Tuesday, October 18, 2011

Transactions under Section 297 of the Companies Act, 1956: A Brief Analysis


Transactions under Section 297 of the Companies Act, 1956: A Brief Analysis

By this article I attempted to elaborate and interpretation Section 297 of the Companies Act, 1956, which deals with ‘Board’s sanction to be required for certain contracts in which particular directors are interested’.

What section 297 says (bare act):

(1)   Except with the consent of the Board of directors of a company, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company-

(a)    for the sale, purchase or supply of any goods, material or services; or

(b)    after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of, the company:

[Provided that in the case of a company having a paid-up share capital of not less than rupees one crore, no such contract shall be entered into except with the previous approval of the Central Government.]

(2)   Nothing contained in clause (a) of sub-section (1) shall affect-

(a)    the purchase of goods and materials from the company, or the sale of goods and materials to the company, by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices; or

(b)    any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for sale, purchase or -supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business.

Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract or contracts; or

(c)    in the case of a banking or insurance company any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company as aforesaid.

(3)   Notwithstanding anything contained in sub-sections (1) and (2) a director, relative, firm, partner or private company as aforesaid may, in circumstances of urgent necessity, enter, without obtaining the consent of the Board, into any contract with the company for the sale, purchase or supply of any goods, materials or services even if the value of such goods or cost of such services exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract; but in such a case, the consent of the Board shall be obtained at a meeting within three months of the date on which the contract was entered into.

(4)   Every consent of the Board required under this section shall be accorded by a resolution passed at a meeting of the Board and not otherwise; and the consent of the Board required under sub-section (1) shall not be deemed to have been given within the meaning of that sub-section unless the consent is accorded before the contract is entered into or within three months of the date on which it was entered into.

(5)   If consent is not accorded to any contract under this section, anything done in pursuance of the contract shall be voidable at the option of the Board.

(6)   Nothing in this section shall apply to any case where the consent has been accorded to the contract before the commencement of the Companies (Amendment) Act, 1960.

Sub-Section wise Analysis:

Sub-Section
Deals with
     297 (1)

Charging / Fixing responsibility to obtain consent of board for entering into contract
     297 (2)

Exemptions / Gateways


     297 (3) & (4)


Modus operandi for obtaining consent

     297 (5)

Consequences of not obtaining consent


It is now clear that Section 297 states about obtaining consent of the board of directors, for entering into certain contracts in which particular directors are interested. Thus, not every contract requires consent of the board, only those contracts in which directors are interested require the consent of board. It is to be noted that usually a contract is entered into with the approval of the board, or even with the authority of the Managing Director/CEO/VP, or with the sanction of the Management Committee. But, here the only way of getting sanction for the contracts (in which directors are interested) is board’s sanction.

Section 297 (1):

Board’s sanction is required if:
        i.            a director;

      ii.            or his relative;

    iii.            a firm in which such a director or relative is a partner;

    iv.            any other partner in such a firm ( ie; a firm as stated in (iii) above);

      v.            a private company of which the director is a member or director;

enters into a contract with the company (a) for the sale, purchase or supply of any goods, materials or services; or (b) for underwriting the subscription of any shares in, or debentures of the company.

Further, the board’s sanction to be supported by the PREVIOUS approval of the Central Government, if the company’s paid-up capital is not less than Rs.1 Crore.

Section 297 (2):

Exemption to board’s sanction - to the  contract for the sale, purchase or supply of goods, materials or services, ie: Section 297 (1) (a) doest not apply, to the following:

§  purchase / sale for cash at prevailing market prices; or

§  regular trade / business between the company and party (director etc.), up to Rs.5,000/- per annum for the contract period;

§  any transaction in the ordinary course of business (exemption only for banking / insurance company)

Section 297 (3) & (4):

The board should accord its sanction only through a resolution passed at a board meeting (ie; it should not be a circular resolution) before the contract is entered into or within three months of the date on which the contract was entered into (three months allowed only in the case of urgent necessity – sub-section (3)

If the board’s sanction is not obtained, either before the contract date or within three months (in urgent cases), it will be deemed that the board’s sanction is not obtained, under Section 297.

Section 297 (5):

This sub-section states the consequence of not obtaining board’ sanction, as stipulated under section 297. As per 297 (5), if the consent is not accorded to any contract, anything done in pursuance of the contract shall be VOIDABLE AT THE OPTION OF THE BOARD.


CRITICAL INTERPRETATION:

Now, we will go into few critical interpretation of Section 297.

Aspect
Interpretation
Consent of Board


Consent of board means ‘a consent throughresolution at a duly convened board meeting, and not by mere circular resolution.

Contract between a company and director / interested director / relative / firm / private company.


The, the section does not apply to a contract between two public limited companies, because the word used is ‘private company’. If the word used is ‘company’, then it may be interpreted as any type of company (public / private). Thus, the two parties of the contract must be 1st party -  any type of company, and 2nd party -  director / relatives / firm / private company. 

Any other partner in such a firm.


Section is attracted to the contract entered into by the company and any other partners, of the firm of in that the director / his relative are a partner.

Sale or purchase of any goods, materials or services.


Section does not apply to a contract of immovable property (eg: purchase of land, building etc.), because the terms used is goods, materials or services – all are movables.  Thus contract for movables only get attracted by the section, immovable properties contracts are excluded.

Exemptions under sub-section (2)


Exemptions are independent provisions, because the words “or” is used to separate the provisions.

Exemption to transactions in the ordinary course of business.


Exemption applies only to banking and insurance companies, and not for all companies.

Rs.5000/- Exemption limit.


Calculated on Annual Basis, only for the period of contract.

Effect on not obtaining consent of board.


Contract voidable at the option of the board, and not void (invalid). The contract is voidable ie; can be ratified by the board.


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11 comments:

Astik Mani Tripathi said...

good job. GOD Bless you dear.

Anonymous said...

Thanks Astik. I wish you all the best fro your practice

Devesh

Anonymous said...

Excellent. I feel it will be good help to many. thanks

Heena

Anonymous said...

Well presented.... keep it up !
Regards... Kishore Dewani

gulshangupta54 said...

hello sir this is gulshan, does this section applies to a director of a public company doing business with other public company in which relative of a director is the director of such another company..???

gulshangupta54 said...

hello sir this is gulshan, does this section applies to a director of a public company doing business with other public company in which relative of a director is the director of such another company..???

gulshangupta54 said...

hello sir this is gulshan, does this section applies to a director of a public company doing business with other public company in which relative of a director is the director of such another company..???

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