April 2006
LEGAL SIDE

The Companies Ordinance, 2005 & Foreign Companies

By Bharat Upreti

1. Background

The Companies Act, 2021 (1964 AD) has embraced foreign companies under its regulatory regime. It required the mandatory registration of foreign companies operating or willing to operate their business or transaction in Nepal. But the Companies Act, 2053 (1997) did not have any provision on the registration of foreign companies. Consequently, foreign companies operating in Nepal could not be brought under the regulatory and enforcement regime. Realising the situation, provisions have been made under the New Companies Ordinance, 2062 (2005 AD). The provisions of the new Ordinance are more detailed as compared to its predecessor i.e. the Companies Act, 2021.

2. Defining Foreign Company

Under the company law, incorporation and registration are two different processes. Incorporation is a process by which a company is endowed with separate legal personality i.e. a process by which a company is deemed to be formally born. But registration is a process by which a corporate personality of an already incorporated company in one jurisdiction is given recognition for some specific purposes in other jurisdictions. So, a company can be incorporated in one jurisdiction alone but it can be registered in as many jurisdictions as the company deems fit.

So, a company is foreign for the country of registration if it has already been incorporated in other jurisdiction. The Ordinance, in the same line with the 2021 Companies Act, defines foreign company as a company incorporated outside the Kingdom of Nepal.

For the purpose of the Ordinance, there are two types of foreign companies:

# A foreign company willing to have a place of business in Nepal (Branch Office)

# A foreign company willing to establish a contact office (Liaison Office)

Both types of foreign companies should be registered with the Office of Company Registrar.

3. Registration Requirement

3.1 Registration Regime

The 2021 Companies Act was silent on the registration requirement for establishing contact office in Nepal by foreign companies. But under the present Ordinance, a foreign company willing to make Nepal one of its business places or establish a contact (liaison) office in Nepal should be registered in Nepal. However, investing in equity capital of other companies in Nepal, granting loan to such companies or participating in the operation and management of other companies in Nepal with the prior approval of the Department of Industries do not constitute operating business or carrying on transaction and hence, does not require registration.

If any foreign company is operating any business in Nepal for a continuous period of one month or more through establishing or using any office in Nepal or has appointed any person for regular contact or obtained his service, the foreign company is deemed to have transacted or established a contact office in Nepal and should be registered.

After the commencement of the Ordinance, every new foreign company needs to get registered. The Ordinance allows a grace period of six months to those foreign companies operating their business or transaction in Nepal before the commencement of the Ordinance. The Ordinance came into force on the 23 rd of Ashoj (9 th October, 2005). So, the deadline was 23rd Chaitra (5 th April, 2006).

If a foreign company does not comply with the registration requirement of the Ordinance, it or its directors, staffs or authorised representative is subject to punishment—a fine of Rs 50,000 or imprisonment upto two years or both in maximum.

3.2 Registration Fee

The registration fee for foreign companies operating business or transaction in Nepal and establishing contact office has been differently fixed. The government has fixed the fee by notification in the Nepal Gazzette on 27 th , Mangsir 2062 (12 th , December, 2005).

a. Registration fee for foreign companies operating business or transaction in Nepal

The government has fixed the registration fee on the basis of the amount that a foreign company intends to invest in Nepal, which is as given in the accompanying box.

b. Registration Fee for foreign companies establishing contact office Rs 50,000

3.3 Documents to be Filed

A foreign company should file the following documents with the Office of Company Registrar for the registration:

I. The approval letter entitling foreign company to do business or operate transaction in Nepal.

II. Photocopies of the charter, statutes or memorandum and articles of association of the company and their Nepali translation. These documents should be certified pursuant to the law of the country where the company has been incorporated.

III. Name and address of the registered office of the company and its principal place of business, its date of incorporation, issued capital and principal objectives.

IV. Full name, address and details of citizenship of the director, manager, company secretary or other chief officials of the company.

V. Name and address of the authorised representative of the company.

VI. Full details of address of the company’s principal place of business and its registered office in Nepal.

VII. If the company intends to conduct business in Nepal, the details of transaction, proposed investment and date of commencement of its business.

VIII. Declaration of the director’s or his authorised representative on his behalf testifying the genuineness of the submitted documents.

IX. Power of attorney.

The foreign companies should submit altered particulars in the above-mentioned documents to the Office within 35 days from the date of such alteration.

4. Scope of Operation

The foreign companies are entitled to conduct the same nature of business in Nepal as permitted in its country of incorporation or where its registered office is situated. They cannot issue shares or debentures in Nepal.

