Section 25 companies

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Querist : Anonymous

Querist : Anonymous (Querist)

10 July 2012 I would like to know whether a Section 25 company is allowed to get into contracts with its member?

CS Divya Sorayan

CS Divya Sorayan (Expert)
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10 July 2012 Under section 297 a company is not allowed to enter into contract for (i) purchase, sale or supply of any goods, material or services; or (ii) for underwriting subscription of any shares in or debentures of company, with a director of the company; or his relative; or a firm in which such a director or relative is a partner; or a partner in such a firm; or a private company in which such director is member or director unless consent of the Board of Directors has been obtained before entering into such contract[sub-sec. (1)]. If any of the persons or entity mentioned above regularly trades or does business in the subject matter of contract and such contract is made for cash at prevailing market prices then consent of Board is required only in those cases where cost of such contract exceeds five thousand rupees aggregate in a particular year[sub section (2)]. Consent of Board can be obtained within three months from date on which such contract is entered into if there arises some urgent necessity even if cost or value of such contract exceeds rupees five thousand in a year.[sub-sec. (3)]. Section 299 lays down the circumstances when disclosure of interests by Directors of the company is mandatory and procedure in regard to such disclosure. It directs a director to disclose his interest (direct or indirect) or concern in any contract or arrangement made or proposed by the company at the first meeting of Board when such contract is being considered or at first meeting held after he became interested in a contract already entered into by the company. But in case of section 25 companies section 299 applies only to the matters covered by sub-section (1) and (3) of section 297. It follows that section 25 companies are allowed to enter into contracts or arrangements with all of the persons or entity mentioned earlier if such person or entity regularly does trade or business in the subject matter of such contract or arrangement and cost of such contract is made at prevailing market prices without seeking the consent of the Board of Directors even if the cost of such contract exceeds five thousand rupees aggregate in a year. Hence section 25 companies are allowed to conduct trade or business with private companies, firms or persons where some director may be having an interest provided such private company, firm or person regularly does trade or business in such a contract without seeking approval of Board again and again where the cost of such contracts exceeds five thousand rupees in a particular year in which such a contract is entered or seeking approval of central government where share capital of the company exceeds one crore rupees.