business of that organization and institution until the suspension of that organization and
institution lifted, when suspended and until the constitution of new executive committee, when
dissolved.
Further, Sub-section (3) provides that the Ad hoc committee formed pursuant to Sub-section (2)
in the condition of dissolution of any social organization and institution, shall constitute new
executive committee within the period of three months of its formation, in accordance with the
constitution of those organization and institution.

Test Questions
1. What is meant by social welfare? State the importance of social welfare programs.
2. List out the various welfare programs run by the Government of Nepal as per the Social
Welfare Act, 2049.
3. State the formation and legal character of the Social Welfare Council.
4. State the legal provisions as to the meeting and decision of the Council.
5. What are the functions, duties and powers of the Council?
6. How the foreign non-government organisation can provide social service in Nepal?
7. What is the purpose and process of affiliation of social organisations with the Council?
8. How the social welfare organisation can get economic assistance from the government of
Nepal or foreign governments, non-governmental organisation or institutions.
9. How the fund of council is maintained?
10. When the Council suspends or dissolve the executive committee of the social organisation.
11. What special programs may operate by the Government of Nepal relating to the social welfare
as per the Social Welfare Act, 2049?
12. Write a short note on account and auditing of the Social Welfare Council.


CHAPTER 12 : NEPAL CHARTERED ACCOUNTANTS ACT, 2053 AND RULES, 2061
CHAPTER 12
NEPAL CHARTERED ACCOUNTANTS

ACT, 2053 AND RULES, 2061

1. Institute of Chartered Accountants of Nepal
General notes
The fundamental object and provision of the Nepal Chartered Accountants Act, 2053 is to establish
an Institute of Chartered Accountants of Nepal for regulating the accounting profession in the
country in order to enhance social recognition and faith in accounting profession by raising public
awareness towards the importance of the accounting profession, towards economic and social
responsibility of the accountants and towards economic development of the country through
the development of awareness among the professionals about their responsibility towards the
importance of accountancy in order to develop, protect and promote the accounting profession.
Hence, The objectives include enhancing social recognition and faith in the Accounting Profession
by raising public awareness towards economic and social responsibility of Accountants;
contributing towards economic development and creating awareness among the professionals
about their responsibility towards the importance of accountancy profession. The mission is to
promote and regulate high quality financial reporting and auditing in Nepal, to develop and
maintain the competence of professional accountants and enhance the reputation and role of
accounting profession in all sectors of the economy.
Establishment of the institute

An institute by the name of the 'Institute of Chartered Accountants of Nepal' has been established
under Section 3 of the Act for development of the accounting profession. The headquarter of the
Institute shall be located in Kathmandu Valley, and the Institute may, as per necessity, set up its
offices or training centers or branch and sub-branch in any place within the country. Pursuant
to Section 4 of the Act the Institute shall be an autonomous and body corporate with perpetual
succession and it shall have a separate seal of its own for its business. Similarly, the Institute may,
like an individual, acquire, own, and dispose off or otherwise deal with movable and immovable
property and it may sue and also be sued in its name, like an individual. The Institute is an
autonomous body and is fully authorized by the Act to regulate accountancy profession in Nepal.
Objective of the institute

The preamble of the Nepal Chartered Accountants Act, 2053 has highlighted the fundamental
purpose of the Act is enacted to establish an Institute of Chartered Accountants of Nepal in order
to enhance social recognition and faith in accounting profession by raising public awareness
towards the importance of the accounting profession, towards economic and social responsibility
of the accountants and towards economic development of the country through the development
of awareness among the professionals about their responsibility towards the importance of
accountancy in order to develop, protect and promote the accounting profession.

Section 5 of the Act has listed the objective of the institute as follows:-
 To play the role of a regulatory body to encourage the members to carry on accounting
profession being within the extent of the code of conduct in order to consolidate and
develop accounting profession as a cause for economic development of the nation.
 To enhance social recognition and faith in accounting profession by raising awareness
of the general public towards the importance of accounting profession and the economic
and social responsibility of professional accountants.
 To develop, protect and promote the accounting profession by enabling professional
accountants understand their responsibility towards the importance of accounting
profession and accountancy.
 To develop mechanism of registration, evaluation and examination of accounting
professionals in consonance with international norms and practices so as to make the
accounting profession respectable and reliable.
2. Council and its Committees
General notes
A Council shall be constituted to take up necessary actions required to attain objectives of the
Institute in a well-planned manner and to manage and supervise all activities of the Institute. It
shall, except as otherwise provided elsewhere in this Act, exercise all authority and discharge
all duties conferred on and assigned to the Institute subject to the Act and Regulations and Bye-
laws framed under this Act. Therefore, it is the governing body of the institute by which the
objectives of the institute are fulfilled by setting the rules and norms of the standard of accounting
and regulation of the accounting profession to make it reliable and authentic. Similarly, to make
avail the required quality manpower in the field, the council determines the qualifications and
issues the certificate of practice after completion of the requirements and develops the system of
regulation of their activities of accounting works. The various committees are formed under it and
through these committees the council provides the various rules and systems for the regulation of
the accounting profession.
Constitution of the council

Pursuant to Sub-section (3) of Section 7 of the Act, the council shall consist of the following council
members:-


1. Ten persons elected by and amongst Chartered Accountant members Member
2. Four persons elected by and amongst Registered Auditors Member
3. Three persons nominated by the Government of Nepal, upon the rec- Member
ommendation of the Auditor General, from amongst the persons well
experienced in the field of accounting profession
The Council members shall elect a President and a Vice-President from the Fellow Chartered
Accountants (F.C.A) Council members.
Term of office: According to Sub-section (5) of Section 7, the term of office of the President and
the Vice-President shall be of one year and upon expiry of the term of office, they shall be eligible
to be elected for one more term. By contrast, the term of office of the Council members shall be
of three years and upon expiry of the term of office, they shall be eligible to be re-elected or re-
nominated. The functions, duties and authorities of the President and the Vice- President shall be
as prescribed.
Vacant of the council member's post: Sub-section (1) of Section 8 of the Act has stated the various
circumstances where the seat of a Council member shall be deemed to remain vacant. They are as
follows -
 If he ceases to be a member of the Institute. Provided that this provision shall not be
applicable to the nominated Council member.
 If the Council accepts his resignation. (The President shall tender resignation to the Vice-
President and other Council members to the President.)
 If he absconds himself from three consecutive meetings of the Council without giving a
notice with reason.
 If his term of office expires.
 If his non-compliance with the code of conduct referred to in Section 34 is proved.
 If he dies.
Vacancy and Fulfillment: The vacancy of the post shall be fulfilled under Section 9 of the Act is
as follows-
 The Council shall, if any seat of any Council member elected from chartered accountants
and registered auditors turns vacant due to death or resignation or disqualification
to continue as a member of the Institute pursuant to the other provisions of this Act,
designate any member as Council member for the remaining term of office, provided the
remaining period of such vacated office is of less than a year; and if such term is of more
than a year, the vacancy shall be filled through election.

