Non-applicability of provisions of Companies Act to Government Companies

NOTIFICATIONS EXEMPTING THE GOVERNMENT COMPANIES FROM THE APPLICABILITY OF CERTAIN SECTIONS

1.   Notification No. GSR 232, dated 31.01.1978 – Regarding Section 187C

The CG hereby directs that Section 187C shall not apply to Government Company.

2.   Notification No. GSR 233 dated 31.01.1978 – Regarding Section 297 (1)

The provisions of Section 297(1) shall not apply to a Government Company in respect of contracts entered into by it with any other Government Company.

3.   Notification No. GSR 234 dated 31.01.1978 – Regarding Section 255, 256 and 257.

Section 255, 256 & 257 shall not apply to a Government Company in which entire paid up capital is held by Central / State Government.

4.   Notification No. GSR 235 dated 31.01.1978 – Regarding Section 198, 259 268, 269. 309, 310, 311, 387 and 388

Section 198, 259 268, 269. 309, 310, 311, 387 and 388 shall not apply to a Government Company.

5.   Notification No. GSR 577(E) dated 16.07.1985 – Regarding sections 149(2A), 205B, 263, 264, 265, 266, 307, 308, 316, 317 and 386.

sections 149(2A), 205B, 263, 264, 265, 266, 307, 308, 316, 317 and 386 shall not apply to a Government Company in which entire paid up capital is held by Central / State Government.

6.   Notification No. GSR 579 (E), dated 16.07.1985 – Regarding Sections 165, 187D, 294 and 294AA(2) & (3)

Sections 165, 187D, 294 and 294AA(2) & (3) shall not apply to a Government Company.

7.   Notification No. GSR 579(E) dated 16.07.1985 – Regarding Section 108

Section 108 shall not apply to a Government Company in respect of shares held by nominees of Government.

8.   Notification No. GSR 580(E) dated 16.07.1985 – Regarding Section 205A

Section 205A shall not apply to a Government Company in which entire paid up capital is held by Central / State Government.

9.   Notification No. GSR 581(E) dated 16.07.1985 – Regarding Section 295

Section 295 shall not apply to a Government Company provided that such company shall obtain the approval of the Ministry or Department of the Central Government which is administratively in charge of the Company, or as the case may be, the State Government.

10. Notification No. GSR 1294(E) dated 17.12.1986 – Regarding Section 108(1)

     The Central Government hereby directs that the provisions of section 108(1), insofar as it requires a proper instrument of transfer to be duly stamped and executed by or on behalf of the transformer and by and on behalf of the transferee, shall not apply with respect to bonds issued by a Government Company, provided that an intimation by the transferee specifying his name, address and occupation, if any, has been delivered to the Company along with the certificate relating to the Bond, and if no such certificate is in existence, along with the letter of allotment of the Bond.

11. Notification No. GSR 829(E) dated 21.09.2003 – Regarding Section 274(1)(g)

     Section 274(1)(g) shall not apply to a Government Company.

NOTIFICATIONS MODIFYING SECTIONS FOR APPLICABILITY TO GOVERNMENT COMPANIES.

I.     Notification No 1649 dated 13.11.1956 – Regarding Section 21 & 23

The Central Government hereby directs that the provisions of section 21 & 23 shall apply to a Government Company with the modifications set out below,

Modifications

1.    To Section 21, the following proviso shall be added, namely:

“Provided that nothing in this section shall apply to a Government Company where the change in its name consists only in the deletion of the word “Private” therefrom.

2.    In Section 23, after sub-section (1), the following sub-section shall be inserted, namely:

“(1A) where the change in the name of a Government Company consists only in the deletion of the word “Private” therefrom, that Government Company shall, not late than three months from the date thereof, inform the Registrar of the aforesaid change and thereupon the Registrar shall delete the word “Private” before the word “Limited” in the name of the Company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the Company.”

II. Notification No. 355 dated 07.01.1957 – Regarding Section 166 & 621

     The CG directs that section 166 & 621 shall apply to a Government Company with the modifications set out below:

     In Section 166

(i)   In proviso to clause (e) of sub-section (1) for the “Registrar”. The words “Central Government” shall be substituted;

(ii)  In sub-section (2) for the words “some other place within the city, town or village in which the registered officeof the Company is situate”, the words “Such other place as the Central Government may approve in this behalf” shall be substituted, and

In section 621, sub-section (1), the words “The Registrar or of a shareholder of the Company, of” shall be omitted.