5. Accounts and Audit Requirement

A foreign company operating business in Nepal like any company incorporated in Nepal should comply with the entire account and audit requirement. Such foreign companies are required to file audited annual financial statements including profit and loss account and balance sheet relating to its business activities or operation in Nepal within six months from the date of closure of financial year. Additionally, they should also submit the financial statements prepared pursuant to the law of the country of its incorporation or principal place of business within three months from the date of final preparation of such statements. If the statements are in languages other than English or Nepali, the authentic translation in Nepali or English is necessary.

A foreign company establishing a contact office and not carrying on transaction in Nepal should submit audited income and expenditure account within three months of the closure of financial year. The income and expenditure account must contain the particulars of money expended in remuneration and allowances paid to the staffs of the contact office, office rent or other expenses and details of tax deduction.

If the foreign company defaults in submitting those returns within the statutory time limit, its director or officials are subjected to the provision of “automatic fine” imposed by the Registrar under section 81 of the Ordinance. The Ordinance has fixed the amount of fine on the basis of the paid-up capital of the company and it goes increasing with delay.

6. Authorised Representative and His Responsibilities

A foreign company should appoint an authorised representative in Nepal to receive any process, notice or other documents on behalf of the company. The authorised agent is also entitled to receive notice of the court process, summons in any suit filed by the company or filed against it. Such notice or documents is deemed to be duly served to the foreign company if it is served to the authorised agent. Only the persons residing in Nepal can be appointed as an authorised representative. The name and address of such agents should be filed with the Office at the time of the registration of the company. So, it is necessary that the correct details including full name and address of such representative and any change in them is provided to the Office in time. The form and other related contents of such authorisation should be in accordance with the law of the country where the company was incorporated or where the company has its registered office.

The authorised representative has a number of responsibilities. In addition to the above-mentioned responsibilities of receiving notice, process or documents and timely notifying to the company, he should immediately notify the Office in writing if any proceeding of insolvency was initiated against the company in any other jurisdiction. As discussed above, an authorised representative may also be subjected to punishment for not complying with the provisions of the Ordinance.

7. Winding-Up

A foreign company can opt for voluntary winding-up if it is capable of settling all its trading debts incurred in Nepal. It can also be subjected to forced liquidation by the order of the authority of Nepal.

If the assets of foreign companies in Nepal fall short in satisfying all its debts and liabilities, then it should clear up its liabilities from its assets situated in any other jurisdictions. The authorised representative appointed by the foreign company has the responsibility of immediately informing the Office if the proceeding of liquidation against the company has been initiated in any other jurisdiction. It has to stop its transaction in Nepal or close its office if the company has been declared insolvent in any other jurisdiction. The prevailing insolvency legislation of Nepal governs the matters of insolvency to the extent of the transactions carried on or business operated in Nepal.

8. Conclusion: Some Practical Problems

The Ordinance can be appreciated, for it encompasses the foreign companies operating in Nepal under its regulatory regime. But there are still scope for further improvement and clarity. For the purpose of registration in Nepal, the Ordinance required foreign companies to submit to the Office the permission issued by the government authority of Nepal to conduct business in Nepal. But there is no general legislation prescribing the government authority from which the approval is to be obtained. There are scattered legislation requiring the approval of the regulator and some other line agencies to invest in Nepal i.e. in particular sectors such as insurance, banking and financial services and industries. But there is no general law specifying a particular government authority to grant permission to the foreign companies willing to operate branch or set up contact office.

The Ordinance, therefore, should contain a general provision in order to remove such practical problems. If the existing law does not specifically provide on the matter of permission, the Nepal Rastra Bank should be given the authority to grant permission to those foreign companies repatriating foreign currencies from Nepal. Other foreign companies establishing contact offices in Nepal and not repatriating foreign currencies from Nepal should be exempted from the obligation to obtain such permission if other general laws do not provide anything.

The Ordinance is not clear on what happens if a foreign company establishing contact office intends to conduct business in Nepal or vice-versa? Does the company need to be registered again? The Ordinance should also contain specific provision on such change in registration regime. Such provisions are also necessary to avoid the burden of submitting the same incorporation documents and other related documents again to the Office. It is better to have a provision in the Ordinance requiring the filing up of only additional documents, if any and the permission of the government authority if required by the prevailing law.

(Upreti is an Advocate and presently involved in corporate law awareness building program launched by FNCCI-CFG Project supported by Asian Development Bank. Narayan Chaulagain's assistance in preparing this article is appreciated.)