 A seat, falling vacant owing to death or resignation of any Council member, nominated
by the Government of Nepal, shall be fulfilled, for the remaining term of office, as per the
procedure set forth in the same section.
Meeting and Decision of the Council

Powers are exercised and functions or fulfilled through the meeting and the procedures relating
to the meeting of the Council shall be as fixed by the Council itself. Pursuant to Section 10 of the
Act the Executive Director shall convene the meeting of the Council on such date, time and place
as fixed by the President and the Council shall generally meet six times a year, and the interval
between two consecutive meetings shall not be of more than three months. Under Sub-section (3)
the President shall chair meeting of the Council, and in his absence, the Vice-President; and in the
absence of both, a Council member, selected by the Council members from amongst themselves,
shall chair the meeting of the Council.
Under Sub-section (4) if twenty-five percent of Council members request, in writing, to convene a
Council meeting, the President shall order the Executive Director to summon such meeting within
fifteen days of such request.
Quorum: The presence of fifty-percent members shall be deemed to meet a quorum for the meeting
of the Council.
Decision: Sub-section (6) provides that the majority opinion of the Council shall be deemed to be
a decision of the Council and, in case of a tie, person chairing the meeting shall cast the deciding
vote and the Executive Director shall authenticate decisions of the Council.
Further, under Sub-section (8) of the Act, the Council may, if it deems appropriate, invite any
office bearer of the Government, any national or foreign expert, advisor, or any prominent person
in the field accounting profession, to attend meeting of the Council as an observer.
Functions, duties and powers of the Council

The council is the supreme authority to pursue the purpose and objective of the Institute. Section
11 of the Chartered Accountants Act, 2053 has stated the different functions to be carried out by
the council and conferred various powers and at the same time has imposed various duties to the
council. The functions, duties and powers of the council are as follows:
 To offer an advice, as per necessity, to the Government of Nepal on matters incidental to

the development of capital market.
 To conduct professional examinations for new entrants in accounting profession.
 To fix up procedures relating to the registration of members and members holding
Certificate of Practice.
 To provide membership of appropriate class to applicants having acquired qualifications
pursuant to Section 16.

 To optimum utilize available resources and means for the cause of development of
accounting profession.
 To determine appropriate qualifications for manpower engaged in the accounting
profession.
 To fix curriculum and practical training period required for obtaining membership of
the Institute.
 To organize academic classes and training programs by itself or in collaboration with
any university or other academic institutions.
 To issue Certificates of Practice to members willing to carry on accounting profession.
 To offer career development opportunities in order to enhance efficiency of members.
 To monitor as to whether or not the members and Members holding Certificate of Practice
have acted in conformity with the prescribed professional code of conduct.
 To initiate actions, in accordance with the recommendation of the Disciplinary
Committee, against members holding Certificate of Practice for their acts and actions
done in contravention of the professional code of conduct.
 To issue theoretical or practical guidance and guidelines in various aspects of accounting
and auditing and to carry out other professional development activities as and when
needed.
 To monitor and regulate so as to ensure the compliance of Accounting Standards and
Standards on Auditing developed or recommended by Accounting Standards Board and
Standards on Auditing Board".
 To safeguard rights and interests of the members and to protect and promote their
reputation.
 To render advice and suggestions to His Majesty's Government for improvement in
prevailing laws related with industry, commerce, finance, revenue and accounting
profession.
 To acquire membership of the International Federation of Accountants and Regional and
Sub-regional Federations, and establish contact with other foreign professional institutes.
 To recommend appropriate educational standards for account education, in consultation
with university or any other educational institutions.
 To organize, as and when necessary, training, symposia and seminars to enhance
professional efficiency of Registered Auditors.
 To conduct short-term or long-term training, workshops or symposia for the benefit of
manpower involved accounting profession.
 To publish materials related with accounting profession.

 To establish a library containing materials related to profession.

 To determine procedures to be followed by Committees constituted by the Council.
 To approve budget of the Institute and arrange for the fund.
 To recruit staff, as required, for the Institute and fix their remuneration and other perks.
 To install the mechanism of providing Continued Professional Education (CPE) to
members.
 To develop education system to produce Accounting Technicians and undertake other
necessary actions in this regard.
 To carry out such other functions as prescribed by this Act or Regulations and Byelaws
framed under this Act.
 To carry out any other functions that deem to be necessary to attain the objectives laid
down by this Act.
Committees of the council

There are various committees of the council to be formed to achieve the objective of the Institute.
Under Sub-section (1) of Section 13 of the Act the council may constitute following committees to
discharge its responsibility. These committees under the council are called as Standing Committees.
 Disciplinary Committee.
 Examination Committee.
 Executive Committee.
 Professional Guidance Committee.
Similarly, as per Sub-section (2) the Council may, as per necessity, constitute other committees
for the attainment of the objectives of the Institute and the functions, duties and powers of the
Committees constituted pursuant to this section shall be as prescribed. Pursuant to Sub-section
(4) the Committee constituted under Sub-section (1), shall not be so constituted that the members
of one Committee, except the President and the Vice-President, are also included in another
Committee.
Disciplinary Committee
Under Sub-section (1) of Section 14 of the Act a Disciplinary Committee, comprising of following
members, shall be constituted to recommend the Council to take necessary actions after
investigation upon complaints lodged against any action, contrary to this Act or Regulations or
code of conduct framed under this Act, rendered by any member, or the Institute receives any
information of such kind:


1. A FCA member designated by the Council Chairman
from amongst the Council members referred to in clause (a) of sub-
section (3) of Section 7
2. Three persons nominated by the Council from amongst the Council Member
members
3. Two persons nominated by the Council from amongst the members Member
4. One person nominated by the Auditor General Member
Meeting: The Chairman or members shall not be allowed to attend any meeting that hears
complaint against the Chairman or member of the Disciplinary Committee for their actions
contrary to this Act or the Regulations, Bye-laws or code of conduct framed under this Act.
Further, the procedures of the meeting of the Disciplinary Committee and the term of office of
the Chairman and members of the Disciplinary Committee shall be as prescribed. The tenure of
members of disciplinary committee shall be 1 year and after completion of such tenure he may be
re-nominated.
Powers of the Disciplinary committee: Pursuant to Sub-section (4) of Section 14 of the Act, the
Disciplinary Committee shall have the authority, similar to a judicial court, in respect of summoning
concerned person and investigating evidences and witnesses. While exercising the judicial powers
the committee has to follow the following two fundamental principles of natural justice-
 Equal opportunities of being heard.

