Dean's Office Official Model Question Paper

Definition and Sources of Business Law

Business Law is the aggregate of legal rules, statutes, customs, and judicial precedents governing commercial relationships, business transactions, corporate formation, and financial dealings between trading parties.

Two Major Sources in Nepal:

1. Statutory Legislation: Enacted Acts of the Federal Parliament (e.g., Muluki Civil Code 2074, Company Act 2063, BAFIA 2073).
2. Judicial Precedents (Stare Decisis): Binding rulings and interpretations established by the Supreme Court of Nepal.

Agreement vs. Contract

• Agreement: Every promise and every set of promises forming the consideration for each other (Offer + Acceptance). An agreement may or may not be legally enforceable.
• Contract: An agreement enforceable by law (Section 503 of Muluki Civil Code, 2074). All contracts are agreements, but not all agreements are contracts.

Meaning of Free Consent

Consent is said to be free when two or more parties agree upon the same thing in the same sense (consensus ad idem) without any unlawful external interference.

Factors that Vitiate Free Consent:

1. Coercion (Physical duress)
2. Undue Influence (Moral/psychological dominance)
3. Fraud (Intentional deception)
4. Misrepresentation (Innocent untrue statements)
5. Mutual Mistake of essential fact.

Contract of Indemnity

A contract of indemnity is a promise whereby one party promises to save and protect the other party from loss caused to him by the conduct of the promisor himself or by the conduct of any other person (Muluki Civil Code 2074).

Parties Involved:

1. Indemnifier: The promisor who undertakes to make good the financial loss.
2. Indemnity-Holder (Indemnified): The promisee whose loss is covered.

Bailment vs. Pledge

• Bailment: Delivery of goods by one person to another for some specific purpose upon a contract that the goods shall be returned when the purpose is accomplished (e.g., giving a suit to a dry cleaner).
• Pledge (Pawn): A specialized species of bailment where goods are delivered specifically as security/collateral for the payment of a debt or performance of a financial promise.

Doctrine of Separate Legal Entity

Under Section 8 of the Company Act, 2063, an incorporated company is an autonomous artificial legal entity distinct from its individual promoters, directors, and shareholders (Salomon v. Salomon & Co.). It has perpetual succession, a common seal, and the legal capacity to hold property, incur debt, sue, and be sued in its own corporate name.

Four Powers and Duties of Directors

1. Formulate corporate strategy, operational policies, and annual business budgets.
2. Call and organize Annual General Meetings (AGM) and Extraordinary General Meetings (EGM).
3. Maintain accurate statutory books of accounts and prepare annual financial statements.
4. Appoint senior executive officers (CEO/General Manager) and implement internal control systems.

Primary Objectives of BAFIA, 2073

1. To protect the financial rights and deposits of the general public.
2. To maintain sound fiscal and financial sector discipline and stability across licensed banks.
3. To regulate corporate governance, lending norms, and capital adequacy of Class ‘A’, ‘B’, ‘C’, and ‘D’ BFIs.
4. To foster healthy competition and expand inclusive financial outreach across Nepal.

Four Major Banking Offences in Nepal

1. Drawing an unauthorized cheque without sufficient funds in the bank account (cheque bounce).
2. Obtaining loans using fraudulent collateral, forged land ownership certificates, or artificial asset valuations.
3. Misappropriating or embezzling bank funds by board directors, employees, or managers.
4. Operating unauthorized banking business or creating counterfeit electronic payment instruments.

Role of Nepal Insurance Authority (Nepal Beema Pradhikaran)

Established as the supreme autonomous regulator under the Insurance Act, 2079, the Authority is empowered to regulate, supervise, license, and monitor life, non-life, and reinsurance companies, protect policyholders’ interests, resolve claim disputes, and ensure solvency margins in the insurance sector.

Essential Elements of a Valid Contract

Under the Muluki Civil Code, 2074, a legally binding contract requires:

1. Offer and Acceptance: A definite, unambiguous proposal accepted unconditionally.
2. Lawful Consideration: Something of legal value exchanged between the parties (quid pro quo).
3. Capacity of Parties: Parties must be of the age of majority (18 years) and sound mind.
4. Free Consent: Consent given voluntarily without coercion, undue influence, fraud, or mistake.
5. Lawful Object & Purpose: The agreement must not be illegal, immoral, or opposed to public policy.
6. Intention to Create Legal Relations: Genuine intent that legal consequences attach upon failure.

Legal Remedies for Breach of Contract

1. Rescission of Contract: The aggrieved party is discharged from all remaining obligations.
2. Suit for Damages: Monetary compensation for pecuniary losses arising naturally:
   • Ordinary Damages: Natural market-price differential losses.
   • Liquidated Damages: Pre-agreed contractual penalty sums.
3. Specific Performance: A judicial decree compelling the defaulting party to execute the exact terms agreed upon.
4. Injunction: A court order prohibiting a party from committing an unauthorized or wrongful act.
5. Quantum Meruit: Claiming reasonable compensation for the proportionate work already executed.

Legal Procedure for Company Incorporation in Nepal

1. Name Reservation: Apply to the Office of the Company Registrar (OCR) online for corporate name approval.
2. Drafting Constitutional Documents: Prepare the Memorandum of Association (MOA) outlining capital and objectives, and the Articles of Association (AOA) detailing internal governance rules.
3. Submission of Application: Submit signed MOA, AOA, promoters’ citizenship copies, and consent letters to the OCR.
4. Scrutiny & Registration Fee: OCR examines documentation compliance and calculates statutory registration fees.
5. Issuance of Certificate of Incorporation: OCR issues the official legal certificate of incorporation.

