Section 297(1)

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Brijesh Patel

Brijesh Patel (Querist)
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27 October 2010 What are the provision lay down under section 297(1) of the Companies Act?

Ajay Mishra

Ajay Mishra (Expert)
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27 October 2010 Hi

297. Board's sanction to be required for certain contracts in which particular directors are interested

(1) Except with the consent of the Board of directors of a company, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company-

(a) for the sale, purchase or supply of any goods, material or services; or

(b) after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of, the company:

1[Provided that in the case of a company having a paid-up share capital of not less than rupees one crore, no such contract shall be entered into except with the previous approval of the Central Government.]

2[(2) Nothing contained in clause (a) of sub-section (1) shall affect-

(a) the purchase of goods and materials from the company, or the sale of goods and materials to the company, by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices; or

(b) any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for sale, purchase or -supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business.

Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract or contracts; or

(c) in the case of a banking or insurance company any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company as aforesaid.

(3) Notwithstanding anything contained in sub-sections (1) and (2) a director, relative, firm, partner or private company as aforesaid may, in circumstances of urgent necessity, enter, without obtaining the consent of the Board, into any contract with the company for the sale, purchase or supply of any goods, materials or services even if the value of such goods or cost of such services exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract; but in such a case, the consent of the Board shall be obtained at a meeting within three months of the date on which the contract was entered into.

(4) Every consent of the Board required under this section shall be accorded by a resolution passed at a meeting of the Board and not otherwise; and the consent of the Board required under sub-section (1) shall not be deemed to have been given within the meaning of that sub-section unless the consent is accorded before the contract is entered into or within three months of the date on which it was entered into.

(5) If consent is not accorded to any contract under this section, anything done in pursuance of the contract shall be voidable at the option of the Board.

(6) Nothing in this section shall apply to any case where the consent has been accorded to the contract before the commencement of the Companies (Amendment) Act, 1960.

Sooraj Nandan

Sooraj Nandan (Expert)
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28 October 2010 NOTE ON SECTION 297 OF THE COMPANIES ACT, 1956.

It is telling that Directors are having Fiduciary position in the company. A person in a fiduciary position is not permitted to obtain profit from his position except with the consent of other beneficiaries. So a Director in a fiduciary position is not permitted to obtain profit from his position as a director except with the consent of other Board of Directors. The object of the Section is that the Board should have knowledge of the extent of interest of a director in any contractual dealings with the company; or of any person connected with the director and accord their consent to such dealings.

So under Section 297 of the Companies Act, 1956 the consent of Board of Directors of the Company is required, if the company is going into contract with any one of the following parties:

 Director of the Company; or
 Any relative of any director of the Company; or
 Any partnership firm in which any director of the Company is partner; or
 Any partnership firm in which any relative of any director of the Company is partner; or
 Any partner of the partnership firm in which any director of the Company is a partner; or
 Any partner of the partnership firm in which any relative of any director of the Company is a partner; or
 Any private company in which any director of the Company is a member; or
 Any private company in which any director of the Company is a director.

The Contract to be entered can be for:

 sale, purchase or supply of any goods or material;
 sale, purchase or supply of any services;
 For underwriting the subscription of any shares in, or debentures of, the company

EXEMPTED CONTRACTS

Any contract falling within the purview of any of the three exemptions as mentioned in clauses (a), (b) and (c) of sub-section (2) of Section 297 shall neither require the consent of the Board of Directors of the Company nor the previous approval of the Central Government. Such contracts are as under:

a) The contract for the purchase of the goods and materials from the company; or the sale of goods and materials to the Company by any of the parties as mentioned earlier, for cash at prevailing market price.

b) The contract, between the company and any one of the parties as mentioned earlier, for sale, purchase or supply of any goods, materials or services, in which the company or the director / relative/ firm/ partner / private company regularly trades or does business and the value of such goods / materials or the cost of the services does not exceed Rs. 5,000/- in aggregate in any year, materials or services;

c) In the case of banking company or an insurance company, any transaction in the ordinary course of business of such company with any of the parties as mentioned earlier.