 Equal treatment of the parties.
Further, under Sub-section (5) the Disciplinary Committee shall recommend to the Council,
along with its opinion and finding, for necessary action against a member, if found guilty, and
the Council may, considering such a recommendation, impose any of the following punishment
according to the degree of offense:-
 Reprimanding;
 Removing from the membership for a period up to five years;
 Prohibiting from carrying on the accounting profession for any particular period;
 Cancellation of the Certificate of Practice or membership.
According to Sub-section (6), any Council member against whom the Disciplinary Committee,
after investigating upon the complaint of his action contrary to the Act or Regulations, Bye-laws
or code of conduct framed under the Act, has decided to recommend the Council to take necessary
action, shall not be allowed to attend and to vote at the Council meeting where the Council is
hearing at such recommendation.
It is to be noted here is that the decision making body should be independent and there should not
be a condition of conflict of interest. As the members of the council and disciplinary committee are

elected from the member of the institute and they have to investigated and punished their own
members, it puts the council and committee members in the conflict of interest, hence, there should
be form as a quasi judicial body to decide the disputes other than the matters of administrative
actions taken by the council on the recommendation of the disciplinary committee.
Right of being heard: Before imposing a punishment referred to in sub-section (5), the Council
shall provide reasonable opportunity to the concerned members to submit their clarification.
Appeal: The concerned member may, if he is not satisfied with the decision of the disciplinary
committee, file an appeal in the High Court.
Executive Committee
Under Section 15 of the Act an Executive Committee, comprising of the following members, shall
be constituted for carrying out day to day business of the Institute :-

1. President Chairman
2. Vice-President Vice-Chairman
3. Two persons nominated by the Council from amongst the council Member
members
4. Executive Director Member-Secretary
The functions, duties and authorities of the Executive Committee and the procedures of its
meeting shall be as prescribed by the council of the Institute. The tenure of office of members of
executive committee shall be 1 year and they may be re-nominated.
Constitution of Accounting Standards Board

Under Section 15 of the Act the Government of Nepal, in order to govern and regulate financial
reporting and accounting profession, shall constitute Accounting Standards Board. The Board
shall comprise of following members:

1 One FCA member nominated by the Government of Nepal Chairman
2 Representative, Ministry of Finance Member
3 Representative, Office of the Auditor General Member
4 Representative, Office of the Comptroller General Member
5 Company Registrar, Company Registrar's Office Member
6 Director General, Department of Inland Revenue Member
7 Chairman, Securities Board Nepal Member
8 Five Chartered Accountant members nominated by the Government Member
of Nepal on recommendation of the Council
9 One Registered Auditor members nominated by the Government of Member
Nepal on recommendation of the Council

Rights and Duties of Board: The fundamental function, rights and duties of the board is to develop
accounting standards in order to govern and regulate the financial reporting and accounting
profession. Section 15B of the Act has provided the rights and duties of Accounting Standards
Board shall be as follows :
 To develop accounting standards, on the basis of relevant International Accounting

Standards, in order to govern and regulate financial reporting and accounting profession.
 To evolve appropriate process of development of accounting standards and publish
material related to accounting standards.
 To redraft, improvise and revise standards.
 To interpret the standards.
 To undertake other related tasks related to accounting standards.
Vacant of post: Under Section 15C the seat of any member of the Accounting Standards Board
shall be not be retained on any of following conditions:
 If resigned or dead
 If remained absent for three consecutive board meeting without any information,
 If convicted and penalized by the court in a criminal offense,
 If declared insane,
 If the name is removed from the Membership Register pursuant to Section 22 of the Act.
Constitution of Standards on Auditing Board

Section 15D of the Act has provided the provisions to form the Standards on Auditing Board.
Under Sub-section (1), the Government of Nepal, in order to govern and regulate accounting and
auditing profession, shall constitute Standards on Auditing Board. The Standards on Auditing
Board shall comprise of following members:

1 FCA member nominated by Government of Nepal. 1 Chairperson
2 Representative, Ministry of Finance. 1 Member
3 Representative, Office of the Auditor General. 1 Member
4 Chartered Accountants nominated by the Government 3 Member
of Nepal on recommendation of the Council.
5 Registered Auditor nominated by the Government of 1 Member
Nepal on recommendation of the Council.

Tenure of office: The chairperson, chartered accountants and registered auditor nominated
members by the government of Nepal on recommendation of the Council shall remain in their
post for the period of three years and shall be eligible for re-appointment on expiry of their tenure.
Meetings of the board: The meeting and business procedure of Standards on Auditing Board shall
be as prescribed by the Standards on Auditing Board itself. As per Sub-section (3), the Standards
on Auditing Board, if deems necessary, may invite concerned experts to participate in the meeting
as observer and the secretariat of Standards on Auditing Board shall be stationed in the Head
Office of the Institute.
Rights and Duties of Standards on Auditing Board

The rights and duties of Standards on Auditing Board as stated under Section 15E are as follows
 To develop Standards on Auditing, on the basis of relevant International Standards on

Auditing, in order to govern and regulate accounting and auditing profession.
 To evolve appropriate process of development of Standards on Auditing and publish
material related to Standards on Auditing.
 To redraft, improvise and revise Standards on Auditing.
 To interpret the Standards on Auditing.
 To undertake other related tasks related to Standards on Auditing.
Vacant of post: Under Section 15F the post of any member of Standards on Auditing Board shall
vacant on any of following conditions:
 If he resigned.
 If he remained absent for three consecutive board meetings without any information.
 If he is convicted and penalized by the court in a criminal offense.
 If he is declared insane.
 If dead.
 If his name is removed from the Membership Register pursuant to Section 22 of the Act
in case of members of the Institute.
Fund of the Council: (Section 36)

The Institute shall have a separate fund of its own; and the fund shall consist of the following
amounts:
 Grants received from Government of Nepal;
 Amounts received from any international or foreign organizations or institutions.
However, prior approval of Government of Nepal shall be obtained prior to obtaining
such amounts.

 Amounts received while registering the names of members of the Institute or issuing the
professional certificate;
 Amounts earned from the movable and immovable properties of the Institute;
 Amounts received by the Institute from any other sources.
All amounts to be received by the Institute shall be credited to an account to be opened with any
commercial bank within Nepal. All expenditures to be incurred by the Institute shall be chargeable
on the fund. Provided that, any amount received by the Institute for any specific purpose shall
be spent for that purpose only. The executive director shall make expenses chargeable on the
fund subject to the control and supervision of the Council. The bank account of the fund shall be
operated as prescribed by the council.
3. Membership of the Institute
General notes
It is mandatory that no person can engage in audit and verify account without obtaining membership
of either chartered accountant or registered auditor from the institute. The act of audit is highly
skilled and confidential to be performed by a person with high moral and integrity and dignity.
The financial interest of the shareholder or other stakeholders in a company or organisation is
always at risk as the money of shareholders or other contributors is in the hands or use of the
directors. In such situation, the auditor can play an affirmative role by disclosing true financial
position of the company. In other words, the auditor with a person of dignity and skill can save the
interests of the organisation and the shareholders or other stakeholders by assuring the corporate
governance. Such important responsibility can be discharge only by the person whose quality,
skill and dignity is examined and has issued membership certificate by the public authority, i.e.,
the Institute of Chartered Accountants of Nepal. The Nepal Chartered Accountants Act, 2053 has
provided the provisions by which the institute can issue the membership certificate, cancellation
or suspension of it and regulate the profession and members' activities.
Kinds of membership of the institute

Under Section 16 of the Act the membership of the Institute has been classified into the following
classes:
 The Chartered Accountant.