Powers and Functions of SEBON under Securities Act, 2063

1. Market Regulation & Registration: Registering securities offerings (IPOs, FPOs, debentures) and approving issue prospectuses.
2. Licensing Intermediaries: Granting operating licenses to stock exchanges, clearing houses, depository participants, and merchant banks.
3. Investigation & Enforcement: Power to summon persons, inspect records, freeze suspicious demat accounts, and impose monetary fines.
4. Investor Education & Policy Formulation: Recommending capital market policy reforms to the Ministry of Finance.

Classification of BFIs under BAFIA, 2073

1. Class ‘A’ Commercial Banks: Minimum paid-up capital of Rs 8 Billion; authorized for comprehensive retail, corporate, and international forex trade banking.
2. Class ‘B’ Development Banks: Minimum capital of Rs 2.5 Billion (national level); focuses on regional agriculture, infrastructure, and commercial financing.
3. Class ‘C’ Finance Companies: Minimum capital of Rs 800 Million; specialized in consumer credit, leasing, and hire-purchase loans.
4. Class ‘D’ Microfinance Financial Institutions (MFIs): Dedicated to collateral-free poverty alleviation and rural microcredit.

Major Provisions of Anti-Money Laundering Act, 2064

1. Criminalization of Money Laundering: Prohibits converting or transferring assets acquired through illegal criminal predicate offences.
2. Customer Due Diligence (CDD / KYC): Mandates all reporting entities (BFIs, insurance firms, merchant banks) to identify and verify beneficial owners.
3. Threshold and Suspicious Transaction Reporting (TTR/STR): Obligation to report cash transactions exceeding statutory thresholds and suspicious transactions to the Financial Intelligence Unit (FIU-Nepal).
4. Freezing & Forfeiture: Empowers authorities to freeze, seize, and confiscate tainted property.

Arbitration as an ADR Mechanism in Nepal

Governed by the Arbitration Act, 2038 / 2055, arbitration provides an efficient extra-judicial mechanism for commercial dispute settlement:

1. Arbitration Agreement: Parties contractually agree in writing to submit disputes to private neutral arbitral tribunals.
2. Confidentiality & Speed: Avoids public court delays and maintains corporate commercial confidentiality.
3. Technical Expertise: Parties can select arbitrators with specialized industry expertise in banking, finance, or engineering.
4. Enforceability: Arbitral awards have the binding legal force of a court decree and are executable by District Courts.

Legal & Regulatory Framework of Banking Regulation in Nepal

1. Statutory Powers of Nepal Rastra Bank (NRB Act, 2058):

• Sole issuer of currency notes and legal tender in Nepal.
• Formulates and executes national monetary, liquidity, and credit policies.
• Regulator and supervisor of all bank and financial institutions with autonomy.

2. Regulatory Norms under BAFIA, 2073:

• Prudential Capital Adequacy: Implementation of Basel III capital framework (Common Equity Tier 1 and total capital adequacy ratio of minimum 11%).
• Credit Exposure & Single Borrower Limits: Limits maximum aggregate fund-based and non-fund-based credit to a single corporate group to prevent concentration risk.
• Asset Classification & Provisioning: Mandatory provisioning against non-performing loans (Pass, Watchlist, Substandard, Doubtful, Loss).

3. Supervisory Enforcement Mechanisms:

• On-Site Inspection: Direct periodic field inspection of credit files, IT systems, and liquidity records.
• Off-Site Surveillance: Continuous electronic monitoring of daily liquidity and monthly returns.
• Corrective Action & Prompt Sanctions: Capping dividend distributions, barring branch expansion, imposing financial fines on board directors, or appointing central bank management teams in troubled institutions.

Protection of Minority Shareholders under Company Act, 2063

1. Statutory Corporate Governance Protections:

1. Right to Information and Inspection: Shareholders have the right to inspect shareholder registers, minutes of general meetings, and audited accounts.
2. Calling Extraordinary General Meetings (EGM): Shareholders holding at least 10% of paid-up voting shares can requisition an EGM.
3. Class Action and Derivative Lawsuits: Minority shareholders can file legal petitions in the High Court against directors who commit acts of fraud or breach fiduciary duties.
4. Remedy Against Oppression and Mismanagement: Under Section 138, if the company’s affairs are conducted in a manner oppressive to minority interests, the court can order the majority to purchase minority shares at fair market value.
5. Audit Committee Mandate: Public companies must establish an independent Audit Committee headed by an independent non-executive director.

Contract Formation, Electronic Execution, and Discharge in Nepal

1. Electronic Contract Formation (ETA, 2063):

• Contracts formed through digital data messages, email exchanges, and electronic signatures possess full legal evidentiary validity.
• Time and place of dispatch and receipt of electronic records are legally recognized.

2. Modes of Contractual Discharge:

1. Discharge by Full Performance: When both parties perform their agreed contractual promises.
2. Discharge by Mutual Consent (Novation, Rescission, Alteration): Substituting a new contract or releasing obligations mutually.
3. Discharge by Impossibility of Performance (Doctrine of Frustration): Destruction of subject matter or change in law rendering performance impossible.
4. Discharge by Operation of Law: Insolvency, merger, or death of personal service contractors.
5. Discharge by Breach: Anticipatory or actual failure to perform triggering rights to damages.