- the Companies Act section for a consensus agreement
- 145
- directors in a public company board
- 3 to 11
- of assets, the related party test set for public companies
- 5%
- documents to put in place first
- 6
Almost every established business in Nepal is a family business. The structure is usually the same: one or two founders who built the company, siblings or cousins who joined along the way, a spouse who signs cheques, and a second generation who studied abroad and came back with different expectations. Decisions are made over tea, approvals are verbal, and the accounts are what the accountant produces at year end for the auditor.
This works, and it works for longer than outsiders expect, because trust is genuinely efficient. Nobody has to document a decision that everybody already agrees with. The problem is that the arrangement has no answer for the day somebody disagrees, or dies, or wants their money out, or when a lender, an investor or the Inland Revenue Department asks a question that trust cannot answer.
When does informal governance actually break?
In our experience the breaking point is rarely a family argument on its own. It is an external event that exposes the absence of rules.
The common triggers are a bank moving the company from an overdraft to a term loan and asking for audited numbers and board minutes; a second generation entering the business with no agreed role or authority; the first senior manager hired from outside the family, who finds that nobody can tell them what they are allowed to approve; a foreign or institutional investor conducting due diligence; a death or illness with no documented share succession; and an IRD assessment that questions payments made to family members.
Each of these asks the same question in a different language: who in this company has the authority to decide, and where is that written?
What does Nepali company law already give a family company?
A great deal, and more flexibly than most owners realise. The Companies Act, 2063 treats a private company as something the shareholders may largely design for themselves.
The central provision is Section 145, the consensus agreement: an agreement made unanimously by all the shareholders of a private company about how the company is run. Subject to the rest of the Act, it may deal with:
| What the consensus agreement may cover | Why it matters to a family company |
|---|---|
| The management and conduct of the business | Fixes who runs the company day to day, rather than leaving it to seniority |
| Restrictions on the transfer of shares | Stops shares drifting to in-laws, creditors or outsiders |
| The right of one or more shareholders to wind up the company | A deliberate, agreed exit route instead of a deadlock |
| Voting rights | Lets a founder keep control while sharing value |
| Terms of service of staff and officers | Family members employed in the business get defined roles |
| Who serves as director or chief executive | Removes the annual argument about titles |
| Whether the company has a board at all, and who performs its functions if not | Avoids a paper board that never meets |
| Whether an annual general meeting is required | See Section 148 below |
| The method of paying dividends and the classes of shares | Separates working family members from passive ones |
Two features make it unusually strong. It can be amended only with the written consent of all the parties to it, so it cannot be rewritten by whoever holds a majority at the time. And a person who receives shares by gift or donation, or who acquires shares knowing the agreement exists, is treated as having consented to it and become a party. In a family company where shares move by gift between generations, that second feature is exactly what keeps the rules intact as ownership passes down.
Section 148 completes the picture: while a consensus agreement that says so is in force, a private company is not required to hold its annual general meeting. The condition is that the agreement must then set out how the matters that would normally go to a general meeting will be decided, and who has the authority to decide them. The law will let you skip the ceremony, but not the decision rule.
On the board itself, Section 86 leaves the appointment and number of directors of a private company to its articles of association. The three to eleven director range, and the requirement for independent directors, apply to public companies. A family private company is free to design a board of two, three or five, and should design it on purpose.
Where do family companies actually get hurt?
Not usually in the constitution. They get hurt in the cash.
Money taken out as a loan. Section 101 prohibits a company from making a loan or providing financial assistance to its officers, substantial shareholders, shareholders of its holding company, or their close relatives, and from guaranteeing or securing their borrowings from others. The exceptions are loans and facilities provided to employees under the company's own rules, and lending by banks and financial institutions in the ordinary course of business. Yet the single most common entry we see in a Nepali family company's trial balance is a director's or proprietor's loan account that grows every year. It is usually not a planned loan at all: it is household spending paid from the company's bank account, recorded as a receivable because nobody decided what else to call it.
