Every time I read section 297 of The Companies Act,1956, I learn some thing new and it creates a questions and answers flashcard. I thought of sharing my views on section 297  of The Companies Act,1956.

1. Applicability of Section 297 of The Companies Act,1956:

Section 297 of the The Companies Act,1956  is based on the principle of trust, loyalty and disclosure and it precludes the directors from entering into any business dealing or arrangements on behalf of the company in which he has personal interest or conflict of interest. He has very important fiduciary duty of acting bona fide in the interests of the company and any violation of this duty will amount to breach of trust. There are certain statutory obligations cast on him.

 Section 297(1) states that a company cannot enter into contracts with specified persons without the consent of Board and if company is having a paid up share capital of Rupees One Crore or more, all contracts of the nature referred below other than the exempted contracts can be entered into only after they are approved by the Central Government as per the proviso under section 297(1):-

(a)    sale, purchase or supply of any goods or materials or services;

(b)   underwriting the subscription of any shares in or debentures of the company.

 The consent considered in the section is not a general consent but consent referable to each specific contract.

Further, if at the time of entering into contract, no approval of Central Government is required then no subsequent approval is to be obtained though section 297 becomes applicable if the company’s paid up capital is enhanced to Rupees One Crore or more, the contracting persons afterwards falls in category of persons covered under section 297, the public company is converted into private company. If any modifications are made in the terms of contract or it is renewed after the expiry of its original period, previous approval of the central government is required.

2.    Non applicability of section 297:  

ü  Contracts between two public companies;

ü  Contract between company registered under the companies act, 1956 and company incorporated outside India;

ü  Contracts between two Government companies;

ü  Professional services rendered by solicitors/advocates or by firms of solicitors and advocates.

ü  Contract for employment of director as managing director or whole-time director.

ü  Unless the contractee company is private limited company.

ü  Contracts for sale, purchase or lease of immovable property.

ü  Transaction of loan made to the director by the company, since it is not a sale or purchase of goods or a contract to render services.

ü  Contract entered into by the company with dealer on ‘principal to principal’ basis, provided the dealer doesn’t acquire the same on agency basis.

ü  Prior approval of central government will not be required in the following circumstances:

(i) Contract for purchase of goods from the company or sale of goods to the company, which are for cash at prevailing market prices.

(ii)Contract for sale or purchase of goods and services in which the company or other party regularly does business but up to Rs.5000 in a year during the period of the contract

(iii)  Any transaction of a Banking/Insurance company in the ordinary course of business of such company with specified person.

 3.  Persons covered under section 297:

The following are the persons with whom a company cannot enter into contracts without the consent of the Board of Directors and prior approval of the Central Government is required in case if the paid up capital of the company is not less than Rupees One Crore:-

a)      director of the Company; or

b)      any relative of such director of the Company; or

c)      any partnership firm in which any such director of the Company is partner; or

d)     any partnership firm in which any relative of any director of the Company is partner; or

e)      any other partner of the partnership firm in which any director of the Company is a partner; or

f)       any partner of the partnership firm in which any relative of any director of the Company is a partner; or

g)      any private company in which such director of the Company is a member; or

h)      any private company in which such director of the Company is a director.

4. Procedure for  making application to the Central Government for prior approval of Contracts in which Directors are interested:

 (1) Delegation of power to Regional Director and Form of Application:

The power under the said proviso is delegated to the Regional Directors at Mumbai, Kolkatta, Kanpur and Chennai for providing approval by the offices of Regional Directors located in their regions:

The application shall be made electronically in e-form 24A by the Notification No. GSR 58(E) dated 10th February, 2006 along with fees prescribed in Companies (Fees on Applications) Rules, 1999.

 The Application is required to be submit to the regional office of Regional Directors’ alongwith following annexures:

ü  Copy of agreement containing particulars of contract

ü  Copy of board resolution for entering into contracts in which directors were interested and proceeding of that meeting.(Specimen Board resolution as per Annexure no.1.)

ü  Certified true copy of the latest amended Memorandum and Articles of Association;

ü  Certified copy of the audited Balance Sheet and Profit & Loss Account for last three years;

ü  Letter of Intent given by the party providing goods, materials or services

ü  Purchase Order

ü  Copy of Estimated amount of transactions to be entered in future.

ü  List of names, address, description and occupation of its Directors with the names of the companies and institution in which they hold position as the director of the company.

 If a contract, which requires consent of the Board of Directors in advance or subsequently, is entered into without taking the consent, the contract is viodable at the option of the Board and where the prior approval of central government is required to be obtained and if it is not obtained then failure to obtain such previous approval will make the contract void and illegal. The section itself does not provide for any penalty for non compliance, so penalty would therefore be as per the provisions of section 629A of the Act.

 The offence committed under the section is compoundable in accordance with the provisions of the section 621A of the Companies Act, 1956.

 Specimen of Board Resolution requiring approval of the Central Government

 “RESOLVED THAT subject to the approval of Central Government(Regional Director) as required under section 297 of the Companies Act,1956, the approval of the Board be and is hereby given to the contract (a copy of which was placed before the meeting and initialed by the chairman for the purpose of identification) for the period from _______ to ________ for the supply of __________/for rendering of __________services of the value of Rs.____________ per year proposed to be entered into between the company and Shri __________, a director of the company/Shri ___________ a relative of Shri __________, a Director of the Company/Messrs ____________, a firm in which Shri__________, a relative of Shri_____________, a Director of the company, is a partner in ___________________(P) Ltd., of whom Shri______________, a Director of the Company, is a member/director.”

 “RESOLVED FURTHER THAT Shri ABC Director and /or Shri ___________, the company secretary be and is hereby authorized to make application in the prescribed e-form 24AA to the Central Government (Regional Dierctor, ______ Region, _______) for seeking approval and to make necessary entries in the Register of Contracts maintained under section 301 of the Companies Act,1956 and to comply with all other statutory requirements in this regard.”

Yours views are solicited!!!