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Applicability of section 297 of companies act

Law Aspire (CS) (755 Points)

01 December 2011

Whether Renting of a building by a private company which is a parent company regd in India to its subsidiaries also regd in India comes under purview of section 297?

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4 Replies

Rajeev kumar Nayak (ACS) (283 Points)
Replied 01 December 2011

Section 297 applies to dealing in goods and providing the services. it does not apply to immovable properties. In ur case, If the renting of flat is not the business of parent private company, then section 297 will not apply as it does not qualify for services. However if renting of flat is one of its business, then section 297 apply.

Regards

CS Rajeev Nayak

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Naresh Patel (C.A. Final) (144 Points)
Replied 01 December 2011

But, sir. sec 297 does not provide for the any transactions between parent & sub cos, since this transaction is not covered in specified persons given in such section.

Hence, co. is not required to obtain the concent of the BOD, even though company is carrying on such buisness...

Sumit (Chartered Accountant) (133 Points)
Replied 07 December 2011

Section 297 applies to all companies, public as well as private. However, it does not apply to the contracts where both the parties to the contract are public companies. The section would apply where one of the two companies (being parties to the contract) is a private company and the other is a public company, but in such a case, it will have to be complied with by the public company only.

BOARD’S CONSENT AND CENTRAL GOVERNMENT’S APPROVAL FOR CERTAIN CONTRACTS IN WHICH PARTICULAR DIRECTORS ARE INTERESTED [Sec. 297]

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.

The consent of Board of Directors of the Company is required for the contracts entered with the Company, except for the contracts which are exempted under Section 297 (2), as one of the party and other party being any of the following: -

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;
for underwriting the subscripttion of any shares in, or debentures of, the company.

Apart from the consent of the Board, previous approval of the Central Government is also required where the paid up capital of the Company is Rs. One Crore or more. (However, this power of giving approval has been delegated to the Regional Director at Kanpur, Bombay, Calcutta and Madras). The Application for approval shall be made to the concerned Regional Director in Form No. 24A prescribed under Companies (Central Government’s) General Rules & Forms, 1956 alongwith a certified copy of the contract and / or relevant papers and Demand Draft for the fees payable under the Companies (Fees on Applications Rules, 1968). Further, this provision does not has any impact on contacts entered into prior to the date of crossing of the limit of Rs. One Crore, and subsisting after that date. However, the Central Government’s approval is not required in respect of contracts entered into by the Government Company with any other Government Company.

CONSENT OF THE BOARD OF DIRECTORS

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

either before entering into a contract;

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.

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 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:

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.

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.
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.

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;