30 May 2012
Please let me know the applicability of Section 297 in this particular case as mentioned below:
X,Y & Z are director in XYZ PVT Ltd as well as in ABC PVT ltd.
(1)If XYZ PVT Ltd purchase some goods from ABC PVT Ltd on credit on regular basis & make payment through cash & cheque.
(2)If XYZ PVT Ltd purchase some goods from ABC PVT Ltd on credit on regular basis & make payment through cash & cheque at the prevalling market rates.
(3)If XYZ PVT Ltd purchase some goods from ABC PVT Ltd on credit on regular basis & make payment through cash & cheque at the prevalling market prices. The amount of contract is of Rs. 3 crores approx.
1. Giving or taking loans. 2.Contract in respect of immovable property (as it is not 'good' ).{Letter No. 9/4190-CL-X dated 27.03.1990}. 3.Contract between two public Companies. 4.Contract of employment of director or managing or whole time director.[ Circuler No.8/11/75-CL-V dated 27.03.1975] 5.Contract for employment of relative of director. 6.Contract entered into by the company with the dealer on principle to principle basis. [Circuler No. FM 8/297/56-PR dated 02-08-1956] 7. Professional services of the nature given by firms of solicitors and advocates, etc.[circuler No. 8/11/75-CL-V dated 05.06.1975] 8.hiring of office premises on rent as the transaction is in immovable property. [Department Clarification dated 10-09-1990]
23 July 2025
The scenario you described involves inter-company transactions between two private limited companies where common directors (X, Y, Z) exist in both. Here's how Section 297 of the Companies Act, 1956 applies:
✅ Applicability of Section 297 Section 297 applies to contracts entered into by a company with certain related parties, which include:
Directors,
Relatives of directors,
Firms where directors/relatives are partners,
Other companies where the company's director is also a director or member (as in your case).
✅ Answer to Each Point (1) & (2) – XYZ Pvt. Ltd. purchases goods from ABC Pvt. Ltd. (common directors), with payment made through cash or cheque, at prevailing market rates: 👉 Yes, Section 297 applies — because this is a contract for sale/purchase of goods with a related party (ABC Pvt. Ltd. has common directors).
Even though it’s at market rate, approval of the Board is mandatory before entering into the contract.
If the paid-up share capital of XYZ Pvt. Ltd. exceeds ₹1 crore, then prior approval of the Central Government was also required under the law in force at that time (pre-Companies Act 2013).
✅ Mode of payment (cash or cheque) is not relevant for the applicability of Section 297 — the key factor is the related party relationship and the nature of the contract.
(3) – Same transaction, but contract value is ₹3 crores: 👉 Yes, Section 297 applies, and since the contract value is significant, it highlights the need for:
Board approval (mandatory), and
If paid-up capital > ₹1 crore, Central Government approval is also mandatory, irrespective of the contract value.
⚠️ Important Notes: Section 297 did not differentiate based on value of contract for CG approval — it was based only on paid-up capital.
Failure to comply with Section 297 could result in the contract being voidable and penalties for officers in default.
✅ Summary: Condition Section 297 Applicable? Board Approval CG Approval (if PUC > ₹1 Cr) Same directors in both companies ✅ Yes ✅ Required ✅ Required At market price, on credit/cash/cheque ✅ Yes ✅ Required ✅ Required Value ₹3 crore ✅ Yes ✅ Required ✅ Required
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