Note:
 A Cheque is to be treated as equivalent of cash payment
 This clause is not applicable to contracts of service irrespective of any value involved (section 297(2) (a) (b) (c).
 The expression at prevailing market price suggests that the price charged ought to be the ruling market price of the seller and no extra favour vis-à-vis the other buyers should be shown as to the prices.

When and who should have to obtain the Approval of Central Government?

 Contract in which company having a paid up share Capital of not less than rupees 1 Crore should get the approval from the Central Government and it should be prior approval and not an ex-post-facto approval.

 Section 297 applies to all companies, public as well as private. But we also have to consider the parties involve in the contract for the applicability of the section. It is detailed below.

• In the case of Contract between Private Company/ Public Company and Individual/ Partnership firm. (Director/ Relative of Director/ mentioned partner/ Partnership Firm).

The Company has to comply with the provisions of the Act depends upon the paid up capital of the company ie, whether it has to go for Board of Directors Consent or Central government Approval. If the company’s paid up capital is not less than Rupees 1 Crore they have to obtain the both ie, Board Consent and Prior Approval of the Board.

• In the case of Contract between Private Company and Public Company

Public company has to obtain the Board Consent/ Central government Approval/ both, Depends upon their own paid up capital irrespective of considering the paid up capital of the Private Company. In this contract only Board approval needed by the Private Company.

• In the case of Contract between Private Company and Private Company.

Both the companies has to follow the procedure depends upon their own paid up capital. The company having less than Rupees 1 Crore paid up capital has to obtain the Consent of the Board and the Company having not less than Rupees 1 Crore has to obtain consent from the Board of Directors and also the prior approval of the central Government. If the Both Company is having not less than Rupees 1 Crore Paid up Capital then both the companies has to obtain consent from the Board of Directors and also the prior approval of the central Government separately.

• In the case of Contract between Public Company and Public Company.

Neither company has to comply with the provision of the Act.

Procedure for Board Consent:

1. A consent of the Board of Directors to a contract attracting Section 297 may be given:

• either before entering into a contract or ;
• After entering into a contract in circumstances of urgent necessity, but within three months of the date of which the contract was entered into.

2. Consent required to be given by the Board cannot be a general one; it must be specific with respect to the particular transaction.

3. Board must give its consent by a resolution passed at its meeting and not otherwise; it cannot be accorded by a circular resolution or in any other manner.

4. If consent is not accorded to any contract, then anything done in pursuance of the contract shall be voidable at the option of the Board.

Procedure for Prior Approval of the Central Government:

However, this power of giving approval has been delegated to the Regional Director. The Application for approval shall be made to the concerned Regional Director in e-Form No. 24A prescribed under Companies (Central Government’s) General Rules & Forms, 1956.

The following Documents should be attached with the said e-form 24A

 Copy of agreement containing particulars of contract.
 Copy of board resolution and proceedings of meeting.
 Detailed application should be filed as an optional attachment containing details relating to the following:-

• Whether the terms of the contract conform to the prevailing market rates

• Whether the company has entered into any contract with any other person in respect of sale, purchase or supply of the same kind of goods, materials or services and whether the terms of such contract are similar to the terms of the proposed contract(s). Reasons for variation in rates, if any should be indicated

SPECIMEN BOARD RESOLUTION FOR ACCORDING CONSENT UNDER SECTION 297

“RESOLVED THAT subject to the approval of the Central government Under Section 297 of the Companies Act, 1956, the Board be and is hereby gives its consent to the Company entering into a contract ( a contract entered into) with ……………………ltd, in which Mr……………, a Director of the Company, is a member, for the supply of the ………….on the terms and conditions set out in the contract proposed to be entered into with them, a draft whereof duly initialed by the Chairman for the purpose of Identification is laid on the table.”

“RESOLVED FURTHER that Mr………………….., a Director of the Company be and is authorised to sign and deliver the documents as far as necessary to give effect to the contract.”

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