Internal Control and Monitoring Directive, 2080

The Office of the Company Registrar, pursuant to the authority provided under Section 16 of the Company Act, 2063 (2006), has issued the Internal Control and Monitoring Directive, 2080 (2023) on 16 Kartik 2080 (2 November 2023).

The Directive, which came into effect immediately, aims to enhance the quality of services provided by the Office in the company registration and administration process.

Its objectives include holding companies accountable and responsible for compliance with prevailing laws related to the Company Act and company administration, and developing the capacity of the Office as a regulatory body, bolstering the overall credibility of company administration in Nepal. In this article, we set out what the Directive requires, which companies it reaches, and what the Office can do with its findings.

Background

Throughout this note, the Office of the Company Registrar is referred to as the “Office”, the Company Act, 2063 (2006) as the “Act”, the Registrar of the Office as the “Registrar”, and the Internal Control and Monitoring Directive, 2080 (2023) as “Directive 2080”.

What Is the Internal Control System?

The internal control system is implemented by the Registrar in order to fulfil the objective provided in the preamble of the Directive. This system is implemented to ensure compliance with the law in the context of work performed by employees of the Office, and by company directors and officers who use the delegated authority from the Registrar for works related to company registration and administration. (Section 3 of Directive 2080)

The following are the specific areas where the Office intends to implement the internal control system (Section 4 of Directive 2080):

• In terms of company registration and administration, to verify whether the officers and employees of the Office have complied with the Act, prevailing company laws and delegated authority.
• Re-examine the calculation of fees related to company registration and administration, as well as fines applicable to company directors.
• Ascertain whether the company and its directors have adhered to the Act and prevailing company laws.
• Validate the authenticity, quality, and reliability of the information provided in documents submitted on behalf of the companies.
• Evaluate whether the company and its directors have adhered to the values of corporate governance prescribed by the Act and prevailing laws.

Selection of Companies for Internal Control

To ensure the effective implementation of the internal control system, the Registrar may select companies for internal control through one or all of the following methods (Section 5 of Directive 2080):

• Verify and re-examine the assessment of fees and fines calculation, as well as identify any shortcomings in the service delivery process within the Office. This thorough verification process will be conducted on a sample of companies, selected in a specific proportion to the overall companies registered, administered and serviced by the Office.
• Study and examine the data and records of specific categories of companies, or companies registered for specific purposes, or based on information obtained from any source deemed necessary by the Office.
• Study and research the data and records of a specific company based on information received from any source, including law enforcement entities or a government office.

Responsibilities and Compliance Requirements

The periodic timeframe for conducting internal control work will be determined by the Registrar, along with the specified time and conditions. (Section 6)

The Registrar may incorporate a risk-based approach to implement the internal control system on selected companies. (Section 7)

The Registrar may delegate the responsibility of carrying out the internal control work under Section 5 to a designated branch head or authorised employee, along with the necessary support staff and resources, forming one or more task forces. (Section 8)

Company directors shall be accountable for irregularities in the operation and administration of companies. Such accountability must be borne jointly and severally by all the directors and office-bearers of the company, including the chairman. (Section 9)

It shall not be required for the Office to disclose the findings and observations from the internal control study of the concerned company, except when it is necessary to verify the accuracy of the information collected through the study, or when clarification is needed from the company or its directors. (Section 10)

Inspection and Monitoring

In instances where it becomes necessary to furnish information from the concerned company as per Section 10, the company may be informed, along with keeping the company in remarks or freezing it. (Section 11)

The Office should give an opportunity to be heard to the company and its directors before initiating any action. Additionally, if an opinion, response, clarification or answer is requested from the company or the director, there is no need to provide an opportunity for re-hearing, but further clarification may be requested to bring the investigation to a conclusion. (Section 12)

While conducting internal control work, the Office may deem it necessary to focus on the related company, or involve the company or its director to confirm or refute the facts obtained during the study. If the company under investigation has invested in, or is involved in the operation and management of, another company, or if another company has invested in the company under investigation, an investigation will also be carried out on the additional company. (Section 13)

The Office shall monitor companies on the following subject matter (Section 18):

• Compliance with the prevailing laws and directives in the operation and management of the company.
• Investigate permission obtained from the relevant authorities.
• Study and monitor the company registration and administration-related documents in the company’s registered office, in the case of a company approved by the regulatory body.
• Monitor the activities of companies that are registered for a specific purpose, and study the documents present in the company’s registered office, in the case of a company which has not obtained approval from regulatory authorities.
• Monitor the activities of companies that operate contrary to their stated purpose, or have engaged in business without registration.

The Registrar shall establish a separate branch for monitoring companies. Until such a branch exists, one or more monitoring teams can be formed, led by any officer of the Registrar with the necessary resources provided. The designated monitoring officer is required to submit a monitoring report to the Office within the stipulated time. (Section 19)

The Office can seek assistance from the Local Level, Local Administration, or licensing and regulating bodies of the Federal, Province or Local Level, which are compatible with the nature of the work. (Section 20)

Reporting Format

The Registrar could adopt the following methods in the implementation of a report or recommendation arising from the study or investigation of the internal control system. (Section 15)

In the Case of an Employee

• In the case of government employees, proceed with the action in accordance with the Civil Service Act, 2049, its Rules and other applicable laws.
• In the case of an employee covered by the Service Contract Directive, action shall be taken according to the conditions mentioned in the contract, or the contract may be terminated.
• In the case of an assisting employee deployed under a contract made by the Office, necessary and appropriate actions shall be carried out as stated under the contract or prevailing laws, or the contract made with the Office may be terminated and the entity or company blacklisted.
• Send a written complaint to the concerned authority to investigate the matter of misuse of delegated authority by an employee.

In the Case of Companies

• Make them submit the remaining documents for improvement of records.
• Initiate the process of reapplication for any exempted fines and penalties.
• Provide necessary direction to the directors and officers of the company as per Section 120 or Section 178 of the Act.
• Void the records as per Section 180 of the Act.
• File a case in court as per Section 159, with the claim mentioned in Sections 160, 161 and 162 of the Act.
• Recommend investigation and action to the law enforcement authority established as per prevailing law.
• In the case of a company or trust service provider, take appropriate action as per the condition of the license.
• In the case of a professional, businessperson or individual involved in presenting the company accounts, documents and details for preparation and record, write a letter to the concerned regulatory body for action.

The information related to actions taken against any company can be disclosed to the concerned approving governmental body of the company and any other concerned stakeholders. (Section 16)

The information on the actions taken against companies, as per study and investigation under the Directive, shall be notified to licensing, regulating and other concerned bodies. (Section 17)

Implementing the Monitoring Report

The Office can implement the Monitoring Report in the following ways (Section 21):

• The Office can issue a direction for the closure of any company, or quash the license of a company that has operated in contravention of the objectives of the company, or that has not obtained any necessary permission required to commence its operation.
• If directed to close the business or company, the Office can provide sufficient time for the appointment of a liquidator, and for the liquidator to perform the necessary work according to the law.
• Other matters under the Monitoring Report shall be as per the prevailing law and directives.

Directive 2080 Section Reference

The provisions of Directive 2080 referred to in this note, and the subject each one covers.

Key Contacts

If you have any questions or would like to know how this might affect your business, get in touch with Dechen Gurung, Attorney at Law, Senior Associate, or Nikhil Dongol, Attorney at Law, Associate. You can also contact the firm directly, or read more about our regulatory and transactional advisory and internal control and management advisory services.

Disclaimer: this publication is not intended to be used as a basis for undertaking any significant transactions, financial or otherwise, without consulting appropriate professional advisers.

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