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VIPUL SHARMA

VIPUL SHARMA (Querist)
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06 December 2012 Pls. Give short provisions of section 300,299 &314.....its very difficult to learn.

Ajay Mishra

Ajay Mishra (Expert)
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06 December 2012 Hi

Read Section 299 in a simple way:

Section 299 casts a duty on a director for disclosure embedded in many provisions of the Companies Act, 1956. Accordingly, every director of a company who is, in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors.
1. Object of disclosure of interest
The directors are in a position of trustees under common law and they have a fiduciary relation towards the company and its shareholders, so as to ascertain whether he is acting for his own benefit or in any way prejudice to the interest of the company.
2. Disclosure of nature of interest whether direct or indirect
A director is said to be directly concerned or interested in a contract or arrangement, when he himself has personal interest in a particular contract or arrangement. Whereas a director is said to be indirectly concerned or interested when any of his relatives and associates has got personal interest in the particular contract or arrangement.
3. Disclosure of interest is applicable to all companies
The section is applicable to all companies. Therefore, all directors are required to give the notice of disclosure, in writing. It is equally applicable to the alternate director including the directors appointed by the financial institutions and the Central Government under section 408 of the Act.
4. Time for disclosure of concern or interest in a particular contract or arrangement
Every director of a company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors. Section 299(2) relates to the time of disclosure, which may be described as under, depending upon the status of contract. (Appendix 1)
In the case of proposed contract or arrangement, the disclosure shall be made at the meeting of the Board at which the question of entering into the contract or arrangement is first taken into consideration, or if the director was not, at the date of that meeting, concerned or interested in the proposed contract or arrangement, at the first meeting of the Board held after he becomes so concerned or interested. [Section 299(2)(a)]
5. Method of disclosure by a general notice
Section 299(3) deals with the mode of disclosure. A general notice given to the Board by a director, to the effect that he is a director or a member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with that body corporate or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation to any contract or arrangement so made. Following are the important aspects in this regard:—
(i) Contents of general disclosure.—The notice shall specify the following details which he furnishes to the Board of directors of the concerned company:—
(a) He is a director of a specified body corporate(s).
(b) He is a member of a specified body corporate(s).
(c) He is a member of a specified firm. This also includes member of HUF, sole proprietary or charitable concern.
(d) He has indirect interest as he is interested through his relatives in specified body corporate(s) or firm.
(ii) Validity of general notice.—Any such general notice shall expire at the end of the financial year in which it is given, but may be renewed for further period of one financial year at a time, by a fresh notice given in the last month of the financial year in which it would otherwise expire. [Section 299(3)(b)]
(iii) Giving or reading of general notice at Board meeting.—Section 299(3)(c) provides that no general notice as described under section 299(3)(a), and no renewal thereof, shall be of effect unless either it is given at a meeting of the Board, or the director concerned takes reasonable steps to secure that it is brought upon and read at the first meeting of the Board after it is given.
(iv) Include details of relatives' interest.—It is the responsibility of a director to disclose the nature of interest of his relatives, if any.
(v) Form for disclosure.—It should be made in the prescribed Form 24AA. (Appendix 2)
6. Requirement of general notice of disclosure is not mandatory
A director may instead of giving general notice, opt for making a specific disclosure before the Board at the meeting of the Board of directors.
7. Disclosure should specify the nature of interest
Section 299(1) requires disclosure of not only the fact that he is concerned or interested in a particular contract or arrangement but also the nature of concern or interest.
Word 'interest' occurring in sections 299 and 300 means personal interest and not official or other interest.

Ajay Mishra

Ajay Mishra (Expert)
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06 December 2012 Burden of proof of non-disclosure of interest
The burden lies on a plaintiff to prove for non-disclosure of interest by director when there is no evidence that the directors are not aware of the interest and that the formal disclosure at the meeting is necessary.
If a director enters into a self-dealing transaction which is challenged, the burden is on him to show that full disclosure was made and that the requirement of the company's article was also complied with. If he fails to ensure that formal disclosure is minute he exposes himself to the risk that after some years he may be unable to show by positive evidence that there was disclosure.

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Ajay Mishra

Ajay Mishra (Expert)
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06 December 2012 Consequences and penalties

The only duty cast upon a director by the provisions of section 299 is to disclose the nature of his interest in the proposed contract at a meeting of the Board of directors. Every director who fails to comply with section 299(1) shall be punishable with fine, which may extend to fifty thousand rupees. Besides a director who acts in contravention of section 299 of the Act is liable to vacate his office by virtue of section 283(1)(i) of the Act. The vacation of office is automatic and does not require any resolution to that effect.
If a director has given a general notice to the company in terms of sub-section (3) of section 299, he will not be liable for prosecution under sub-section (4) for non-compliance of sub-sections (1) and (2) provided the general notice under sub-section (3) includes the relevant contract in question.
Consequences of contravention of section 299:—
(a) Liability to be prosecuted under section 299(4);
(b) Cessation of office of directorship under section 283(1)(i);
(c) Liability to be prosecuted under section 283(2A); and
(d) Liability to refund to the company all remuneration received by the petitioner as director after the cessation of his directorship.

Ajay Mishra

Ajay Mishra (Expert)
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06 December 2012

Contracts or arrangements not covered by section 299

Section 299 applies also to contracts other than those entered into at a meeting of the directors. The following types of contracts or arrangements are exempted from the requirement of disclosure of interest by a director:—
(i) In cases where the contract or arrangement entered into or to be entered into is between two companies and where the interest of any director of one company or two or more of them together does not exceed a shareholding of 2% of the paid-up share capital in the other company. [Section 299(6)]
In other words, where a director singly or together with other directors or all the directors holds not more than 2% of the paid up share capital of the company, directors will not be deemed to be interested or concerned in any contract or arrangement of that company with the company in which they hold the office of director. Section 299 will be attracted only where a director or two or more or all of the directors hold more than 2% of the paid up share capital of another company.
If at the date on which the contract or arrangement is entered into, the holding of a director in the other company exceeds 2% but may fall below 2% on the date of the meeting at which the disclosure is required to be made, holding of shares on the date of contract entered into is relevant for the purpose of disclosure under section 299. (Circular No. 4 [8/16(1)/61], dated 19th May, 1961)
(ii) Where some directors have been nominated by a company as stewards of another organisation, disclosure of interest by them is not necessary when a contract with that organisation is being considered.

Ajay Mishra

Ajay Mishra (Expert)
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06 December 2012 Read Section 300 in a simple way:

Non-participation of interested director in proceedings of the Board Meeting
Section 300 of the Companies Act provides that no interested director can take part in the proceedings of the Board or vote on the resolution on that matter.
But in a private company an interested director is under no such disability. Further, this restriction is not applicable in respect of a contract which a private company subsidiary of a holding company enters with the holding company nor to a contract which may be entered into by a public company in which the interest of the director consists in his holding the qualification shares or in his holding not more than 2% of the paid-up share capital.