 The Registered Auditor.
Unser Sub-section (2) of Section 16 the membership of Chartered Accountant shall, subject to
Section 18, be provided to a person who:-

 Has, on the date of commencement of this sub-section, obtained the certificate of

Registered Auditor of class 'A' pursuant to the Auditors' Act, 1974 or of class 'B' on the
basis of qualification of Chartered Accountant.
 Has passed Chartered Accountancy or equivalent course from the Institute or other
foreign accounting bodies recognized by the Institute and has received practical training
relating to accounting profession.
Similarly, under Sub-section (3) the membership of Registered Auditor shall, Subject to Section 18,
be granted, on the date of commencement of this sub-section, to a person holding audit license of
class 'B', 'C' or 'D' acquired under the provisions of Auditor's Act, 2031.
Fellow Chartered Accountant (FCA): Pursuant to Section 17 of the Act the Fellow Chartered
Accountant (FCA) membership may be provided to the following members:
 Members with class 'A' Registered Auditor Certificate acquired under the provisions of
Auditor's Act, 1974 at the time of commencement of this Section,
 Chartered Accountant members engaged in the accounting profession for at least five
years.
Disqualification for membership

Section 18 of the Act has stated the various grounds Following persons shall not be deemed to be
eligible to be a member of the Institute:-
 One who has not acquired qualifications as referred to in sub-sections (2) and (3) of
Section 16.
 One who has not attained the age of twenty-one years.
 One who is insolvent and is unable to settle up the debts.
 One who is convicted by the court in a criminal offense involving moral turpitude.
 One who is insane.
Registration of name: According to Sub-section (1) of Section 19 of the Act, person desiring to
become a member of the Institute and possesses qualifications referred to in this Act shall submit
an application, as prescribed, to the Institute with full details.
The Act has provided a special provision for the registered auditor, hence, a person qualified to
be a Registered Auditor, if wishes to have his name registered as a member of the Institute, shall
submit an application within six months of the date of commencement and date of notification of
such commencement in Nepal Gazette (01/04/2059) by Government of Nepal, of Sections 29 and
49 of this Act. A person, failing to submit such application within that period, shall not be entitled
to obtain membership referred to in this Act. Further, as per Section 21 of the Act a member, if
ceases to practice or changes his address, shall notify the Institute within thirty-five days from the
date of such event.

Prohibition on Audit without COP: As per Section 29, no one shall be allowed to undertake audit
business without a Certificate of Practice. Provided that this section shall not deem to restrain
Government to regulate and cause to regulate under separate arrangement, regarding audit of
entities other than companies or commercial establishments registered under Company Act.
Following are the special arrangement made by GON to produce accounting technician:
a) Prepare curriculum of Accounting Technician,
b) Conduct examination of Accounting Technician at least once a year,
c) Issue certificate to those passing the examination of Accounting Technician,
d) Provide appropriate training to Accounting Technicians,
e) Regulate the Accounting Technicians with necessary code of conduct and disciplinary
actions,
f) Develop appropriate procedure and execute, by itself or through other institutions, the
above mentioned functions.
Membership Certificate: When the applicant is found to be eligible to be a member of the Institute,
according to Sub-section (1) of Section 20 the Council shall register the name of such person in the
Membership Register of the Institute and provide a Membership Certificate, in a prescribed format,
referring the class of the member. As per Sub-section (2) the Institute shall maintain a separate
Membership Register, in a prescribed format, for each class of members and other provisions
concerning the registration of members shall be as prescribed.
Certificate to be Cancelled: Pursuant to Section 23 of the Act, the Council, upon receipt of
information that a person has been registered in the Membership Register by fraud or by mistake
and upon an inquiry such matter has been found to be true, may order to invalidate such
Membership and Certificate of Practice, if any. Notice of such actions shall be publicly announced.
Removal of names and re-instatement: Section 22

The Council may issue an order to remove the name of any member from the Membership Register
on any of the following circumstances:-
 If he is convicted by a court in a criminal offense involving moral turpitude and punished

there for.
 If he fails to pay any fees required to be paid to the Institute.
 If he fails to abide by the professional conduct referred to in this Act and the Rules
framed under this Act.
 If he becomes unsound-minded.
 If he is dead.

Re-instatement of names: Under Sub-section (2) of Section 22 of the Act in case, a member whose
name has been removed from the Membership Register pursuant under the grounds stated as
above makes an application along with the fees as prescribed stating reasonable ground to restore
his membership, the Council may consider to restore his membership by reinstating his name in
the Membership Register.
4. Examination, Qualification and Certificate of Practice
General notes
Accounting business requires high skills and integrity of a person. He must acquire such knowledge
to understand and make his comment upon the financial statement and other documents prepared
by the board of directors or management. Such accounting or auditing skill is possible only if one
has studied about the relevant subject and acquired the skills and certified by a proper authority.
The Nepal Chartered Accountant Act, 2053 has deputed the Institute to determine the course of
study and conduct examination of the Chartered Accountants in Nepal. The institute has designed
the course of study in such manner that the person passing the examination can acquire sufficient
understandings or special knowledge required for the auditing profession. A person passing
chartered accountant examination from a foreign institute have to obtain membership of the
institute fulfilling the conditions as fixed by the institute. These chartered accountants have to
pass the examination held by the institute. Similarly, the chartered accountants to conduct audit
have to obtain the certificate of practice that generally certifies that the certificate holder is a person
of cable to conduct the audit.
Curriculum and course books

Under Sub-section (1) of Section 24 of the Act, the Council shall fix level of education, curriculum
and course-books required for professional accountancy or accounting technician course and
conduct examinations. The Council under Sub-section (2) for the purpose of examinations, if it
deems necessary, may seek advice and assistance of local or foreign universities or professional
institutions or experts and it shall conduct examination by itself or with cooperation of any local
or foreign university or other professional institutions.
Similarly, the eligibility qualifications required to participate in any examination of accounting

profession or accounting technician shall be as prescribed by the council from time to time and the
council may fix the necessary provisions relating to examinations. Further, as per Sub-section (6)
of the Act, the provisions, relating to education and teaching programs to be undertaken by the
Institute as per this Chapter, shall be as prescribed.
Certificate: The Council pursuant to Section 25 shall award certificates to those who have passed
examinations pursuant to this Chapter in a prescribed format.