III. Notification No. 1234 dated 30.12.1958 – Regarding Section 13(1)(a)

Modification

In clause (a) of sub-section (1) of Section 13, the words “in the case of a public limited company, and with ‘Private Limited’ as the last words of the name in case of a “Private Limited Company” shall be omitted.

IV. Notification No. 238 dated 02.02.1978 – Regarding sections 100, 101, 102, 103, 391, 392 and 394.

     Modification

1.    In sections 100, 101, 102, 103, 391 and 394 for the word “Court”, wherever it occurs, the words “Central Government” shall be substituted;

2.    In section 391, sub-section (7) shall be omitted;

3.    In sub-section (1) of section 392, for the words “High Court”, the words “the Central Government”  shall be substituted.

SECTOR / COMPANY SPECIFIC NOTIFICATIONS:

I.     Notification No. 769(E) dated 10.09.1990

The CG directs that the provisions of clause (e) of sub-section (1) of section 217 read with Companies (Disclosure of particulars in the report of Board of Directors) Rules, 1988, framed thereunder, shall not apply to Hindustan Aeronautics Limited, Bangalore, which is a Government Company.

II. Notification No. 770(E) dated 10.09.1990

The CG hereby directs that the provisions of clause (b) of sub-section (3) of section 209 shall not apply to any Government Company engaged in the promotion and Development of industries, to the extent it relates to income from –

a.    Interest on seed money loans or bridge loans;

b.    Interest on installments due on the cost of industrial plots or sheds allotted to entrepreneurs;

c.    Claims from the Central Government or State Governments in relation to special rebate on the sale of handloom clothes as declared by the Ministry of Textiles (Office of the Development Commissioner for Handlooms) from time to time as a special measures for boosting the sale of handloom clothes produced in different parts of the Country;

Provided that such accrued income, which is not accounted for in the books of account, is disclosed by way of a note in the Company’s Annual Accounts.

An analysis of Section 295 of the Companies Act, 1956

According Section 295(1) of the Companies Act, 1956, previous approval of the Central Government will be required, if a company directly or indirectly, to:

i)         Make any loan to any of the persons mentioned in Section 295 (1); or

ii)       Give any guarantee in connection with a loan made by any person to any of the persons mentioned in Section 295 (1); or

iii)      Give any guarantee in connection with the loan made to any person by any of the persons mentioned in Section 295 (1); or

iv)      Provide any security in connection with a loan made by any person to any of the persons mentioned in Section 295 (1); or

v)        Provide any security in connection with a loan made to any person by any of the persons mentioned in Section 295 (1).

Following persons mentioned in Section 295 (1);

i)         Any director of the lending company;

ii)       Any director of the lending company’s holding company;

iii)      Any partner of a director of the lending company;

iv)      Any partner of a director of the lending company’s holding company;

v)        Any relative of a director of the lending company;

vi)      Any relative of a director of the lending company’s holding company;

vii)     Any firm in which a director of the lending company is partner;

viii)   Any firm in which any relative of a director of the lending company is a partner;

ix)      Any private company of which a director of the lending company is a Director or member;

x)        Any body corporate at a general meeting of which not less than 25% or more of the total voting power is exercised or controlled by one or more directors of the lending company;

xi)      Any body corporate, the Board of Directors, managing director or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Meaning of Loan:

The word ‘Loan’ is not defined in the Act. Hence we can take the general meaning. According to Black’s Law Dictionary ‘loan’ means a lending; delivery by one party to and receipt by another party of a sum of money upon agreement, express or implied, to repay it with or without interest. Hence essential requirements of a loan is the advance of money upon the understanding that it shall be returned, and it may or may not carry interest.

This section also applies to any transactions represented by Book debt which was from its inception in the nature of a loan or an advance vide section 296.

Applicability of Section 295 under certain situations:

1.       Applicability of Section 292

Any loan falling within the purview of section 295 would attract the provisions of section 292 i.e. exercise of the powers only by means of resolutions passed at the Board meeting. Hence this power is to be exercised ny means of Board resolution not otherwise. However Board can delegate the power to any committee of directors, managing director, manager or any other principal officer of the company, in accordance with the provisions of the Act.