Transactions with the family's other businesses. Most Nepali groups are a cluster of companies and firms with overlapping owners: the trading company buys from the family's import firm, rents the family's building, and pays a management fee to the holding entity. Section 93 requires a public company to obtain general meeting approval before entering a meaningful transaction with its directors, their close relatives, its basic shareholders, or firms and companies in which those people hold basic shares. It defines a meaningful transaction as the purchase, sale or lease of goods or services worth more than one lakh rupees or five percent of total assets, whichever is less, or annual turnover of one lakh twenty thousand rupees or more. Where a transaction breaches the rule, the benefit must be refunded and the person who gained is liable for any loss.
A private family company is not bound by Section 93. We still treat its threshold as the right internal benchmark, because it is the standard the law considers material, and because an assessing officer or a due diligence team will ask the same question: was this related party transaction priced the way an unrelated party would have priced it, and who approved it?
The books themselves. Section 108 requires every company to keep accounts in Nepali or English, on a double entry basis, following the applicable accounting standards, so that they clearly show the company's actual affairs. Cash above the limit the board sets must be deposited in a bank and transactions routed through the bank. And the directors or other officers carry the final responsibility for maintaining the books. In a family company this last point is the one nobody has internalised: the accountant prepares the records, but the family member who signs is answerable for them. For how this plays out in day to day control, see why growing businesses need better internal controls.
How should a family board actually run?
A workable family board in a Nepali private company does not need to meet monthly or produce a hundred page pack. It needs four things.
A fixed calendar. Four meetings a year is enough for most: one to approve the annual accounts before the auditor finalises them, one to approve the next year's budget and any capital spending, and two to review performance. Fixing the dates a year ahead is what makes the meetings happen.
A reserved matters list. A short, written list of decisions the family does not delegate: borrowing above a stated amount, giving a guarantee, buying or selling land, hiring or paying a family member, any related party transaction above the internal threshold, and any distribution. Everything not on the list belongs to management.
Minutes that record the decision and the reason. One page is plenty. Minutes are what a bank, an auditor and a court can read; conversation is not. They are also the only defence for a transaction an assessing officer later queries.
One voice from outside the family. Not necessarily an independent director in the statutory sense, which the Act requires only of public companies. A professional adviser who attends the accounts and budget meetings is often enough to change how the conversation is conducted.
A worked example
Consider a Kathmandu trading company owned by two brothers, with annual turnover of NPR 120,000,000 and total assets of NPR 60,000,000. The elder brother runs operations and draws NPR 400,000 a month from the bank account for household and business expenses together. The younger brother manages purchasing and draws less. The company rents its warehouse from a partnership owned by the family and pays NPR 350,000 a month.
Under the public company benchmark in Section 93, the related party test would be the lower of one lakh rupees and five percent of total assets. Five percent of NPR 60,000,000 is NPR 3,000,000, so the applicable figure is NPR 100,000 and the warehouse rent is far above it. The rent may well be entirely reasonable, but nothing in the file shows how the amount was set or who approved it.
Three documented decisions change the position. First, the elder brother's drawings are split into a salary of NPR 250,000 a month, run through payroll with tax withheld, and a dividend declared on both brothers' shareholdings, with the balance of the loan account cleared against it. Second, the warehouse rent is supported by a written lease and a note of comparable rents in the area, approved in minuted board resolution. Third, a reserved matters list is adopted so that the next lease, guarantee or family salary comes to the board before it is paid. None of this costs the family anything in substance. It changes an unexplained set of cash movements into a defensible record, which is what a lender asks for and what an assessment is won or lost on.
How do tax and succession interact?
Two points matter more than any other at the moment of transition.