Recognition of professional qualifications of foreign body

The council is only the body in Nepal having power to recognise and equivalent the examination
conducted by any foreign accounting body. Pursuant to Sub-section (1) of Section 26 of the Act
a person, who has passed Chartered Accountancy or equivalent examination and has received
training from any foreign accounting body, shall submit an application, in a prescribed format,
to the Institute for recognition of such examination and training. The Council shall, upon receipt
of such application, make a decision to grant or not to grant recognition to such examination and
training. Any condition, that the Council deems necessary that the applicant should accomplish
before recognition of such examination and training, shall be notified to the applicant. As per Sub-
section (3) in case of notification of any condition, the application for membership of the Institute
pursuant to this Act, could be tendered only after accomplishment of such condition.
Recognition of Foreign Institute: According to Sub-section (1) of Section 27 the Council may, with
prior approval of Government, grant recognition to foreign accounting bodies and recognize the
examinations and training conducted by such accounting bodies. The Council has to maintain a
list of such recognized foreign accounting bodies and the procedures under Section 26 of the Act
need not to be followed regarding the recognition of examinations and training provided by the
accounting bodies mentioned in such list.
Certificate of practice
Under Sub-section (1) of Section 28 f the Act members, willing to carry out audit profession, shall
make an application, in a prescribed format, for Certificate of Practice, along with the prescribed
fees, to the Institute and the Council shall provide a Certificate of Practice, in a prescribed format
to such member, provided that the applying member has fulfilled all conditions prescribed by
the Council. Similarly as per Sub-section (3) the Council shall ensure that the members observe or
shall cause to observe conditions prescribed for members holding Certificate of Practice and may
prescribe Code of Conduct for such members. Further, No one shall be allowed to undertake audit
business without a Certificate of Practice. Provided that this section shall not deem to restrain the
Government of Nepal to regulate and cause to regulate, under separate arrangement, regarding
audit of entities other than companies or commercial establishments registered under Company
Act.
Registration of auditing firms: It is mandatory under Section 28A that the members, holding
Certificate of Practice and willing to carry on audit business under the name of an accounting firm,
shall apply to the Institute, in a prescribed format, for registration of such firm and the Council,
after completion of the procedures, shall issue Certificate of Firm Registration in a prescribed
format.

Special provision relating to Registered Auditors

Under the provision of Section 30 of the Act, the Council, subject to this Act, Regulations and
bye-regulations framed under this Act, shall categorize the Registered Auditors existed at the
commencement of this section and shall issue Certificate of Practice to carry out audit business as
per the provisions of this Act. Provided that such Registered Auditors shall not be deprived of the
privileges provided under the Auditors' Act, 1974.
Limit of Audit Business: Section 30A provides that the limit of audit business, entitled to a
Registered Auditor member holding a categorized Certificate of Practice pursuant to Section 30,
shall be fixed by the Government of Nepal on recommendation of the Council.
Upgrade of the Class of Certificate of Practice: The Council may upgrade the class of Certificate
of Practice, issued to Registered Auditor members under Section 30 of the Act.
5. Code of Conducts
General notes
Code conducts are the set of norms, ethics and standards which are to be observed or followed
by a professional in his profession. The Nepal Chartered Accountants Act, 2053 under Section
34 has listed the various code of conducts which are to be followed by a member or members
holding certificate of practice in his profession. These are the rules designed to make the profession
authentic, reliable, quality and trustworthiness that helps to maintain the financial morality in an
organisation and protect the economic interests of all the stakeholders including the shareholders
or members of a body corporate. Further, the professional respect, privacy, integrity and dignity
which are top most important for the profession can be maintained through the due observance of
these code of conducts. On the other hand, these code of conducts are not only the guidelines but
binding rules, hence, if a member of the institute fails to abide these code of conducts, they can be
charged and punished as prescribed by the Act.
Members to observe the conduct

The members of the institute under Section 34 have to follow the following code of conducts-
 Members and members holding Certificate of Practice shall fully abide this Act and the
Regulations framed under this Act.
 Auditing, either in partnership or in collusion in any manner with a person who has not
obtained the Certificate of Practice of one's class, is prohibited.
 One shall not share or distribute as profit the auditing fees or remuneration with any
person other than a member of the Institute; and shall not pay any commission, brokerage
etc. out of the professional fees earned to any person or member.

 One shall not, directly or indirectly, influence any person by way of fear, threat, terror or
enticement in order to secure any professional business.
 One shall not disclose or divulge any information and explanations acquired in the
course of professional service to any person other than the employer employing him and
the person whom he is complied with by the law to do so.
 Members holding Certificate of Practice shall not certify any financial statement or give
report of any type until they or their partner or employee checks and verifies it.
 Member holding Certificate of Practice shall, while certifying financial statements or
making report thereon of any corporate body in which he or his partner has interest,
clearly mention the extent of his or his partner's interest therein. Provided that being
merely a shareholder in a company shall not be deemed to have interest therein.
 Member holding Certificate of Practice shall, in order to truly present the financial
statement certified by him, clearly indicate all the material facts or any false statements
or explanations known to him or to the best of his knowledge.
 Members holding Certificate of Practice shall discharge their duties with due care in the
course of their profession and shall draw attention of all concerned to all material facts
which are or have take place contrary to the prevailing law and do not comply with
generally accepted principles of auditing.
 Members holding Certificate of Practice shall not base their remuneration as a percentage
on the profit or on any other uncertain results.
 One shall not knowingly or recklessly mention any false matter in a notice, explanation
or statement required under the prevailing law to be provided to any office, department
of His Majesty's Government or any organisation.
 One shall not perform audit of accounts of any organization where he has served until
the elapse of at least three years of his leaving the service.
 A member holding Certificate of Practice shall not accept his appointment as an auditor
of an organisation without ascertaining that all required procedures for appointment as
the auditor under the prevailing law has been duly fulfilled.
 One should have obtained sufficient information prior to give audit opinion.
 Other matters concerning the conduct to be observed by the members and members
holding Certificate of Practice shall be as prescribed.
Complains to be lodged: Under Section 35 of the Act the concerned person may lodge complaint
to the Institute against any member or member holding Certificate of Practice for not upholding
the conduct mentioned in this Act or the Regulations framed under this Act or for violation of this
Act or Regulations framed under this Act. If the Executive Director finds convincing information
that proves any member or member holding Certificate of Practice is not observing the conduct,

he shall submit the proposal along with the related facts to the Council for further action against
such member or member holding Certificate of Practice.
Punishment
With a view to make accounting profession as accountable, responsible, reliable and trustworthiness,
the Act apart from the provision of academic qualifications, skills and quality has provided the
provisions of punishment to be imposed those violating the laws and rules and other standards
and ethics to be observed by the member of the Institute. Punishment, either regulatory, monetary
or imprisonment in jail, is imposed to maintained the professional moral and the standard. The
Act has provided the different form of punishment for the commission of different offences. The
nature of offence and the forms of punishment prescribed by the Act can be stated as under-
S. No. Nature of offence Punishment

1. Carry out audit without obtaining a Penalty of maximum two thousand rupees or
Certificate of Practice pursuant to this with an imprisonment for a maximum period
Act. of three months or with both.
2. Use of the name or the seal of the Penalty of one thousand rupees maximum
Institute or exercises any type of on first conviction, and on any subsequent
authority bestowed to the Institute in conviction thereafter, a maximum penalty of
contravention of Section 6 of the Act. five thousand rupees or imprisonment for a
maximum period of six months or both.
3. Verifying any document in capacity Penalty up to two thousand rupees or
of the member holding Certificate imprisonment for a period of up to three
of Practice who has not obtained a months or both.
Certificate of Practice.
4. Commission of any act contrary to the Suspension for a maximum period of five
provisions of this Act or Regulations years and shall be liable of punishment with a
framed under this Act. maximum penalty of two thousand rupees or
imprisonment for a maximum period of three
months or both.
5. Lodgment of a complaint without any Punishment with fine up to one thousand
reasonable cause to make complaint rupees.
and it is proved that the complaint
was made with an intention to harass
a member
The complain cases, except those to be heard under Section 14, lodged in the Council against any
member, pursuant to Section 35, shall be instituted in the concerned High Court.

