An analysis of section 297 of the companies act, 1956

AN ANALYSIS OF SECTION 297 OF THE COMPANIES ACT, 1956

By CS. Balakrishnan Bilu
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Most of the company professionals, executives and directors feel Section 297 of the Companies Act 1956 a deep breath, because of the intricacies in interpreting and practical application of that section.  It also makes corporate law professionals especially, company secretaries and corporate lawyers in double-mind.
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This article attempts to make a detailed interpretation of Section 297, which deals with ‘Board’s sanction to be required for certain contracts in which particular directors are interested’.
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Sub-Section wise Analysis:
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It is now clear that Section 297 states about obtaining consent of the board of directors, for entering into certain contracts in which particular directors are interested. Thus, not every contract requires consent of the board, only those contracts in which directors are interested require the consent of board. It is to be noted that usually a contract is entered into with the approval of the board, or even with the authority of the Managing Director/CEO/VP, or with the sanction of the Management Committee. But, here the only way of getting sanction for the contracts (in which directors are interested) is board’s sanction.
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Section 297 (1) :
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Board’s sanction is required if:
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> a director;
> or his relative;
> a firm in which such a director or relative is a partner;
> any other partner in such a firm ( ie; a firm as stated in (iii) above);
> a private company of which the director is a member or director;
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enters into a contract with the company (a) for the sale, purchase or supply of any goods, materials or services; or (b) for underwriting the subscripttion of any shares in, or debentures of the company.
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Further, the board’s sanction to be supported by the PREVIOUS approval of the Central Government, if the company’s paid-up capital is not less than Rs.1 Crore.
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Section 297 (2):
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Exemption to board’s sanction - to the  contract for the sale, purchase or supply of goods, materials or services, ie: Section 297 (1) (a) doest not apply, to the following:
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> purchase / sale for cash at prevailing market prices; or
> regular trade / business between the company and party (director etc.), up to Rs.5,000/- per annum for the contract period;
> any transaction in the ordinary course of business (exemption only for banking / insurance company)
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Section 297 (3) & (4):
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The board should accord its sanction only through a resolution passed at a board meeting (ie; it should not be a circular resolution) before the contract is entered into or within three months of the date on which the contract was entered into (three months allowed only in the case of urgent necessity – sub-section (3)).
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If the board’s sanction is not obtained, either before the contract date or within three months (in urgent cases), it will be deemed that the board’s sanction is not obtained, under Section 297.
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Section 297 (5):
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This sub-section states the consequence of not obtaining board’ sanction, as stipulated under section 297. As per 297 (5), if the consent is not accorded to any contract, anything done in pursuance of the contract shall be VOIDABLE AT THE OPTION OF THE BOARD.
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CRITICAL INTERPRETATION:
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Now, we will go into few critical interpretation of Section 297.
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