2.       Applicability of Section 372A

Following provisions of Section 295 will also apply to section 372A. Hence compliance of both sections besides section 292 is required for any loan made to, or any guarantee given or security provided in connection with a loan made by any other person to, or to any other person by, -

i)         Any private company of which director of lending company is a director or member;

ii)       Any body corporate at a general meeting of which not less than 25% or more of the total voting power is exercised or controlled by one or more directors of the lending company;

iii)      Any body corporate, the Board of Directors, managing director or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

3.       Applicability on Debt

A loan contracted creates a debt, but there may be a debt contracted without contracting a loan. Therefore every debt is not a loan. In order to attract section 295 there has to be the making of loan. For example: In case of sale/supply of goods on credit, the outstanding amount on such sale on credit is debt but it was not of the nature created by Loan.  The Bombay high court held that the deferred amount payable  by a director a consideration for sale of flat by the Company to the Director is a Debt but not in the nature of loan.

4.       Applicability on Advances

Section 295 is not applicable for all types of advances. Section 295 would not be attracted if the person taking advance against his salary is an employee. Suppose an advance against salary given to the wife of director who was employed by the company on a monthly salary, the provisions of section 295 would not applicable provided such advance facility should be available to all employees of the Company. However if advance is given on the her capacity as Wife of Director, then Section 295 will be applicable.

5.        Housing loans to managing and whole-time directors

The Central Government has permitted the Companies granting of loans to their managing and whole-time directors for the purpose of housing without the approval of the Central Government subject to certain conditions i.e. the provisions of section 295 is not applicable if housing loan was given the managing/ whole-time directors under the housing loan scheme of the Company for its employees and for the purpose said loan, the managing director shall be  treated in all respects like other employee in a particular grade and loan is granted on the terms and conditions as applicable to the other employees in the identical category.

6.       Loans to directors of Government Companies

The Government Companies have been exempted by notification no. SO 729 dated 27.05.1978, provided that such company shall obtain the approval of the Ministry or Department of the Central Government which is administratively in-charge of the Company, or as the case may be, the State Government.

7.       No retrospective effect

On the question whether the approval of the Central Government under sub-section (1) will be required to be obtained after any exempted loans (under sub-section (2)) ceases to be such or after the exempted company ceases to be eligible to enjoy the exemption, such as conversion of private company to public. The Department has advised that the provisions of section 295 would not be applicable to loans already made by the exempted companies even though they ceased to be so and compliance of section 295 would not be required.

Criteria followed by the Government in considering the applications under Section 295

In considering the applications under section 295, the following important aspects will scrutinized by the Central Government –

i)         Purpose of loan;

ii)       Financial position of lender and borrower;

iii)      Whether lending company possesses surplus fund to lend;

iv)      Whether loan is secured, if yes whether security is adequate;

v)        Whether the rate of interest offered is reasonable;

vi)      Whether loan is for a definite period;

vii)     Whether the borrower is fully solvent;

viii)   If the borrower is a company, whether it has a good profit record etc.

Exempted loans, guarantees and securities

According Sub-section (2), following transactions are exempted from the restrictions of sub-section (1)

i)         Any loan made, guarantee given or security provided – by a private company which is not a subsidiary of a public company,

ii)       Any loan made – by a holding company to its subsidiary,

iii)      Any guarantee given or security provided – by a holding company in respect of a loan made to its subsidiary.

Penalty for contravention of provisions of Section 295

Section 295 (4) provides that every person who is knowingly a party to any contravention of sub-section (1), including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to Rs. 5000/- or with a simple imprisonment for a term which may extend to 6 months; provided that where any such loan, or any loan in connection with which any such guarantee or security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed under sub-section (4); and where the loan has been repaid in part, the maximum punishment which may be imposed by way of imprisonment shall be proportionately reduced.

Further, according to sub-section (5), all persons who are knowingly parties to any contravention of this section shall be liable, jointly or severally, to the lending company for the repayment of the loan or for making good  the sum which the lending company may have been called upon to pay in virtue of the guarantee given or the security provided by such company.

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)