Test Questions
1. What are the objectives of the Institute of Chartered Accounts of Nepal?
2. State the constitution of the Council and the terms of office of the president and vice-president
of the council.
3. When the post of Council's member remains vacant?
4. State the functions, duties and powers of the Council.
5. List out the various committees of the council and state the powers of the disciplinary
committee.
6. How the Accounting Standard Board is formed under the Nepal Chartered Accountant Act,
2053.
7. When the members of the Accounting Standard Board vacant?
8. What are the rights and powers of the Standard on Auditing Board.
9. Explained the membership of the institute and disqualification of members.
10. When the names of member shall be removed from the membership register and when the
names reinstated?
11. How a person can obtain the certificate of practice from the Institute?
12. List out the code of conducts to be observed by the member of the Institute.
13. State the legal provisions of the offence and punishment thereto under the Nepal Chartered
Accountant Act, 2053.
14. Write a note on recognition of professional qualifications of foreign body.
15. Discuss how a disciplinary action is taken against the member and what punishment can be
imposed to them by council.
16. List out the objectives of the ICAN and state the formation of council including the election of
president and vice-president pursuant to the NCA Act, 2053.
17. State the circumstances where a councilor may cease from his post and how such vacant post
is fulfilled pursuant to the Nepal Chartered Accountants Act, 2053.

CHAPTER 13 : WORLD TRADE ORGANIZATION AND NEPALESE LAWS
CHAPTER 13
WORLD TRADE ORGANIZATION

AND NEPALESE LAWS

World Trade Organization and Nepalese Laws
General notes
The World Trade Organisation (WTO) is the only international organisation dealing with the
global rules of trade. Its main function is to ensure that trade flows as smoothly, predictably and
freely as possible. Although the WTO is meant to liberalise trade and our effort to bind the rates at
a higher level is rather regressive, the challenge will be to protect the interest of present producers
without jeopardising future potential. As the basic principle of the WTO is protection through
tariff, other routes to protect producers will be blocked. Under these circumstances, we need to
identify products that will allow us a margin of critical potential put at a higher bound rate (at
around 40 percent) that can be traded off with lower rates on products that are less important.
The crucial consideration for our country is the protection of the livelihood of service operators
and protecting employment in an under employed country. Unlike goods, it is not possible to
protect services by tariffs. While opening services may lead to greater efficiency and productivity
of resources in all sectors, it means we have to strengthen and protect domestic service
providers. Nepal also faces the challenge of making our laws and policies compatible with the
WTO. Various new legislations and amendments are needed to comply with existing trade
standards. We need to act fast to create and pass these laws to protect biodiversity, intellectual
property, government procurement, etc. Once we are in the WTO, we must be able to deliver.
In order to become more competitive, our challenge lies in capital injection, advanced technologies
and development of human resources. The trade competitiveness study under the integrated
framework (IF), supported by the World Bank and DFID, will help us identify areas of yield.
In any case, we have to build our capacity to produce competitive and quality products for the
international market.
Formation, Structure and Secretariat of WTO

The World Trade Organization (WTO) is an international body dealing with the rules of trade
between nations. The Uruguay round of GATT (1986-93) gave birth to World Trade Organization.
GATT was an informal organization which regulated world trade since 1948. The members of
GATT signed on an agreement of Uruguay round in April 1994 in Morocco for establishing a new
organization named WTO. It was officially constituted on January 1, 1995 which took the place
of GATT, as an effective formal organization. Contrary to the temporary nature of GATT, WTO
is a permanent organization which has been established on the basis of an international treaty
approved by participating countries. It achieved the international status like IMF and IBRD, but it
is not an agency of the United Nations Organization (UNO). On April 23, 2004, Nepal also got its
membership. Many countries are currently negotiating for their accession.
The WTO has nearly 161 members since 26 April 2015, accounting for over 97% of world population.
Decisions are made by the entire membership. This is typically by consensus. A majority vote is

also possible but it has never been used in the WTO and was extremely rare under the WTO’s
predecessor, GATT. The WTO’s agreements have been ratified in all members’ parliaments.
The WTO’s top level decision-making body is the Ministerial Conferences which meets at least
once in every two years. Below this is the General Council (normally ambassadors and heads of
delegation in Geneva, but sometimes officials sent from members’ capitals) which meets several
times a year in the Geneva headquarters. The General Council also meets as the Trade Policy
Review Body and the Disputes Settlement Body. At the next level, the Goods Council, Services
Council and Intellectual Property (TRIPs) Council report to the General Council. Numerous
specialized committees, working groups and working parties deal with the individual agreements
and other areas such as, the environment, development, membership applications and regional
trade agreements.
The WTO secretariat, based in Geneva, has around 600 staff and is headed by a Director-General. Its
annual budget is roughly 160 million Swiss Francs. It does not have branch offices outside Geneva.
The secretariat’s main duties to supply technical support for the various councils and committees
and the ministerial conferences, to provide technical assistance for developing countries, to analyze
world trade and to explain WTO affairs to the public and media. The secretariat also provides
some forms of legal assistance in the dispute settlement process and advises governments wishing
to become members of the WTO.
Principles of WTO
Laws, regulations, judicial decisions and administrative ruling pertaining to the classification or
valuation of products for customs, rates of duty, taxes or other charges affecting sales, distribution,
transportation, insurance and warehousing with the objectives of enabling governments and
traders to become familiar with them. This helps exporters plan their trade and safeguard them
against hassles.
 Transparency: WTO aims at achieving transparency in the world trade relations by

obligating members to publish their respective laws, regulations, judicial decisions
and administrative ruling pertaining to the classification or valuation of products for
customs, rates of duty, taxes or other charges affecting sales, distribution, transportation,
insurance and warehousing with the objectives of enabling governments and traders to
become familiar with them. This helps exporters plan their trade and safeguard them
against hassles.
 MFN Treatment: Trades need to be conducted without discrimination. Any member
country shall not discriminate between its trading partners-all members countries are
granted “most favoured nation” MFN status. MFN means that every time a member
country lowers a trade barrier or open up a market, it need to extend the benefits to all
trading partners.
 National Treatment: National Treatment This principle implies that imported and
locally produced goods should be treated equally. Non-discrimination within a country.

