Section -297: Requirement of Board sanction for contracts in which Directors are interested

Parties to contracts:

As per sec.297(1), contract by the company with any of the following –

i.      Any Director

ii.      relative of director

iii.      Partnership firm in which director is a partner

iv.      Any partnership firm in which relative of director is partner

v.      Any partner of the partnership firm in which director is a partner

vi.      Any partner of the firm in which in which relative of director is a partner

vii.      Any private company in which director is member/director.

Section 297 does not make any allowance on the basis of shareholding of director. Therefore, even if the shareholding is negligible, the contract with such private company would attact the provisions of section 297.

Even if director holds only preference shares in the contractee private company, nevertheless the section attracted because holder of preference share is also a member.

Types of contracted covered by sec.297:

Ø  Contracts for the sale, purchase or supply of any goods, materials or services;

Ø  For underwriting the subscription of any shares in or debentures of the company.

Sec 297 does not apply to the sale or purchase of immovable property. However contracts of provision of services relating to immovable property e.g. leasing of flat or land etc. it may be held that these transactions attracts sec.297. However CLB clarified that a proposal for taking on rental, premises for the office, is not covered by sec.297 since this section does not apply to transactions of immovable properties.

This section applies only to supply of service not to rendering of service. Hence this section is not applicable for contract of employment of a director as MD/WTD.

Central Govt. approval is not required if contract is entered before the company crosses the paid-up capital limit of Rs. 1 crore and crossed after the execution of the contracts. Because provision clearly says that “ no such contract shall be entered into”. Hence the provision has no retrospective operation.

Applicability

Ø  Transactions b/w pubic & pvt. Co., public company has comply

Ø  Transactions b/w private cos, both have to comply

Ø  Transactions b/w both public cos, not applicable.

Exemption:

Exemption u/sec.297(2)(a)  available only for the contract for purchase & sale of goods or materials. Hence exemption is not available for contracts for –

Ø  Supply of goods & materials

Ø  Contract of service (irrespective of the value involved)

Exemption u/s 297(2)(b) is available all category, for transactions upto Rs.5000/-  per year. The word “regularly” used in this section is of significance. If it is not of the regular business of the party to deal, trade or do business in the goods , materials or providing services, then, this exemption is not available.

Central Govt.s power is delegated to Regional Director.