Search This Blog

Sunday, June 26, 2011

An analysis of Section 297 of the Companies Act, 1956

Applicability

This section is applicable to both Public as well as private companies. As per the section, the Company shall not enter into any contract without Board’s approval:

1.  For sale, purchase or supply of any goods, materials or services; or
2.  For underwriting of the subscription of shares in or debentures of the Company

With following parties

1.  Director
2.  Relative of Director
3.  Firm in which Director is a partner
4.  Firm in which relative of the Director is a partner
5.  Any partner of a firm in which Director or his relative is a partner
6.  Private Company in which Director is a Director
7.  Private Company in which Director is member (irrespective of percentage of shares)

Provided in case of a Company having paid up share capital not less than Rs. One Crore, no such contract shall be entered into without the previous approval of the Central Government. Application for this purpose shall be made to the Central Government in eForm No. 24-A. The power of the Central Government under this section is delegated to Regional Director.

Nothing contained in this section shall affect for the –

a.   Purchase or sale of goods and materials for cash at prevailing market prices (Service Contracts are not covered hence this benefit not available for service contracts);  or
b.  Any contract/s between the Company and any of the above said parties, as the case may be, regularly trades, or does business. Provided the values of goods and materials or cost service shall not exceed Rs. 5000/- in the aggregate in any year comprised in the period of contract.

Object of the Section
The purpose of this section is not prohibit the contracts in which directors are interested. But to ensure that the directors are not misusing the fiduciary position. The object of the section is the Board should have the Knowledge of extent of interest of a director in any contractual dealings with the Company. The prior approval of the Central Government is also required in case of a Company with paid up capital of Rs. One Corore or more with the objective that the terms of the Contract are at arms’ length.

The Consent of the Board must be accorded by a resolution passed at the meeting of the Board. It is not enough to obtain the consent by means of a resolution passed by circulation. The Consent contemplated in the section in not a general consent. It should be for a specific contract/s.

In cases of urgent necessity, the contacts can be entered into without obtaining the Board’s approval provided the consent of the Board shall be obtained within three months from the date on which the contract was entered into. However, in case of companies required to obtain Central Government approval, cannot enter into contract without Central Government’s Prior approval.

Office or Place of Profit:

In case of appointment of persons enumerated in sub-section (1) of Section 297 to office of profit, provisions of both section 314 and 297 have to be complied. There is no exemption in this section as in section 314(1)(b), of offices carrying monthly remuneration below Rs. 10,000/- per month. However in cases where previous  approval of the Central Government is required under section 314 (1B), then application has to be made under only section 314 (1B).

Consequences of non-compliance:

This section does not provide any penalty for non-compliance. Hence penalty will be  as per the provisions of Section 629A i.e. the Company and the Officer in default shall be punishable with fine which may extend to Rs. 500/-, and where the contravention is continuing one, with a further fine which may extend to Rs. 50/- for every day after the first during which contravention continues.

Default or non-compliance with the section in cases where Central Government approval is necessary would render the transaction void but it would be only voidable where the consent of the Board is necessary and was not accorded.

Exemptions:

1.  Sale, purchase or lease of immovable property:
This section has not defined the word ‘goods’, hence reference may be made to the definition given in Sale of Goods Act, 1930 according to which ‘goods’ means every kind of movable property. Thus for the purposes of this section, sale, purchase or lease of immovable property such as office space, Plant and Machinery attached to the earth is outside the scope of this section.

2.  Central Government approval under other provisions of the Act:
DCA has clarified that provisions of Section 297 are of general nature. And those of section 269, 294AA and 314 (1B) are of special nature. Hence in such case separate application under section 297 for Central Government approval is not required (Circular No. 18/76, dated 29.06.1976)

3.  Purchase and sale of goods and materials for cash at prevailing market prices:
If a transaction is one of purchase for cash (which includes a cheque) at prevailing market prices, i.e. it is transaction falling within sub-section (2)(a), neither the consent of the Board not the previous approval of the Central Government will be necessary. This exemption is available only for purchase and sale of goods and materials. Hence exemption is not available for supply of goods and materials and contract for services

4.  Professional services of Solicitors/advocates:
The scope of the section does not extend to supply of professional services of the nature given by firms of solicitors and advocates, etc. (Circular No. 13/75, dated 05.06.1975)

5.  Appointment as Managing or Whole-time Director:
Directors are agents or trustees and they stand in fiduciary position to the Company, Member and Creditors. This position is not changed merely by entrusting them with the additional responsibility for managing the affairs or rendering the services of a professional nature though they are remunerated for those services in accordance with the Articles of Association of the Company subject to the provisions of the Companies Act, 1956. ‘Supply of service’ is not same as ‘rendering of personal service’ as a director or managing or whole-time director. Furthermore there are specific provisions in the Companies Act, 1956 to regulate such appointment. Hence section 297(1) does not apply to contract of employment of a director as Managing or whole-time Director (Circular No. 13/75, dated 05.06.1975)

6.  Government Company:
Proviso to section 297(1) does not apply to the Government Company in respect of contracts entered into by it with any other Government company. (Notification GSR 233, dated 31.01.1978)

1 comment:

  1. There is a query sir
    suppose Mr. x is a director in co. XYZ Pvt. Ltd.
    and Mr. B(Relative of Mr. A) is a member in another co. say ABC Pvt. Ltd. XYZ co. enters in to a contract with ABC Ltd.
    Now question arises whether sec 297 is applicable on XYZ pvt. Ltd or not ?

    Kindly Reply
    u can reply on Kaushik7258@gmail.com

    ReplyDelete