 Free Trade Principle: Optimal utilisation of resources lowering trade barriers is the best
way of promoting trades. Trade ensures optimum utilisation of resources.
 Dismantling Trade Barriers: Physical restrictions on the import and export of goods
are prohibited under GATT. However member countries can protect domestic industry
through tariff. The WTO is not a free trade institution. It permits tariffs and other form of
protection but only in limited circumstances.
 Rule-based Trading System: The WTO stands for rule based trading system. The WTO
sets and enforces rules necessary for conducting world trade fairly.
 Treatment Of LDCs: The WTO recognises the need for positive policies efforts to help
developing countries to grab the benefits of trade liberalisation. The WTO contains special
and differential treatment provisions for developing and least developed countries.
 Competition Principle: The WTO system is designed to promote open and fair
competition. Removal or reduction of tariffs and subsidies will expose locally produced
goods and services to imported ones. There is level playing field between foreign and
local goods and services and this promote competition between them.
 Environment Protection: The last principle of WTO relates to protection of environment.
The preamble to the WTO agreement refers to the objective of sustainable development
and to the need to preserve the environment.
Role of WTO in international business

Overall WTO was set up to play a very important role in the world economics though settling
trade related disputes through rules, regulations and consensus based agreement mechanisms
that would prevent trade related wars between powerful countries. Through resolving trade
related disputed WTO has got the potential to maintain world peace and bilateral relations
between its member countries thorough following negotiations, consultations and mediations.
The fundamental role of WTO in international business can be listed as under-
 WTO facilitates implementation, administration and smooth operations of trade

agreements between the countries.
 It provides a forum for the trade negotiations between its member countries.
 Settlements of disputes between the member countries through the established rules and
regulations.
 It cooperates with the IMF (International Monitory Fund) and World Bank in terms of
making cohesiveness in making global economic policies.

Function of WTO
Among the various functions of the WTO, basically, it oversees the implementation, administration
and operation of the covered agreements and provides a forum for negotiations and for settling
disputes. Additionally, it is WTO's duty to review and propagate the national trade policies, and to
ensure the coherence and transparency of trade policies through surveillance in global economic
policy-making. Another priority of the WTO is the assistance of developing, least-developed
and low-income countries in transition to adjust to WTO rules and disciplines through technical
cooperation and training. In general the functions of WTO are given as follows-
 The WTO shall facilitate the implementation, administration and operation and further
the objectives of this Agreement and of the Multilateral Trade Agreements, and shall
also provide the framework for the implementation, administration and operation of the
multilateral Trade Agreements.
 The WTO shall provide the forum for negotiations among its members concerning their
multilateral trade relations in matters dealt with under the Agreement in the Annexes to
this Agreement.
 The WTO shall administer the Understanding on Rules and Procedures Governing the
Settlement of Disputes.
 The WTO shall administer Trade Policy Review Mechanism.
 With a view to achieving greater coherence in global economic policy making, the WTO
shall cooperate, as appropriate, with the international Monetary Fund (IMF) and with
the International Bank for Reconstruction and Development (IBRD) and its affiliated
agencies.
The above five listings are the additional functions of the World Trade Organization. As
globalization proceeds in today's society, the necessity of an International Organization to
manage the trading systems has been of vital importance. As the trade volume increases, issues
such as protectionism, trade barriers, subsidies, violation of intellectual property arise due to
the differences in the trading rules of every nation. The World Trade Organization serves as the
mediator between the nations when such problems arise. WTO could be referred to as the product
of globalization and also as one of the most important organizations in today's globalized society.
Nepal and WTO

Nepal has obtain the member of WTO on 23rd April 2004 as the first LDC entering the organisation
through full working party negotiation process. It has opened the possibility for wider market
access, rule based trade, integration with global economy, access to dispute settlement process
which will lead to enhancement of Nepalese enterprises and make economy more competitive
by promoting better business environment. Benefits doesn’t appear in vacuum. Measures to be
adopted to grasp opportunities, e.g., identify the area of competitive and comparative advantage;
sustain business friendly macroeconomic policies; enhance domestic productivity, technology

and innovation; brand the product and resources; expand trade by utilizing Nepalese Diplomatic
Missions; strengthen negotiation capacity; enact new laws and amend existing laws; develop
comprehensive national plan and policies; build trade related infrastructure and develop trained
manpower for trade and industry etc.
Opportunities/Advantages of WTO to Nepal
The opportunities and advantages which Nepal can achieve through WTO can be listed as under
 Market access for Nepalese products

 Transfer of technology and foreign investment
 Technical assistance and training to enhance the efficiency of the government
 Credible forum for trade disputes settlement
 Protection of domestic industries through tariff/ domestic regulation
 Protection of consumer rights and transit rights
 Employment generation, export promotion and economic growth
 Opportunity for improving the global competitiveness
 Patent right in bio-diversity and other indigenous knowledge
Disadvantages of WTO to Nepal

In its quest to move along with global economic development, the Nepalese government
realized that it cannot remain aloof from the waves of globalisation. Consequently, it applied
for the membership of the General Agreement on Tariffs and Trade (GATT) in May 1989 and
was subsequently given an observer's status. The World Trade Organisation succeeded GATT
from 1 January 1995. Nepal acceded to the World Trade Organization in 2004 as 147th member of
the multilateral trade body and as the first least-developed country to have joined the institution
through the process of accession. WTO is now the third economic pillar of worldwide dimensions
along with the IMF and World Bank.
WTO membership was simply a beginning of the process to integrate Nepal into the global
economy in a meaningful manner. Trade between nations is increasingly being conducted under
the rules and agreements negotiated at the WTO. WTO membership will help Nepal integrate
with the global trading system .The special provisions of the WTO will guarantee a predictable
and stable trading environment for the Nepalese SMEs.
The two fundamental principles of the WTO, namely “Most favored nation (MFN)” and “national
treatment”, will enhance the export potential of Nepalese products and services. Under the MFN
clause, the Nepalese products and services will get access to global markets at equal or no less
terms than being enjoyed by other WTO members. Similarly, the national treatment provision

guarantees that the Nepalese goods and services will receive the same treatment as the goods and
services of the importing country.
In practice, it is proved that the free economy and trade has served the developed country because
of their competitive economy and other political and cultural influences over the under developed
or list developed countries, like Nepal. The crucial consideration for our country is the protection
of the livelihood of service operators and protecting employment in an under employed country.
Unlike goods, it is not possible to protect services by tariffs. While opening services may lead to
greater efficiency and productivity of resources in all sectors, it means we have to strengthen and
protect domestic service providers.
A small, land locked, poor and donor dependent country like Nepal the membership to the WTO is
not a matter of choice. Membership of WTO was necessary; whether consequences are positive or
negative. So the only choice Nepal has to mitigate the negative consequences and try to utilize potential
benefits. The major challenges or disadvantages of WTO to Nepal can be identified as under.
 Domestic industries may be adversely affected

 Tariff reduction causes decrease in revenue collection
 Domestic investment may suffer because of FDI
 Difficult to meet international standard of quality
 National indigenous expertise may decline
 Elimination of duty free and quota free system
Nepal’s trade capacity is too weak to utilize the most advanced forum. There is no automatic
benefit as it is only a means not an end. The high cost for dispute settlement process compels
to compromise to such terms unequal. To take the benefit from WTO, Nepal must increase
competitive capacity, more advance mechanism to channelise the WTO provisions to secure the
interest of the Nepalese trade and industry.
Separation of Powers
The separation of powers is a model for the governance of a state. Under this model, a state's
government is divided into branches, each with separate and independent powers and areas of
responsibility so that the powers of one branch are not in conflict with the powers associated with
the other branches. The typical division is into three branches: a legislature, an executive, and a
judiciary, which is the trias politica model.
Separation of powers, therefore, refers to the division of responsibilities into distinct branches
to limit any one branch from exercising the core functions of another. The intent of separation
of powers is to prevent the concentration of unchecked power by providing for "checks" and
"balances" to avoid autocracy, over-reaching by one branch over another, and the attending
efficiency of governing by one actor without need for negotiation and compromise with any other.