The first is the loss carry forward trap. The Income Tax Act, 2058 treats a substantial change in the ownership of an entity as a disposal event: where ownership changes by fifty percent or more compared with its position three years earlier, accumulated losses cannot simply be carried forward past that point. A family restructuring, a gift of shares to the next generation or the buyout of a sibling can cross that threshold without anybody intending a tax consequence. If the company has losses worth preserving, the sequence and timing of the transfers are not administrative details. We cover the mechanics in restructuring a loss making company in Nepal.
The second is that succession is a valuation problem before it is a tax problem. The question of what a departing family member's shares are worth, and on what basis, is the one families postpone and then cannot answer under pressure. A pricing mechanism agreed in advance, written into the consensus agreement, is worth more than any later negotiation. Our notes on valuing a partner's share when they want out and on selling a family business in Nepal set out the approaches commonly used.
Where the next generation is being brought in as managers rather than simply as heirs, a share scheme is sometimes a better instrument than an outright gift. The position under Nepali law is set out in employee share schemes in Nepal.
What are the six documents to put in place first?
If a family company does nothing else this year, these are the six, in order of return.
Articles of association that match reality. Most were filed at incorporation from a template and say nothing the family would recognise. The articles decide the appointment and number of directors of a private company, so they are the first thing to align.
A consensus agreement under Section 145. Signed by every shareholder. It should at minimum cover the management structure, restrictions on share transfer, how general meeting matters are decided if the AGM is waived, dividend policy and a share pricing mechanism on exit.
A reserved matters list, adopted by board resolution and kept to one page.
A board calendar and minute book, with four dated meetings and a standing agenda.
A related party register: every transaction with a family member, family firm or family-owned property, with the amount, the basis of pricing and the approval reference.
A written remuneration decision for every family member in the business, distinguishing salary for work done from return on ownership.
None of these requires new law, a new structure or a new shareholder. They require one afternoon of decisions and somebody to write them down.
Frequently asked questions
Does a private family company in Nepal have to hold an annual general meeting?
Not if a consensus agreement in force says it will not be held. Section 148 of the Companies Act, 2063 waives the requirement in that case, provided the agreement also states how the matters that would go to a general meeting will be decided and who decides them.
How many directors must a family private company have?
The Act leaves the appointment and number of directors of a private company to its articles of association. The range of three to eleven directors, and the requirement to appoint independent directors, applies to public companies under Section 86.
Can the company lend money to a director or shareholder?
Section 101 prohibits a company from making loans or providing financial assistance to its officers, substantial shareholders, shareholders of its holding company or their close relatives, and from guaranteeing their borrowings, with exceptions for facilities provided to employees under the company's rules and for banks and financial institutions lending in the ordinary course of business. In practice this means the common director's loan account should be turned into a proper salary or dividend decision rather than allowed to accumulate.
Do related party transaction approvals apply to private companies?
Section 93 imposes the general meeting approval requirement on public companies. A private company is not bound by it, but its threshold, more than one lakh rupees or five percent of total assets, whichever is less, is a sensible internal benchmark, because it is the level the law treats as material and the level at which a lender or an assessing officer will ask how the price was set.
Can a consensus agreement be changed by a majority of the family?
No. It may be amended only with the written consent of all the parties to it. That is what makes it a protection for a minority family shareholder rather than just a statement of current practice.
What happens when shares pass to the next generation?
A person who acquires shares by gift or donation, or who acquires them knowing that a consensus agreement exists, is treated as having consented to that agreement and become a party to it. The governance rules therefore survive the transfer, which is one of the strongest reasons to put them in place while the founding generation still holds the shares.
Where we help
We work with Nepali family companies on the governance papers themselves, on separating family drawings from salary and dividend, on building a related party register that survives an assessment, and on the internal controls that let a non-family manager be given real authority. We provide support and assistance on internal audit and control reviews; we do not perform statutory audits. If the trigger has already arrived, a bank asking for minutes, a sibling asking for a valuation, a notice asking about a payment, that is the right moment to start. See internal audit and control support or get in touch.
General information only, not advice.