Checks and Balance

Checks and balances is a system that was built into the Nepal Constitution, to keep each branch of
government in check. It is meant to prevent any one branch from usurping too much power. Each
branch of government has a certain amount of control over the other branches, in addition to its
individual powers.
In Nepal, the executive is a part of the legislature. The president is the head of the executive but
he/she acts on the advice of the Council of Ministers. He can be impeached by the parliament. The
Council of Ministers is collectively responsible to the House of Representative (Lower House) and
is therefore removable by it. There is separation only so far as the judiciary and other organs of the
government are concerned. The judges of the superior courts are appointed by the government,
although they can be removed only by the parliament, and their salaries are provided by the
constitution or can be laid down by a law made by the parliament. The courts can declare legislative
as well as executive acts unconstitutional. So, we can say that the system operates in Nepal is not
based on the doctrine of the separation of powers in it rigidly but there is the system of check and
balance.
Legislative process in Nepal

The Constitution of Nepal is the supreme law of the land and any laws, rules, regulations or
directives are made or promulgated inconsistent to it shall be void-ab-initio being ultra-vires.
Under the current legal system, we have 3 types of laws, the federal laws, provincial laws and
local laws. Laws can also be further expanded into regulations made by the Government of Nepal.
Federal laws
The Parliament is the supreme organ to make, amend and repeal any law as per the necessity
and pursuant to the Constitution of Nepal there are two levels of federal parliament, i.e., House
of Representatives and National Assembly. Bill may, subject to this Constitution, be introduced
in any House of the Federal Parliament. Provided that a Money Bill shall be introduced only
in the House of Representatives. In Nepal usually, it’s the Government that drafts the laws but
individual Member of Parliament can also draft a law and present it to the concerned Committees.
Article 109 states that the legislative powers of the Federal Parliament shall be as enumerated
in the lists of Schedule-5, Schedule-7 and Schedule-9 and A Money Bill and a Bill concerning a
security body including the Nepal Army, Nepal Police and Armed Police Force, Nepal shall be
introduced only as a Government Bill.
In General, the concerned ministries draft a bill and that bill is sent to the law ministry. The law
ministry makes sure that those bills from various ministries are compatible with the Constitution.
Then that final bill is sent to the Cabinet which also can modify that final draft and then it passes
that bill. After that, the concerned minister presents that bill to the federal Parliament, first House
of Representative.

There is debate on that bill in the floor of the House and then amendments to that bill can be
offered by any MP. After this process is over, the bill can either to sent for a vote in Parliament of if
further discussion is needed it is sent to the relevant Parliamentary committees where that bill can
be further modified and finally presented it to the House of Representative and it passes if there
is majority vote for it. After this, the bill goes to National assembly where the majority of National
Assembly members too have to okay it, if it is not okayed then further discussion can take place
but usually if a House of Representative passes a bill National Assembly too does it.
Pursuant to Article 112, one who has introduced a Bill may, with the approval of the House,
withdraw the Bill. A Bill passed by one House of the Federal Parliament shall be transmitted to the
other House as soon as possible and such Bill, if passed by the receiving House, shall be presented
to the President for assent who must authenticate it within 15 days after which it is published in
Nepal Gazette and then it comes in to force.
Provincial laws
The Provincial laws must be consistent with both the Constitution and federal laws and there’s
just one legislature whose composition is different in different provinces. The method is almost
same as in case of federal laws as discussed above. They can make laws on various topics listed
in the annex of the Constitution like forming Provincial police or Provincial civil service, forming
laws to set salary of local representatives under them and so on. Those Provincial laws passed by
their respective Parliaments is certified by Provincial speaker and sent to Province Governor for
authentication and is enforced after it is published in the Gazette.
Local Laws
It is the new concept for us that even the local bodies may make laws. These laws need to be
compatible with the Constitution, federal and provincial laws. The laws in this case are made by
rural municipal or municipal assemblies, again a majority is needed to pass those local laws and it
is authenticated by the chair or Mayor of that local Government and published in their respective
Gazettes for their implementation. They can form various local laws as authorised and provided
under the Constitution of Nepal.

Test Questions
1. Explain in brief the governing principles of World Trade Organisation.
2. Critically analyse the various roles of WTO for the development of trade and business in the
world.
3. What are the functions of World Trade Organisation?
4. State the advantages of World Trade Organisation by which Nepal can take benefit to strength
its trade and economy.
5. Is there any disadvantage of World Trade Organisation to Nepal? Give your opinion.
6. Stated in brief the legislative process in Nepal.
7. How the federal laws are framed and enacted through the parliamentary process?


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Corporate and Other Laws

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NEPAL

© The Institute of Chartered Accountants of Nepal

This study material has been prepared by the Institute

All rights reserved. No part of this publication may be

Price : Rs. 350/-

First : May, 2011

Second Edition : September, 2014

Third Edition : November, 2019

Designed & Printed at:

COMPANIES ACT, 2063

The Institute of Chartered Accountants of Nepal 1

1. Meaning and Concept of Company

2 The Institute of Chartered Accountants of Nepal

Company and Corporation

The Institute of Chartered Accountants of Nepal 3

 Corporate personality/Separate legal entity

The fundamental attribute of incorporation of a company is its independent legal existence

4 The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal 5

6 The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal 7

 Capacity to sue and subject to be sued

8 The Institute of Chartered Accountants of Nepal

Share of the company is transferable as movable property. It is an individual property so can

 Formalities, publicity and expense

The Institute of Chartered Accountants of Nepal 9

Difference between a company and partnership

 A partnership is created by an agreement among the partners. A company is created by

 The liability of a partner is unlimited, whereas the liability of a member of a company is

10 The Institute of Chartered Accountants of Nepal

Limited by shares Limited by guarantee Private Public

Private Public Private Public

2. On the basis of the extent of liability – Limited by shares

Public and private companies

 A company which membership is limited to 101.

The Institute of Chartered Accountants of Nepal 11

 A company which is not a Private company.

Distinction between private and public company

12 The Institute of Chartered Accountants of Nepal

Privileges of private companies vis-à-vis public companies

Holding & Subsidiary companies

 The company controlling composition of the board of directors.

 Voting Control: Where A holds a majority of the voting right in B.

The Institute of Chartered Accountants of Nepal 13

 In making decision on a resolution to relinquish the title to an undertaking pursuant to

14 The Institute of Chartered Accountants of Nepal

2. Lifting of corporate veil

 Company is distinct from its shareholders.

The Institute of Chartered Accountants of Nepal 15

Cases of lifting the corporate veil

1. Where the companies are in relationship of holding and subsidiary companies;

16 The Institute of Chartered Accountants of Nepal

4. In the law relating to the exchange control;

1. When the court is construing a statute, contract or other documents;

1. Reduction of number of members

The Institute of Chartered Accountants of Nepal 17

18 The Institute of Chartered Accountants of Nepal